Ex gratia payments are a unique and often misunderstood aspect of employment law in Australia. These discretionary payments, made by employers without legal obligation, play a significant role in:
- employment termination
- redundancy, and
- dispute resolution
In this article, our employment lawyers explore the definition, purpose, and application of ex gratia payments. We also discuss their legal and tax implications, and how they differ from other forms of compensation.
Key Takeaways
- Ex gratia payments are voluntary payments made by employers without legal obligation
- They are often used during employment termination, redundancy, or to settle disputes
- These payments must not contravene statutory rights and are typically accompanied by a deed of release
- Ex gratia payments may be subject to income tax, but specific conditions can influence their tax treatment
- Employers use ex gratia payments to manage risks, avoid litigation, and maintain goodwill
What Are Ex Gratia Payments?
Definition
The term “ex gratia” is derived from Latin, meaning “out of kindness” or “by favour.” In the employment context, an ex gratia payment is a voluntary payment made by an employer to an employee without any legal obligation. These payments are not part of an employee’s statutory or contractual entitlements and are often made as a gesture of goodwill.
Why Are Ex Gratia Payments Made?
Employment Termination
Ex gratia payments are commonly offered during employment termination to supplement standard notice and severance entitlements. They can encourage a smoother transition and discourage employees from pursuing further claims against the employer.
Redundancy
In redundancy situations, ex gratia payments may be used to acknowledge the service of long-standing employees or to address additional hardship beyond statutory entitlements.
Settlement of Disputes
Ex gratia payments are often included in settlement agreements to resolve disputes such as unfair dismissal or discrimination claims. These payments help employers avoid litigation costs and mitigate reputational risks.
How Do Ex Gratia Payments Differ from Other Compensation?
Type of Payment | Legal Obligation | Purpose | Regulation |
Salary/Wages | Yes | Compensation for work performed | Defined in employment contracts |
Redundancy/Severance Pay | Yes | Compensation for redundancy or termination | Regulated by the Fair Work Act 2009 (Cth) |
Ex Gratia Payments | No | Voluntary payment as a gesture of goodwill | Discretionary |
Unlike redundancy or severance pay, ex gratia payments are not calculated based on tenure or other predefined formulas.
Legal and Tax Implications of Ex Gratia Payments
Legal Considerations
- Ex gratia payments are often contingent on the employee signing a deed of release, which waives certain legal rights. However, statutory entitlements (e.g., leave and superannuation) and workers’ compensation claims cannot be waived
- Payment of an ex gratia amount does not constitute an admission of wrongdoing by the employer
Tax Treatment
The taxation of ex gratia payments can be complex. Generally, these payments are subject to income tax unless they form part of a redundancy package eligible for tax concessions.
Included in Employment Termination Payments | Excluded from Employment Termination Payments |
Payment in lieu of notice | Lump sum payments for unused annual or long service leave |
Ex gratia amounts | Tax-free portion of genuine redundancy payments |
Invalidity payments | Superannuation benefits |
For detailed tax advice, consult the Australian Taxation Office (ATO).
Strategic Use of Ex Gratia Payments
Managing Legal Risks
Ex gratia payments can reduce the risk of litigation by encouraging employees to settle disputes amicably. For example, in Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357, the court recognised that an ex gratia payment reduced the amount of compensation otherwise payable.
Maintaining Goodwill
These payments can help preserve relationships with departing employees, particularly in redundancy scenarios where long-serving employees are affected.
Frequently Asked Questions (FAQs)
What is the purpose of an ex gratia payment?
Ex gratia payments are made as a gesture of goodwill, often during employment termination, redundancy, or dispute resolution
Are ex gratia payments taxable in Australia?
Yes, ex gratia payments are generally subject to income tax unless specific conditions apply, such as inclusion in a redundancy package eligible for tax concessions.
Can an employer require an employee to sign a deed of release in exchange for an ex gratia paymen
Yes, it is common for employers to require a deed of release, which waives certain legal rights, in exchange for an ex gratia payment.
Are ex gratia payments legally required?
No, ex gratia payments are discretionary and not mandated by law or employment contracts.
Can ex gratia payments waive all employee rights?
No, statutory entitlements (e.g., leave and superannuation) and workers’ compensation claims cannot be waived, regardless of the payment amount.
