An ex gratia payment is a termination payment paid to an employee by an employer in a situation where the employer is not obligated to do so. Ex gratia payments are, therefore, gestures of goodwill on behalf of the employer outside of your contract of employment. Such a payment is also referred to as a golden handshake. These payments are commonly made in a retirement, redundancy and dismissal scenario.
The key feature of an ex gratia payment is that there is no contractual or legal obligation placed on the employer to make it to the employee. Moreover, unlike statutory redundancy pay, there is no limit on how much an ex gratia payment can be.
If your employer has contacted you about an ex gratia payment, it is important that you seek expert legal advice before making a decision about whether to accept it or not. These payments tend to be offered at difficult times, such as part of a dismissal process, and so employees should be well informed about their rights and what impact the payment will have on them.
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Reasons for receiving an ex gratia payment
If you have been the subject of unfair dismissal and your employer wishes to avoid going to the employment tribunal, they may offer you a settlement payment. The terms of this payment are set out in a Settlement Agreement.
On top of the settlement agreement sum, an employer may also offer you an ex gratia payment as a gesture of goodwill and to show you they acknowledge you have been treated unfavourably. Such an offer may also be made before entering into a Settlement Agreement as a means of making that option more attractive than bringing an employment tribunal claim.
It is important that if you are to enter into a Settlement Agreement you seek legal advice to ensure your rights and best interests are protected. At Cavendish Employment Law, we have a well-deserved reputation for securing the best possible outcome for our clients when they are facing problems at work. We specialise in negotiating high-value Settlement Agreements.
Retirement
After many years of service, an employer may offer you an ex gratia payment to encourage you to retire early. This is a goodwill gesture to an employee but can also be to the employer’s advantage when they need to reduce running costs.
Redundancy payments
Employers may often offer an ex gratia payment in a redundancy situation to bring the employment to an end without having to go through the extended consultation stage. This payment would be on top of the statutory redundancy pay you would receive if eligible upon redundancy. Such a payment can vary in value but it is often equivalent to a month’s pay. This gives the employee time after the employment ends to look for a new job. Moreover, an ex gratia payment can also be of benefit to a short-serving employee who would not normally have recourse in redundancy proceedings through law.
Tax Implications
Under the Income Tax (Earnings and Pensions) Act 2003, the first £30,000 of any compensation payment made to you by your employer is considered a tax exemption and is, therefore, tax-free. You must inform HMRC of the payment at the end of the tax year to ensure you do not pay any income tax or national insurance on it. However, payments over £30,000 are not considered tax-exempt and will be subject to the usual deductions of tax and National Insurance.
Any element of the ex gratia payment that is for a contractual entitlement, such as lieu of notice pay or holiday pay, will usually be subject to the usual deductions of tax and National Insurance.
In addition, if an ex gratia payment is promised through a contract or an established routine in a company, it could risk no longer being tax-free, regardless of the amount. This is because HMRC may not view the payment as being out of goodwill but rather an entitlement.
There are scenarios where a payment can be structured to minimise such implications but this can be difficult and employers are wary of doing so. For example, your employer may be willing to make the ex gratia payment or part of it directly to your pension fund rather than directly to you as a taxable individual. Alternatively, some employers may decide to pay your legal costs for you out of the amount that they intended to pay as an ex gratia payment. This is advantageous as this will reduce or remove any amount over the £30,000 threshold.
Legal Advice
It is important to seek independent legal advice when approached by an employer about making an ex gratia payment, especially in cases where you believe you have been unfairly dismissed.
Our employment law solicitors can advise you on how strong your case is and whether you would be likely to secure more by bringing a claim before the employment tribunal. They are experts in negotiating higher settlements on behalf of clients and can also advise whether you should accept a settlement agreement and ex gratia payment.
Our team of specialist employment lawyers can also advise you on the implications that any ex gratia payment will have on your income tax and national insurance contributions. It is important that before you accept any offer of payment you know how it will affect your circumstances.
Contact our Ex Gratia Payment Solicitors in London
If you are facing any difficulties at work or if your employer has discussed the possibility of an ex gratia payment with you, do not hesitate to get in touch with us. Our team can analyse and explain the implications that any payment can have on your right to legal action against an employer, as well as any tax implications.
We are based in the heart of London with our head office in Gracechurch Street, and assist clients throughout the UK from our offices in Chancery Lane, Holburn, Wandsworth, Hammersmith, Isle of Dogs, Crawley and Barking. One of our employment law solicitors will be able to advise you within hours of your call. To speak to a member of our team, call us on 020 9657203 or contact us online.
