Losing a job can be a stressful experience, and understanding your entitlements is crucial when facing redundancy or negotiating an exit. Two common terms that arise are ex gratia payments and severance pay. While both involve payments from your employer, they have different legal meanings and implications for employees in Australia.
This article explains the key differences between ex gratia and severance pay, how each is calculated, and what you need to know to protect your rights. If you need help reviewing a termination payment or negotiating a fair exit, visit our employment law services page.
Key Takeaways
Severance pay is a legal requirement for redundancies under the Fair Work Act 2009 (Cth)
Ex gratia payments are optional and offered at the employer’s discretion
Only severance pay counts toward statutory redundancy entitlements
Ex gratia may require signing a deed of release – read it carefully
The tax treatment of each payment may differ, so seek advice
What is Severance Pay?
Severance pay (or redundancy pay) is governed by the National Employment Standards and is legally required if you’re made genuinely redundant – unless you’re working for a small business (under 15 employees).
The amount depends on your length of continuous service. You can read more about redundancy and severance payments in our article.
What is an Ex Gratia Payment?
An ex gratia payment is a voluntary lump sum your employer may offer when terminating your employment. These are often:
Part of a settlement package
Used to avoid litigation
A gesture of goodwill for long service
Unlike severance, these payments are not legally required and often come with strings attached (such as signing a deed of release waiving future claims).
Learn more about ex gratia payments in our article.
Legal and Tax Differences
Understanding the legal and tax differences between severance and ex gratia payments is essential. Confusing the two can lead to underpayments, unenforceable agreements, or unexpected tax bills.
Legal Status
- Severance pay is enforceable under the Fair Work Act. This means that you can make a claim if it is not paid correctly.
- Ex gratia payments are contractual, and only enforceable if your employer does not pay what is promised in a signed deed of release.
Tax Treatment
| Payment Type | Taxable? | Notes |
|---|---|---|
| Severance Pay | Yes | May qualify for concessional rates under ETP rules |
| Ex Gratia Pay | Yes | Could be taxed as income or ETP (varies by situation) |
Legal Tip: Don’t assume you’re getting the full benefit. A $10,000 ex gratia payment could be significantly reduced after tax if not structured properly.
Best Practices for Employers: Severance vs Ex Gratia Payments
When ending an employment relationship, it’s essential for employers to distinguish between severance pay (a legal requirement) and ex gratia payments (a voluntary option). Confusing the two can lead to underpayment claims, tax issues, and unenforceable agreements.
Here’s how to manage both types of payments lawfully and strategically:
1. Don’t Confuse the Two
Severance pay is required under the Fair Work Act for genuine redundancies. Ex gratia payments are optional and cannot replace legal entitlements unless the total amount clearly exceeds minimum requirements.
2. Label Payments Clearly
Specify in writing which payments are:
Statutory severance
Ex gratia (and subject to conditions like signing a deed)
Clarity avoids disputes and tax issues.
3. Check Awards and Entitlements
Before making an offer, confirm redundancy pay, unused leave, and notice obligations under any applicable award or enterprise agreement.
4. Get Legal Advice for Complex Exits
Seek legal help when offering ex gratia, especially for senior executive roles, disputed exits, or deed preparation.
For a deeper understanding of your obligations under the Fair Work Act, check out our employer’s guide to the Fair Work Act.
Real-World Example
A client, an employee in Victoria, was made redundant after six years and 9 months of service (just shy of their 7 year long service leave qualification for Victoria).
They were offered:
11 weeks’ severance (per Fair Work)
3 weeks’ ex gratia for signing a release (with the employer recognising their length of service)
After consulting us, we helped the employee negotiate an extra two weeks of ex gratia payment and clarified that the release wouldn’t waive superannuation claims. The result: more money and retained legal rights for our client.
Frequently Asked Questions
What is the main difference between severance pay and ex gratia pay?
Severance pay is a legal entitlement under the Fair Work Act for genuine redundancies, while ex gratia payments are discretionary sums offered by your employer, usually as part of a settlement or goodwill gesture.
Can my employer use an ex gratia payment to offset my severance pay?
Only if this is clearly stated in writing and the total payment at least matches your legal entitlement. Otherwise, your employer must pay the full severance amount separately.
Will I be taxed on my ex gratia or severance payment?
Both types of payment are generally taxable, but the tax treatment can vary depending on the circumstances. Severance pay as part of a genuine redundancy may attract concessional tax rates. Ex gratia payments may be taxed as an ETP or as other income (check with your accountant or legal adviser).
Do I have to accept an ex gratia payment?
No, ex gratia payments are negotiable and voluntary. You should review any settlement deed carefully to ensure you are not giving up important rights for less than you are entitled to.
What should I do if I think I have not received my full entitlements?
If you believe you have not been paid your correct severance or redundancy pay, contact the Fair Work Ombudsman or seek advice from an employment law specialist to discuss your options.
