Photo by Kate_Sept2004 from Getty Images Signature
Ex gratia payments are voluntary
1 August 2022
Ex gratia payments are a voluntary payment made by an employer and other organisations as a gesture of goodwill or to settle a dispute. Some people are suspicious of these payments in some situations. They can wrongfully think of them as payments to keep them quiet about a dispute. But this article focuses on ex gratia payments as part of an employment relationship.
What is an ex gratia to employees?
An ex gratia payment is a payment an employer makes when they are under no obligation to make one. This can be a payment made to superannuation as an act of goodwill, a bonus, paid on termination in addition to legal entitlements or when an employee retires to thank them for their service.
When is an ex gratia payment made?
Usually an employer makes an ex gratia payment when an employee is either terminated or they leave.
There is no set formula for what the amount of an ex gratia payment should be so you need to know how to identify this type of payment. Ex gratia is Latin for ‘favour’, so consider whether the payment has any conditions attached or an employer is legally bound to make the payment.
If either of these apply to a payment, it is not ex gratia. The whole point of ex gratia payments is that they are voluntary.
An example is that if an employer terminates your employment and lists your leave entitlements as an ex gratia payment. This is not ex gratia as they are legally obliged to pay out leave entitlements on termination. Another example is offering you an ex gratia payment to not start a business in competition. Again, this is not an ex gratia payment. It is conditional on you not starting a business that may compete with them.
What is an ex gratia payment on redundancy?
When an employer makes an employee redundant they may include an ex gratia payment as part of the employment termination payment as a gesture of goodwill for an employee’s service.
Offering an ex gratia payment to settle an employment dispute
There may be a time when an employer offers an ex gratia payment to settle an employment dispute. Whether you accept it or not depends on what you want as a settlement.
Consider whether the payment covers your costs and if there are any conditions attached to the payment. An employer may offer an ex gratia payment to stop an employee from making a legal complaint. If this is the case, it is not an ex gratia payment. There can be no conditions attached to a payment that is ex gratia.
How is an ex gratia payment calculated?
How an employer calculates an ex gratia payment depends on the employer and the situation. There is no set formula for calculating ex gratia payments.
Are ex gratia payments tax free?
When an employer makes an ex gratia payment as part of an employment termination payment, generally it is tax fee. But it will attract tax if it is paid to an employee while still employed. Calculating tax on ex gratia payments depends on why the payment an employer makes the payment.
Conclusion
An ex gratia payment is a gesture of good will, so it must not come with any strings attached.
It is wise to talk to your lawyer or accountant when you want to make an ex gratia payment or if your employer offers you one. They will be able to give you all the information you need.
Do you have any questions or experiences to share about ex gratia payments? Feel free to share them in the comments section or contact me directly for advice.