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Ex gratia payments are voluntary
Updated: 8 April 2026
Ex gratia payments are voluntary payments made by employers and other organisations. They are often used to settle a dispute in which the party offering the payment maintains there is no legal obligation to pay, but chooses to make the payment as a gesture of goodwill. Because of this, some people are understandably cautious about accepting such payments. This article focuses specifically on ex gratia payments in the context of an employment relationship.
What is an ex gratia payment 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 an employee as an act of goodwill in addition to the employee's legal entitlements. The term ex gratia is Latin and means by favour or out of goodwill.
When is an ex gratia payment made?
Usually, an employer makes an ex gratia payment when an employee is either terminated or leaves. Usually, a discussion about an ex gratia payment takes place first; for example, the employer may offer the employee an ex gratia sum in lieu of working out the remainder of a fixed or ongoing contract to facilitate parting of ways.
What is not an ex gratia payment?
A payment will not be ex gratia if it is required under the contract, for example, for unpaid overtime.
How is an ex gratia payment calculated?
There is no set formula for determining the amount of an ex gratia payment, so you need to know how to identify this type of payment. Ex gratia is Latin for ‘favour’, so consider whether the employer or organisation is legally bound to make the payment. If they are, it is not ex gratia. The whole point of ex gratia payments is that they are voluntary.
For example, if an employer terminates an employee's employment and lists leave entitlements as an ex gratia payment. This will not be an ex gratia payment, nor will an offer to pay notice pay if the employer is terminating a worker, as they are legally obliged to pay out leave and notice entitlements on termination. The exception to paying notice pay is a summary dismissal.
What if someone refuses an ex gratia offer?
Some clients may understandably be wary of receiving an ex gratia offer out of the blue, leading them not only to hesitate to accept it but also to hesitate to sign a deed of release to obtain it. However, if an ex gratia offer is refused, the party making the offer must still pay any legal entitlements owed to the other party and cannot withhold those payments in the hope that the person will later change their mind, accept the payment, and sign a deed.
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 the 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 whether it is subject to any conditions. An employer may offer an ex gratia payment to stop an employee from making a legal complaint.
Are ex gratia payments tax-free?
An ex gratia payment will be subject to tax as an employment termination payment, and the Australian Taxation Office is a good source of information on the applicable taxation.
Key takeaways
An ex gratia payment is a gesture of goodwill, not a legally obligated payment. It is wise to consult 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 provide tailored advice.
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.
