Employment contracts and directors’ service agreements are both fundamental documents within a business, but they serve different purposes and reflect different levels of responsibility. Understanding these differences, alongside the risks and practical considerations surrounding employment contracts more generally, can help businesses operate with greater clarity and protection.

What’s the difference between an employment contract and a director’s service agreement?

An employment contract is given to employees who, whilst having certain duties to their employer (such as loyalty and the tasks that they do), are not as heavily regulated as directors, who take on a lot of personal responsibilities for a company when they become a director.

A director’s service agreement respects that a director has duties such as being suitably able to represent the company, ensuring that their own interests or other people’s interests do not conflict with those of the company, that they are not influenced by others in their role, and demonstrating their independence in the decisions that they make, to name a few.

Therefore, whilst a director might be an employee of a company, they will also have greater duties and responsibilities than the average employee, and a director’s service agreement reflects that greater responsibility.

Why should small businesses avoid using ‘off-the-shelf’ employment contract templates?

Template or ‘off-the-shelf’ contracts are always a starting point and nothing more than that. That sort of contract will have been drafted with either someone else’s business in mind or with only the absolute basics in mind, whilst your contract should not be regarded simply as “something we must have”, but something that also works for your business.

If it is just a lot of printed words to you, then it likely isn’t saying what you need it to say, in addition to respecting your business and how it works.

What clauses should every employment contract include?

These are addressed in section 1 of the Employment Rights Act 1996 and include things such as an employee’s pay (and how to calculate it), how often they are paid, when their employment started, their days and hours of work, whether their working hours or days might change, how much holiday they have and how to take it, what other leave they are allowed to take (including sick leave), details relating to any pension that they might have (or might not have), how much notice the two of you might need to give to each other to bring the employment relationship to an end, and similar matters.

How can restrictive covenants protect your business after an employee leaves?

If they are drafted appropriately, considering your business and the real risks of damage to your business by an employee leaving, then restrictive covenants can be a very helpful source of protection.

However, if they are simply being put into an employment contract to scare your employees and/or to encourage them not to do certain things, then it is likely that they will not be legally enforceable. Therefore, the key is to ensure that any restrictive covenants that you are asking the employee to agree to are sensible and don’t go any further than you need to ensure adequate protection for your business (i.e. you aren’t simply telling them not to go and work for any competitor for a specific period of time after your employment has ended).

Can employment contracts be changed once they’re signed off?

Yes, although this must be done with the agreement of the employee or, if there is a restructure involving 20 or more employees in a group, in consultation through their trade unions or through employees who have been elected to represent them.

The law will also be changing in October 2026 to make practices of firing and rehiring employees on your preferred terms automatically unfair dismissal (i.e. the employee will be able to claim unfair dismissal no matter how long they have been in your employment and for potentially any sum of money that an employment tribunal decides to award to them). Your business will also have to show that the consequences of not making the changes would have caused the business to close.

What’s the legal risk of not having written employment contracts in place?

If an employee has any other claim (i.e. unfair dismissal, discrimination, that you’ve unpaid them, and others) and you have not given them a written contract, an employment tribunal can give the employee two or four weeks’ pay (depending on what the tribunal decides is fair) in addition to anything else that is owed to the employee.

Aside from this, not having written employment contracts in place can make it very difficult to run your business, from your employees not knowing what work they should be doing, not knowing which rules to follow, and perhaps making things difficult for you because they do not consider themselves to be bound by the rules, making it difficult to manage them and, if you have to, to dismiss them.

How often should employment contracts be reviewed or updated?

Every two to five years. This is because employment law is constantly evolving (it does this regardless of big changes like the Employment Rights Act 2025 due to smaller Acts of Parliament and regulations that are brought into force from time to time, and case law decided through the courts).

For example, we still see contracts that were hurriedly amended due to the COVID-19 pandemic, which now have no relevance, and which promise things that are equally irrelevant and which put employers at a disadvantage if they go unchecked.

How do probationary periods work in practice?

Probationary periods are really mini-review periods. Just as you should undertake regular appraisals of your employees to ensure that their performance and your support of them are on track, a probationary period applies in a very similar way, because it is still a two-way process.

Currently, and within reason, you can choose how long a probationary period should last, but the more junior the employee, usually the shorter the probationary period. As employees will be able to claim unfair dismissal after six months of employment from 1st January 2027, it is likely that most probationary periods will last for just under six months as a maximum (since more formal procedures will apply from the six-month mark onwards).

Should contractors and freelancers have different agreements from employees?

Absolutely. A contractor or a freelancer is usually not intended to be an employee or a worker, and, in that case, as one business will be contracting with another business, it is more usual to have some sort of contract for services in place (i.e. confirming that the person or business is offering you services, not offering services to others as your representative).

What happens if an employment contract conflicts with company policy?

This depends on how binding the company policy is. If the policy states that it is contractual (i.e. if the policy is in the staff handbook and is a contractual policy), an employee has the right to rely on whichever promises benefit them the most.

Say, for example, that their employment contract says that they do not receive company sick pay, but there is a contractual policy that applies to all employees, granting them company sick pay, then the employee would have the benefit of that company sick pay. This is because employees are automatically deemed by the courts to be in a weaker bargaining position compared to a business.

It is therefore important to ensure that your employment contracts and your policies complement each other, rather than conflicting with each other.

How Woodstock Can Help

If you need support regarding your employment contracts and directors’ service agreements to make sure you are protected and compliant, get in touch with Richard Hiron, Employment Law Consultant Solicitor, using the email r.hiron@woodstocklegalservices.co.uk or by completing the form below.