What is an employment ex gratia payment?

An ex gratia payment is a payment that is made to an employee that an employer does not have to legally pay. It is a payment that is above a worker’s statutory or contractual entitlements. The term ‘ex gratia’ means ‘in favour’.

An ex gratia payment is generally offered to an employee in exchange for signing a deed of release. An employee typically gives up certain legal rights by signing a deed of release. The settlement payment is made in exchange for the employee giving up those rights.

In this article, our employment lawyer discusses:

1. The benefits of an ex gratia payment
2. Working out the amount of an ex gratia payment
3. What happens if an employee is not offered an ex gratia payment?
4. What rights are given up in exchange for the ex gratia?
5. Is an ex gratia payment an admission of wrongdoing?

The benefits of an ex gratia payment

Payment of a settlement amount is intended to bring a legal dispute (or potential legal dispute) to an end. A settlement amount should be offered under the terms of a deed of release.

No further legal claims can be brought if a settlement amount is paid and the terms of the deed are appropriate. This is subject to some limitations which are discussed below.

The benefit is that:

• without the ex gratia, an employee has no incentive to sign a deed (because they are already entitled to their entitlements); and
• an employer has certainty about how much the dispute is going to cost.

Working out the amount of an ex gratia payment

There is no set formula for working out how much should be paid as a settlement amount.

What matters is the figure that the employer is willing to pay. And it also depends on the figure that the employee is willing to accept.

The worse the employer’s legal position, the more likely a higher amount will be needed to secure an agreement. But the same is true for an employee. For instance, a lower amount may be offered if an employee’s legal case is not strong.

An ex gratia amount can reduce an award of damages

In Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357, the employer paid an employee an ex gratia payment. However, a deed of release was not signed. The employee later sued the employer. The Court held that:

• The ex gratia payment had a sufficient connection to the claim for compensation and therefore reduced the amount of compensation the employee was otherwise entitled to; and
• If the ex gratia payment was not taken into account, the employee would recover more than what she had lost (and would be unfair).

Employment termination payments and tax treatment

In Australia, employment termination payments may be subject to a lower tax rate. Whether an ex gratia amount will be treated as an employment termination payment depends on a number of factors. Those factors include:

To find out how these amounts might be taxed, you can visit the ATO website. You should also consult with your tax or financial advisor.

What happens if an ex gratia payment is not offered to an employee?

If a settlement amount is not offered to an employee, there is no incentive to sign a deed of release. Employees may still decide to sign a deed of release, however, it is less likely.

It may also call into question the validity of a deed where nothing is being exchanged for the releases. Although a deed does not need to have ‘consideration’ (i.e. money paid), it might be seen as coercive and unfair.

Employers and employees should always seek advice from an employment lawyer before offering or accepting a deed of release.

What rights are given up in exchange for the ex gratia?

In an employment context, there is an expectation that legal rights are given up in exchange for payment.

The extent of rights given up depends on the terms of the deed of release. And it may also depend on the amount of the ex gratia. For instance, if the settlement amount is very low, the rights may be limited to a specific issue. On the other hand, if the amount is substantial, there may be a requirement to provide a release from all legal claims in relation to the employment. This is subject to negotiation between the parties.

There are two rights that cannot be contracted out of in an employment deed. No matter how high the ex gratia amount is, it will not exclude these rights. They are:

1. Payment of statutory entitlements, such as leave and superannuation
2. Workers’ compensation claims

If an employer puts these terms into a deed of release, those terms are not enforceable. However, it’s still important to remove them. This is because the employer might be said to be misleading the employee regarding their rights.

Is an ex gratia an admission of liability?

The short answer is no. Payment of a settlement amount (provided there is an appropriate deed of release in place) is not itself an admission of liability. It is common for deeds of release to contain a clause stating that neither party admits liability.

Often, payment of an ex gratia amount may be made when one or both parties feel strongly about their legal position. However, it may make more sense financially (and given the time investment required by legal proceedings) to pay an ex gratia amount rather than seek to prove you are right in legal proceedings or leave the door open to a potential legal claim.

Remember, just because a claim is made by an employee, it does not mean that the employee is going to win. But the same is also true of any defence put forward by an employer. There are often areas of grey in employment law. Ex gratia payments help to manage this risk by encouraging parties to settle and enter into a deed of release.

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