Summary
- Ex gratia payments are voluntary payments made by employers that are not legally required under a contract or award.
- Businesses must consider tax implications, as some ex gratia payments may be subject to income tax or fringe benefits tax.
- Clear documentation of ex gratia payments helps avoid disputes and ensures transparency in the employment relationship.
- This article explains ex gratia payments in the employment context for Australian business owners, serving as a plain-English guide to understanding when and how such payments apply.
- The content is produced by LegalVision, a commercial law firm that specialises in advising clients on employment law matters.
Tips for Businesses
Before making an ex gratia payment, confirm it is genuinely voluntary and not implied by contract. Document the payment clearly, specifying its purpose and amount. Seek tax advice to understand withholding obligations. Keep records to protect the business if the payment is later disputed.
An ex gratia payment is a voluntary payment made to an employee without any legal obligation to do so. Employers typically offer these payments when the employment relationship ends or breaks down, often to resolve disputes involving wrongful dismissal or victimisation. This article explains the laws regarding ex gratia payments.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
When Can Employers Make an Ex Gratia Payment?
To resolve a legal disagreement with an employee, an employer might make an ex gratia offer. If the employment relationship ends, the aim might be to prevent unfavourable publicity or maintain an amicable relationship.
When determining the amount of an ex gratia payment, you must consider various factors, including:
- the employee’s circumstances;
- whether the employee suffers any actual or perceived loss;
- commercial considerations, including budget;
- reputational risks;
- legal risks; and
- the employee’s salary/remuneration.
When is an Ex Gratia Payment Genuine?
Your company is not obligated to offer an ex gratia payment. After all, it is often a gesture of goodwill. For example, say you terminated an employee, and they subsequently filed an unfair dismissal claim. Before conciliation, you offer them a payment of $500. This is a voluntary payment made as a gesture of goodwill and separate from legal entitlements.
Alternatively, ex gratia payments are not genuine if you provide it instead of a payment borne by a legal entitlement you owe the employee. For example, say your employee recently resigned and has an annual leave balance of $500. You make the payment along with their final pay. This is not an ex gratia payment as it is a legal entitlement.
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Is Tax Payable on Ex Gratia Payments?
Payments are typically tax-free, where you make them upon cessation of employment. If you pay your employee voluntarily upon retirement or termination/resignation, these payments are employment termination payments (‘ETP‘).
An ETP is tax-free if it is related to:
- employment before July 1st 1983; or
- invalidity
If an ETP does not fit under one of these categories, it is likely taxed.
Is an Ex Gratia Payment Confidential?
A usual condition of making an ex gratia payment is that it remains confidential. This can be implemented by, most commonly, a deed of release or other written agreement.
Key Takeaways
Employers can utilise ex gratia payments in disputes with employees. They can be negotiated and balanced according to reputational, legal, and commercial risk. Nevertheless, ex gratia payments to employees are voluntary. That is to say, ex gratia payments are separate from your employee’s legal entitlements, such as paid leave.
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Frequently Asked Questions
An ex gratia payment is a voluntary payment an employer or organisation makes to an employee as a gesture of goodwill and in the interest of resolving a dispute.
An ex gratia payment is voluntary, unrelated to legal entitlements, and typically made without admission of liability.
Yes, ex gratia payments can be confidential by agreement, typically via a deed of release.
Yes. Employers can negotiate ex gratia payments based on factors like the employee’s salary, reputational risks, legal risks, and commercial considerations such as budget.
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