Director's Service Agreement vs Employment Contract: What UK Directors Need to Know (2026)

Why the distinction matters

Most executive directors hold two distinct legal positions simultaneously: as a director (an officer of the company appointed under the Companies Act 2006) and as an employee (someone engaged under a contract of employment). A service agreement is the document that governs the employment dimension of that dual role. A standard employment contract, by contrast, is designed for the rank-and-file employee relationship and does not address the director-specific duties, fiduciary obligations, or corporate governance hooks that an executive role requires.

Getting this wrong has real consequences. A poorly drafted document that blurs these two capacities can leave a departing director uncertain about whether garden leave clauses apply, strip away carefully negotiated post-termination restrictions, or—where the Companies Act approval threshold is missed—render a term completely unenforceable.

Section 188 Companies Act 2006: the two-year trap

The single most commonly overlooked legal requirement for UK director service agreements is section 188 of the Companies Act 2006. Under s.188, any provision in a director's service contract that guarantees employment, or gives the director a contractual right to notice or to compensation for loss of office, for a period exceeding two years must be approved by an ordinary resolution of the shareholders.

The rule catches guaranteed-term clauses, rolling contracts where the notice period effectively extends the guaranteed minimum beyond two years, and any arrangement that amounts to the same thing in substance even if the language tries to dress it otherwise. If approval is not obtained before the term takes effect, the offending provision is void—and the contract is deemed to contain an entitlement for the company to terminate on reasonable notice instead (s.189 CA 2006). That is a significantly weaker position than the director bargained for.

Approval must come before the term is agreed, not ratified afterwards. A shareholders' meeting convened after the fact does not cure the defect. Companies with a single director-shareholder who controls 100% of the votes still need a formal resolution; the statutory requirement does not disappear because the approval is a formality.

When to use a director's service agreement

Use a director's service agreement for any individual who sits on the board as an executive director and is also employed by the company. The document should sit alongside—but be separate from—the statutory duties under ss.171–177 CA 2006 (to act within powers, promote the success of the company, exercise independent judgment, avoid conflicts of interest, and so on). Those duties cannot be contracted out of; the service agreement works around them.

A service agreement is the right vehicle when the arrangement includes:

• A fixed or rolling term of service with a defined notice period
• Garden leave provisions or pay-in-lieu-of-notice clauses
• Restrictive covenants (non-compete, non-solicitation, non-dealing)
• Bespoke remuneration structures including bonuses, incentive plans, or equity arrangements
• Confidentiality obligations that survive termination
• Intellectual property assignment for inventions or copyright created in the role

Each of these provisions needs to be drafted with precision. A non-compete covenant that is wider in geographic scope or duration than is reasonably necessary to protect a legitimate business interest will be struck out by the courts entirely—English courts will not rewrite an unreasonable covenant to make it enforceable (unlike some other jurisdictions). The benchmark is what is proportionate at the time the restriction is agreed, not at the time it is invoked.

A director's service agreement template for UK companies, with the correct structure for executive roles, is available at forms-legal.com.

When a standard employment contract is sufficient

Non-executive directors (NEDs) do not normally have an employment relationship with the company at all. They are appointed under a letter of appointment—not a service agreement or employment contract—because their role is advisory and governance-focused rather than operational. NEDs are typically self-employed for tax purposes and do not receive the statutory employment rights (unfair dismissal protection, redundancy pay) that an employee would.

An ordinary employment contract is appropriate for an individual who performs a directorial title in name but has no board-level duties, no fiduciary obligations as an officer, and no participation in strategic decision-making. These are sometimes called 'worker-directors' in smaller companies where a senior employee is given the director title without formal Companies House registration or board authority. In that scenario, a well-drafted employment contract covering seniority, remuneration, and termination is all that is needed.

The danger is the reverse situation: a company uses a standard employment contract for a genuine executive director because it is cheaper or simpler. That document will almost certainly be missing the s.188 approval machinery (since it was never designed for it), will lack appropriate fiduciary acknowledgments, and may create ambiguity about whether the director's employment ends if they are removed from the board under s.168 CA 2006—removal by ordinary resolution with special notice, which operates independently of any contractual notice period.

Common drafting errors that void protections

Guaranteed terms without shareholder approval. As described above, any guaranteed period exceeding two years without a prior ordinary resolution is void under s.188 CA 2006. This is the most frequent error found in service agreements drafted without specialist advice.

Conflating the director's office with the employment. A service agreement should make clear that the employment can survive board removal, or alternatively, that removal from the board automatically terminates employment—whichever the parties intend. If the agreement is silent, expensive litigation follows.

Overbroad post-termination restrictions. A global non-compete for a UK-based managing director of a regional business is unlikely to survive judicial scrutiny. Restrictions must be tailored to the specific competitive threat, the seniority of the role, and the geographic and customer footprint of the business. Courts have consistently refused to sever and save unreasonable covenants when they fundamentally alter the character of the restriction.

Garden leave without a contractual foundation. Garden leave is not an implied right. If the service agreement does not expressly permit the company to require the director to remain away from the office during a notice period, a unilateral instruction to stay home may amount to a breach of the duty to provide work—particularly for senior executives who have a legitimate interest in maintaining their professional standing and skills.

IP assignment gaps. The Patents Act 1977 (s.39) provides some automatic employer ownership of employee inventions, but only within specific conditions. A service agreement that relies solely on statute, without an express IP assignment clause, may leave commercially valuable inventions outside the company's ownership—especially where the director's duties at the time of the invention are disputed.

Inadequate confidentiality provisions. Post-termination confidentiality clauses must distinguish between information that is genuinely confidential (trade secrets, customer data, pricing structures) and information that has become part of the director's general skill and knowledge. Courts will not enforce a clause that purports to prevent a director from using their general professional expertise in future employment.

Practical steps before signing

Before any executive director service agreement is executed, a company should:

1. Check the guaranteed term. If the total notice entitlement or fixed period exceeds two years, put the s.188 shareholder resolution on the board agenda before the agreement is signed.
2. Have the board (minus the director being appointed, if required by the articles to abstain) formally approve the terms under s.177 CA 2006 to declare any interest.
3. Ensure the agreement is filed at Companies House only if required—service agreements must be kept at the registered office or SAIL address and made available for inspection under s.228 CA 2006, but they are not themselves publicly filed.
4. Review restrictive covenants with the actual competitive landscape in mind. Generic clauses copied from another company's agreement are a liability, not a protection.
5. Align the termination provisions with the company's articles of association, to avoid contradictory outcomes if the director is removed by shareholder vote.

The bottom line

Directors occupy a unique legal position that sits at the junction of employment law, company law, and equity. A standard employment contract does not address that junction. A director's service agreement does—but only if it is drafted to account for the Companies Act approval thresholds, the director's fiduciary duties, and the specific commercial protections the parties actually need. Using the wrong document, or a document with the wrong terms, is not a theoretical risk: it regularly produces disputes over notice pay, enforceability of restrictive covenants, and ownership of intellectual property that cost far more to resolve than the drafting would have cost to get right.