The word ex gratia comes from Latin meaning by favour. Often employers will dress up their offer of an ex gratia payment to say that it is within their gift and suggest that they are being generous. Whilst it is accurate that there is a discretion on the part of the employer, the ex gratia offer is not usually about doing you a favour.
Here’s the real reasons why ex gratia offer is not simply a sign of goodwill.
- On termination of employment, the employer must ensure that they pay any amounts that are owed under contract – for example, a payment in respect of the notice period (whether there is a requirement to work) and any holiday pay. Depending on the circumstances, an employer will make a termination payment, which is often termed as ex gratia. This is because if it is not out of obligation (i.e. not contractual) then the money can be paid tax free (providing it meets HMRC’s rules).
- An ex gratia payment may be paid out to a loyal employee as a sign of goodwill to recognise long service. Traditionally, this is often termed as a golden handshake. The intention of the payment is often to recognise the service and to provide a financial cushion as the employee looks for work elsewhere.
- Ex gratia payments are often paid with conditions attached. The conditions will play a part in why an employer offers something extra. Most employers will expect employees to sign a settlement agreement that will require the employee to agree not to bring claims, as well as confidentiality and non-bad mouthing terms. The motivation for making an ex gratia payment might be part of how the company manages reputational risk.
- If an employer wants to dismiss an employee, they know that it will take time to do it fairly. Often when an employer is about to start a performance management process or PIP, there is a window of opportunity to offer financial terms equivalent to the months of salary that they would need to pay out to allow for a fair procedure to be followed. Usually, it will take at least three months to dismiss someone fairly and it might be best for everyone to make an ex gratia payment rather than go through a stressful and upsetting process.
- An ex gratia payment is often offered to settle employment tribunal proceedings. The Employer may have assessed the costs involved in defending the proceedings and the risks of being unsuccessful, and realise that they need to make an attractive offer to settle the dispute.
In all cases you will need legal advice to finalise the terms of a settlement agreement. However, it is worth getting legal advice from an employment law specialist in good time, because the amount of an ex gratia payment will vary and often the employer and the employee will negotiate to reach a figure that is acceptable for both sides.
