Directors Employment Contracts are too often neglected

We know that contracts are not the sexiest of subjects, but they tend to be kind of necessary. At least some of them. One of the more neglected contracts is the Directors Employment Contract. Especially small startups and one-man-companies treat this legal work with carelessness, even though it is all the more important to them. Yup, it is true. Not having such a document can be fatal for your business.

It is not that we deliberately wish to sound like your mother, and it is not because we are trying to scare you. By no means! No, we are really just trying to live up to our Contractbook-gives-you-peace-of-mind-mantra. By making sure that your Directors Employment Contract is signed and securely stored you have one reason less to spark your anxiety attacks.

So, what is it?

A Directors Employment Contract is a legally binding document that contains the most relevant agreements between a company and its managing director. Although a managing director works for the company he/she is not in an employment relationship with the company. A managing director is considered an employer, which means that he/she is not covered by normal employment laws. This, of course, gives you a higher degree of freedom to decide the content of the contract, but you are still obliged to have one.

What do you mean by obliged?

Whether you act as managing director in a multinational powerhouse, a solid SMB or a one-man-business in your parent’s garage, you are obliged (by Danish law) to have a Directors Employment Contract if you receive a salary. Especially the latter tends to neglect this kind of legal work since it seems odd to sign a contract with your self. Your business could nevertheless get dissolved if you are not able to show your Directors Employment Contract to The Danish Business Agency (Erhvervsstyrelsen). Why? Because payments from the company to the director could be considered as illegal shareholder loans and therefore tax fraud if salary information is not specified in a contract.

Ouch! What should be in it then?

As stated above you have a high degree of freedom when creating a Directors Employment Contract. Salary is, of course, the most basic content of the agreement, but you should take more things into considerations. The most basic stuff is obligations, confidentiality, holiday rights and termination payments (also known as The Golden Handshake). But there is even more, for instance — should your wife receive your payment in the tragic event that you die? What happens if the company changes owners? Are you allowed to spank your subordinates as punishment?

There you go!

Hakuna Matata!

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