What does ex gratia mean?
The British legal system is descended from the European legal system, which was influenced by the courts of ancient Rome. Back then, Latin was the predominant language. It survived as such for around 1,000 years.
One reason might be that Latin was the language of ‘the educated classes’ and those were the people who tended to become lawyers. Another is that the definition of terms is critical in law, which needs precision. While everyday language is constantly evolving, the original Latin terms remain constant and mutually understood in court.
A report we found says most laws were translated into Old English in the ninth century – but some Latin terms have passed down throughout the ages.
One of the Latin expressions that still applies today is ‘ex gratia’.
It means ‘given as a favour or from a sense of moral obligation rather than because of any legal requirement’.
In modern-day terms, you might think of it as a ‘goodwill payment’ or a ‘golden handshake’.
When might you get an ex-gratia payment?
You might get an ex-gratia payment as part of the settlement you get when you’re leaving work after redundancy or a dispute with your employer.
If there is a legal minimum your employer must pay you that’s specified in your contract of employment, the ex-gratia element is paid on top of this. It’s the voluntary ‘goodwill’ extra amount you get, over and above the legal minimum.
Note that a settlement agreement is known as a compromise agreement in Northern Ireland. We have offices in Belfast, Leeds, London and Newcastle and can help with any employment law advice you may need. All initial enquiries are completely free of charge and without obligation.
Benefits of an ex-gratia payment
The first £30,000 of an ex-gratia payment is usually tax-free. This is a huge benefit to you, the recipient, as you get to keep all the money you’re awarded instead of having to give a chunk to HMRC.
You will have to declare the amount on your next self-assessment tax return, but simply tick the ‘ex-gratia’ box and you won’t be taxed on it.
Anything you get over £30,000 is subject to tax at your usual rate. Also, your employer will have to make National Insurance contributions on the excess, which might restrict the amount they are prepared to offer you.
The reason you can get a tax-free amount is because the Government would prefer employees and employers to settle early, without having to go to court – which takes time, trouble, stress and expense for all involved.
Statutory redundancy payments up to £30,000 are also paid free of tax. However, if you go to court and get awarded a settlement, it’s not tax-free.
You might notice a tax indemnity clause in your settlement agreement or compromise agreement. It might look as though you have to pay tax after all. But don’t panic. This is standard wording. In practice, this clause is there just in case of future tax changes (which are never applied retrospectively).
We help employees to negotiate an agreement that is as tax-effective as possible. For example, an amount over £30,000 could be paid into your pension free of tax, or used first towards legal fees with the balance to you.
Why might your employer offer you an ex-gratia payment?
If your employer has treated you badly, it’s a payment you get in the form of compensation. A bit like a financial apology for whatever went wrong.
If your job has been made redundant, it’s a payment you get in return for agreeing not to take your employer to the employment tribunal.
Another example is when your employer wants to hasten the redundancy process, and they offer to pay you for a month ex gratia, rather than go through a month of consultation that would still result in redundancy. That would apply even if you don’t have two years’ continuous service and wouldn’t usually qualify for any redundancy pay at all.
Note that your contractual notice pay cannot be paid ex gratia. Notice pay would attract tax and National Insurance deductions as usual.
How to negotiate an ex-gratia payment
Here are some of the things you can offer in your negotiations with your employer, in return for them giving you an ex-gratia payment:
- If you were intending to raise a grievance, subject access request or discrimination questionnaire, you might offer to stop
- If you choose to resign and leave quietly, rather than go through performance improvement procedures
- If you offer to keep information about the company or the agreement confidential
- If you agree to restrictive covenants (also known as non-compete clauses)
- If you promise not to say anything derogatory about the company
We help employees to negotiate settlement agreements and compromise agreements.
Related reading
For more on this, please see our other articles on the subject:
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