Personal Finance: Working to unwritten rules

Does the lack of a written contract of employment mean that an employee's only security is the quality of his or her last piece or work? You could be forgiven for thinking that this was the case. In fact the reality can be somewhat different.

Every employee - whether he or she works part-time or full-time, for a fixed period or in a job-share arrangement - has certain rights. And these rights exist regardless of whether the employee has a piece of paper to prove it.

The absence of a written contract does not mean that there is no contractual relationship. Employers and employees still have certain implied legal rights and obligations.

The employer's obligations include the following: the duty to pay salary; to provide a safe workplace; and to act reasonably. The employee has corresponding duties, which include such things as honesty, competence and loyalty.

Employees have additional rights that are guaranteed by legislation - one of the most important is that most employees have the right to statutory sick pay. Female employees, moreover, have varying maternity rights that depend on their length of service. Employees are also protected against unlawful deductions from salary, as well as discrimination on the grounds of race, sex and disability.

Employees do, by law, have a right to receive a statement that sets out the main terms of their employment within two months of starting work. This statement must include such details such as rates of pay, place of work, job title and holiday pay. There is one major problem with this, however - an employer is not subject to any financial sanction for failing to comply.

The extent of financial protection afforded to employees on instant dismissal is in large part dictated by the length of notice period to which they are entitled. The lack of a written contract does not mean all is lost for the employee, however - in some cases far from it.

There is legislation that provides every employee with the right to a minimum notice period regardless of whether or not they have a written contract. This legislation provides that, until the completion of two years' service, employees are entitled to one week's notice; thereafter they are entitled to one week's notice for each completed year of employment - up to a maximum of 12 weeks.

However, employees who do not have a written contract can, as an alternative, argue that they are entitled to "reasonable notice". This notice period is determined by such factors as the industry norm for someone of their status. For example, a solicitor might be able to argue for a three-month notice period, while the chairman of a company that is traded on the stock exchange may be able to establish a case for a two-year notice period.

The length of the notice period is important, because the starting point for calculating damages is a sum equal to the net salary and value of fringe benefits (such as pension contributions or the use of a car) that the employee would have received during the notice period. The employees are under a duty to attempt to minimise their loss by finding alternative employment.

In other words, if an employee is dismissed without notice and justification and the following day secures a job which pays as well or better than the job he or she has just lost, the claim for compensation under the contract will be reduced to zero. Even if employees do not have written contracts stipulating their salary and perks, they can still show by way of wage slips, pension statements and similar documents the benefits to which they are entitled to receive when it comes to calculating damages.

In addition to contractual rights, all employees who have completed more than two years' continuous employment have a right - provided by statute - not to be unfairly dismissed, regardless of whether or not they have a written contract.

This two-year qualifying period is currently being challenged in the European Court and may, depending on its decision, be reduced. The Government has, in any event, made a commitment in its White Paper entitled Fairness at Work to reduce this qualifying period to one year.

Claims in respect of unfair dismissal must usually be submitted to an industrial tribunal within three months of dismissal. Contractual claims by contrast (including claims on written contracts) may be commenced in the courts up to six years from the date of dismissal. Contractual claims can be heard in the industrial tribunal, provided that they are submitted within the three-month time limit. Although there is no requirement in these circumstances for the employee to have completed two years' continuous employment prior to submitting a claim, the tribunal only has the power to award compensation up to a maximum of pounds 25,000. It is for this reason that larger contractual claims are usually pursued in the High Court.

Unfair dismissal compensation is made up of two parts: the basic award, subject to a maximum of between pounds 110 and pounds 330 for each year of employment depending on age, and the compensatory award, subject to a maximum of pounds 12,000. Under proposals set out in Fairness at Work, this limit may be removed altogether.

What all this means is that employers may find dismissal a more expensive business in the future.

The writer is a partner and employment law specialist with City law firm Bird & Bird. He is also the author of the `Which? Guide to Employment', which will be published in early September