An employment contract for an executive director is usually known as a service agreement. The Companies Act 2006 contains a number of specific regulatory requirements for directors’ service agreements, which vary depending on whether the company is private or listed.
Consultancy agreements, on the other hand, are designed to be used when a contractor or consultant is engaged by a business to provide consultancy services. They are usually drafted on the basis that the contractor is self-employed, rather than an employee or worker of the client business. The distinction is important for tax reasons, as well as for determining whether or not that individual is entitled to any employment rights.
As an employer, whether you are entering into a consultancy arrangement or bringing on board a director, you should take legal advice at the start. In many cases, separate tax advice should also be taken.
Employment contracts for executive roles tend to be more complex than a basic contract of employment. This is because there are several statutory and regulatory provisions that need to be factored into the negotiation and drafting of the contract, particularly in the case of a listed company. They may also include restrictive covenants and employee benefits schemes such as share option schemes.
Directors should not be involved in the preparation of their own service agreement, and they should not be involved in discussions about their own remuneration.
A consultancy agreement is used where a consultant (whether on their own account, or through a service company) provides consultancy services to a client. It is drafted on the basis that the consultant is genuinely self-employed rather than an employee or worker of the client.
The arrangement is structured as a contract for services, rather than a contract of employment, and may be an attractive option to both parties due to the structure’s inherent tax advantages.
Whether or not a consultant or contractor is employed or self-employed is important because it will determine:
- The basis on which their income is taxed, and whether or not the client business will need to make appropriate deductions of income tax and NICs when paying the consultant fees
- Whether the consultant will have the benefit of various employment protection rights available to employees (or the more limited rights available to workers), and
- Whether the individual is owed the common law and statutory duties relating to health and safety owed by an employer to its employees, or whether the individual (as an independent contractor) is responsible for their own safety
Consultancy services can also be provided by an individual through a service company.
Identifying and recording the true relationship at the outset will reduce the likelihood of disputes arising later on.
Our Employment Law team has significant experience in the negotiation and preparation of directors’ service agreements, and can help you to ensure that they are complete, correct and legally compliant. We can also advise you in relation to post-termination restrictions and confidentiality, and negotiating terms which will adequately protect your business when a senior employee exits the business.
We are also experienced in drafting and advising upon consultancy arrangements, for individuals and for service companies.
In most employment situations taking legal advice early on can often stop the situation from escalating and will save you time and money later. With our proactive advice, our Employment Law Solicitors can help your business deal effectively with executive employment and consultancy arrangements, as well as wider employment law advice. Give one of our team a call on 03330 430 350 , or complete our online enquiry form and we will contact you.