Director's Service Contract: Requirements & Key Terms

At a glance

• A director's service contract is an employment contract that also engages statutory duties under the Companies Act 2006 — it covers remuneration, notice, restrictive covenants, and the director's fiduciary obligations.
• Employment Rights Act 1996 s.1: a written statement of employment particulars must be provided on or before the first day of employment (a day-one right since 6 April 2020).
• Companies Act 2006 s.188: if the contract guarantees a term of employment longer than two years, an ordinary resolution of the members (shareholders) must approve it before it is agreed.
• Companies Act 2006 s.189: if the s.188 approval is missing, the offending provision is void and the contract is treated as terminable at any time by the company on reasonable notice.
• Companies Act 2006 ss.228–229: the company must keep a copy of every director's service contract (or a written memorandum of its terms) available for inspection for at least one year after the contract ends; any member may inspect for free and request a copy within seven days.
• Non-executive directors are typically appointed under a letter of appointment rather than a service contract; both are caught by the ss.228–229 inspection regime.

What is a director's service contract?

A director's service contract is a formal written agreement between a company and an executive director setting out the terms on which that person is employed. In legal terms it is an employment contract, so it is governed by the Employment Rights Act 1996 alongside the fiduciary and statutory duties that company law imposes on directors.

The document typically covers:

• Role and duties — the director's title, reporting line, and day-to-day responsibilities
• Remuneration — salary, bonus arrangements, benefits, and pension
• Working hours and location — place of work, travel requirements, and any home-working terms
• Notice period — the minimum period either party must give to end the contract
• Confidentiality — obligations to protect trade secrets and commercially sensitive information during and after employment
• Post-termination restrictions — non-compete, non-solicitation, and non-dealing clauses that apply after the director leaves
• Garden leave — the company's right to place the director on paid leave during the notice period, away from the business
• Intellectual property — ownership of inventions and creative works produced in the course of the role
• Board position — what happens to the directorship if the employment ends, and vice versa

How does it differ from an ordinary employment contract?

The core difference is the additional layer of company law. An ordinary employee's contract is governed mainly by employment law. A director's service contract is governed by both employment law and the Companies Act 2006, which imposes specific rules about the contract's duration, record-keeping, and shareholder oversight.

Directors also owe codified statutory duties to their company under Companies Act 2006 ss.171–177 (including the duty to act within powers, to promote the success of the company, and to avoid conflicts of interest). A well-drafted service contract reflects and sits alongside those duties — it does not override them.

Executive directors and non-executive directors: two different documents

Executive directors

An executive director takes on management responsibilities in the business on a day-to-day basis — for example, a chief executive or finance director. Because they perform work beyond simply sitting on the board, they are usually employees as well as office-holders, and their engagement is documented in a formal service contract.

GOV.UK guidance confirms the point: a person who does work that is not related to being a director may have an employment contract and the employment rights that go with it.

Non-executive directors (NEDs)

A non-executive director typically attends board meetings to provide independent oversight and strategic input but does not manage the business day-to-day. NEDs are usually office-holders, not employees, and their engagement is documented in a letter of appointment rather than a service contract.

The distinction matters for employment rights: a NED who is a pure office-holder does not generally have access to statutory rights such as unfair dismissal protection. The Companies Act 2006 inspection regime (ss.228–229) applies to both — the company must keep any written terms of the NED's appointment available in the same way as a formal service contract.

Written particulars: the day-one duty (ERA 1996 s.1)

Under Employment Rights Act 1996 s.1, an employer must give every employee a written statement of employment particulars. The right applies from day one of employment — the statement must be provided no later than the beginning of employment. This day-one rule came into force on 6 April 2020, replacing the previous two-month window.

The statement must set out a defined list of particulars including the parties' names, the start date, job title or description, remuneration, hours of work, holiday entitlement, notice period, and pension arrangements. A comprehensive director's service contract will typically satisfy the s.1 obligation and go significantly further — but the obligation to provide the written statement exists independently, and failure to do so entitles the director to make a claim to an employment tribunal.

Correct as at June 2026: the required contents of the written statement are set out in ERA 1996 ss.1–4. Check GOV.UK for the current list of mandatory particulars.

Shareholder approval for long guaranteed terms (CA 2006 ss.188–189)

This is the Companies Act provision most often missed — and the one that causes the most expensive problems.

The rule (s.188)

Companies Act 2006 s.188 requires the members of the company to approve, by ordinary resolution, any provision under which the guaranteed term of a director's employment with the company is, or may be, longer than two years.

The "guaranteed term" means the period during which the company cannot terminate the contract without paying compensation. A rolling contract, a fixed-term contract, or a combination of the two can all create a guaranteed term that exceeds two years.

The threshold is "longer than two years" — so a guaranteed term of exactly two years does not require approval, but one of two years and one day does. Before the resolution is passed, a memorandum setting out the proposed contract must be made available to members — either sent with a written resolution or available at the company's registered office for at least 15 days before any general meeting.

Why does this rule exist? The right of members to remove a director by ordinary resolution under CA 2006 s.168 is a fundamental shareholder protection. A very long guaranteed term can make removal prohibitively expensive even when the shareholders hold the votes to do it. Section 188 gives members a say before that situation arises.

The consequence of non-compliance (s.189)

If a company agrees to a long guaranteed term without first obtaining member approval, Companies Act 2006 s.189 provides a clear and automatic consequence:

1. The offending provision is void to the extent of the contravention.
2. The contract is deemed to contain a term entitling the company to terminate it at any time by giving reasonable notice.

This means the director cannot enforce the long guaranteed term — it is treated as if it was never agreed. The rest of the contract remains in force.

Rolling contracts and the stacking rule

Section 188 contains an important anti-avoidance provision. If, more than six months before the end of the current guaranteed term, the company enters into a further service contract, the unexpired period of the original term is added to the guaranteed term of the new contract. This prevents companies from repeatedly renewing shorter contracts to avoid ever triggering the two-year threshold.

The inspection regime (CA 2006 ss.228–229)

Two sections of the Companies Act 2006 impose a transparency obligation on companies regarding their directors' service contracts.

Section 228: keeping the records

Every company must keep available for inspection:

• a copy of every director's service contract with the company (or with any subsidiary of the company); or
• where the contract is not in writing, a written memorandum setting out the terms of the contract.

The copies and memoranda must be retained for at least one year from the date of termination or expiry of the contract, and must remain available for inspection throughout that period.

Section 229: members' right to inspect and copy

Under s.229:

• Any member of the company may inspect the contracts or memoranda without charge.
• Any member may, on request, require the company to provide a copy — the company must provide this within seven days of receiving the request.

Failure to comply is an offence by every officer of the company in default. In practical terms, shareholders have a genuine right to see what they have agreed to pay their directors — and how long that commitment runs.

Restrictive covenants: what is enforceable?

Post-termination restrictions are common and commercially important in directors' contracts. The four main types are:

• Non-competition: prevents the director from working for (or setting up) a competing business for a defined period after leaving.
• Non-solicitation: prevents the director from approaching the company's customers or clients.
• Non-dealing: prevents the director from doing business with those customers, even if the customer approaches them first.
• Non-poaching: prevents the director from recruiting colleagues.

The enforceability test

Restrictive covenants in employment contracts are presumed unenforceable unless the party seeking to rely on them can demonstrate that they:

1. Protect a legitimate business interest — such as trade secrets, confidential information, or genuine customer relationships the director built up in the role.
2. Go no further than is reasonably necessary to protect that interest — assessed by reference to geographical scope, duration, and the activities restricted.

The courts assess reasonableness at the time the contract was entered into, not when the restriction is enforced. A blanket prohibition on all competition with no time or geographical limit is very unlikely to survive challenge.

Directors typically have access to more confidential information and senior client relationships than most employees. Courts will often, but not always, uphold longer or wider restrictions for directors than for junior staff — but each restriction must still be justified on its own facts.

Garden leave

Garden leave — requiring the director to remain employed but away from the business during the notice period — is frequently used in practice to achieve the commercial protection that restrictive covenants are meant to provide. Courts are generally more willing to enforce a contractual garden leave clause than a post-termination non-compete, because the director continues to receive full pay throughout. A well-advised company often uses both together: garden leave during notice, followed by a more modest post-termination restriction.

Resignation from the board: a critical distinction

A director holds two legally separate positions simultaneously — as an employee under their service contract and as a board member (an office-holder) by virtue of their appointment as a director.

These two positions are legally distinct:

• Resignation as a director (by filing at Companies House) does not automatically end the employment contract. The director may remain an employee even after leaving the board.
• Termination of the employment contract does not automatically vacate the director's seat on the board. Without a separate board resolution or a provision in the articles, the departing director could remain on the register at Companies House.

A well-drafted service contract addresses both scenarios directly: it should contain clear provisions specifying what happens to the directorship on termination of employment, and what happens to the employment contract if the director is removed from the board.

Worked example: Redmoor Components Ltd (fictional)

The following example is entirely fictional and is used for illustration only.

Redmoor Components Ltd is a private limited company with four shareholders. The board appoints Sarah as chief operating officer and agrees a five-year fixed-term service contract. No shareholder vote is held before the contract is signed.

What went wrong: The five-year fixed term is a guaranteed term longer than two years. Under Companies Act 2006 s.188, the contract required an ordinary resolution of the members before it could be agreed. No such resolution was passed.

The consequence (s.189): The five-year guaranteed term is void. The contract is deemed to contain a right for the company to terminate it at any time on reasonable notice — what counts as reasonable depends on Sarah's seniority and the wider employment-law context. Sarah cannot enforce the five-year term.

What Redmoor should have done: Before agreeing the contract, the directors should have prepared a memorandum setting out the proposed terms and made it available to the members at the registered office for at least 15 days. The members should then have passed an ordinary resolution approving the guaranteed term. The contract could then have been signed.

Inspection obligation: Once signed, Redmoor must keep a copy of Sarah's service contract available for inspection. When Sarah leaves — whether in year one or year five — the copy must be retained for at least one year from the date her contract ends. During that time, any shareholder can inspect it free of charge and can request a copy within seven days.

What to check before signing a director's service contract

1. Guaranteed term check — is the guaranteed term longer than two years? If yes, has an ordinary resolution been passed under CA 2006 s.188, with the required memorandum made available to members?
2. Written statement — does the contract satisfy the ERA 1996 s.1 written-particulars requirement, and is it ready to give on or before day one?
3. Notice period — does the contractual notice period meet or exceed the statutory minimum (ERA 1996 s.86)?
4. Garden leave — does the contract give the company a right to place the director on garden leave, and make clear the director must not work elsewhere during it?
5. Restrictive covenants — are the restrictions limited to genuine legitimate business interests, with scope, duration, and geography defined precisely?
6. Board position — does the contract address what happens to the directorship on termination of employment, and vice versa?
7. Confidentiality and intellectual property — are obligations to protect confidential information and ownership of work product clearly addressed, both during and after employment?
8. Inspection compliance — does the company have a procedure to keep the signed contract on file and make it available for member inspection, including the one-year post-termination retention requirement (CA 2006 s.228)?

This page provides general information about how directors' service contracts work in England and Wales. It is not legal advice, and it does not address the specific facts of any individual situation. If you need guidance on drafting, reviewing, or enforcing a director's service contract, you should speak to an experienced legal adviser.

Last reviewed: June 2026 · Next review due: June 2027 or on legislative change.