What does 'ex-gratia' mean?

If you are an employee who has just been issued with a settlement agreement, you may have come across the term ‘ex gratia’ for the first time. In this blog post we explain the term, when employers might use it, and what employees can expect when they do.

What is an ex gratia payment?

It’s well known that lawyers love an old Latin term. ‘Ex-gratia’ is Latin and means ‘out of goodwill.’ In the employment context, employers will often make ‘ex-gratia payments’ to employees. These are payments made without there being any contractual obligation for the employer to do so.

Why do employers make ex-gratia payments?

In situations where employees are involved in a disciplinary, grievance or redundancy process, the employer may decide that the best way to resolve matters is through a settlement agreement. Settlement agreements can save time, costs and further strain on the employment relationship, particularly if the employee has more than two years’ service. If the employer chooses to do this, it will usually offer an employee a settlement package in exchange for the employee agreeing that their employment will end and waiving their employment related claims.

An ‘ex gratia’ payment can be one aspect of the settlement package. The package might also include a payment in lieu of the employee’s notice period (the ‘PILON’) and a payment in lieu of any accrued but untaken holiday.

The ‘ex gratia payment’ will be paid without any admission of liability from the employer. The term will therefore often be included to make it clear that the employer is under no legal duty to pay the employee this amount.

Are ex-gratia payments taxable?

As a general rule, ex-gratia payments to employees up to the value of £30,000 are not taxable. If the ex-gratia payment is more than £30,000, anything over the £30,000 will be subject to income tax and employer national insurance contributions.

Almost every settlement agreement we see contains a ‘tax indemnity clause’ setting out that the employee is liable to account to HMRC and/or the employer for any unpaid tax. Upon reading this clause, it can look like the door is open for the employee to pay the tax after all. However, these clauses are standard in almost all settlement agreements and provided that the payments have been considered in advance and the appropriate tax treatment applied in the settlement agreement and at the point of payment, the tax treatment should be fairly easy to anticipate, minimising the risk of nasty surprises.

Negotiating a settlement agreement

There are some things that increase the likelihood of an employee receiving an ex-gratia payment including whether the employee has seen a contravention of their legal rights or entitlements. This is something we always consider when advising on settlement agreements and in a negotiation process.

If you have been provided with a settlement offer or have engaged in negotiations relating to a settlement agreement and you are unsure, we would be happy to advise on the matter.

You can contact us at info@ergolaw.co.uk or on 0131 618 7007 to ensure that you are well informed and achieve the best possible advice in your circumstances. 

Author: Flora Smith, Solicitor