Among the modern features of payroll services are benefits and payments that new employers and employees may not be aware of. Ex gratia payments are lesser-known bonus payments that can be offered to employees in some circumstances. i3Group work with businesses to structure payments to support employees, regardless of the context of the bonus. All ex gratia payments are extended in a timely fashion to coincide with the employee’s end of contract timeline.
Let’s explore what those ex gratia payments are and what conditions typically support the payment.
Firstly, what is an ex gratia payment?
An ex gratia payment is an entirely voluntary bonus that an employer can extend to an employee, translating to ‘by favour’. The payment can be a bonus or gesture of goodwill to an employee leaving the business, and that amount can be paid out as a bonus or a payment to a nominated superannuation fund. Generally speaking, ex gratia payments will be made as employees finish with an employer, but they can also occur through active employment.
Ex gratia payments after a negative outcome
In the event of an employee leaving the business in suboptimal circumstances, employers can extend an ex gratia payment as a gesture of goodwill. The motivation will typically be to satisfy a negative outcome, with the expectation being that the employee will not generate negative publicity. It is important to note that ex gratia is not a legal requirement or reinforced as such, but rather extended at the discretion of the employer.
If an event has occurred and an employer wishes to work with the employee to satisfy any damages they may have been sustained, a settlement payment may be a better alternative. This settlement payment, unlike the ex gratia payment, comes with a contract and a legal agreement as to what is expected from that settlement payment.
Ex gratia payments are not the same as owed wages
Owed wages cannot be extended as an ex gratia payment, as employers are legally obliged to pay owed wages, whereas an ex gratia payment is an involuntary payment. Professional payroll solutions will process these differing payments as separate amounts, and the ex gratia payment may even come out of a different cost centre than wages. If employers are planning to pay an ex gratia at the termination of a contract, in whatever context, this must be in addition to any owed wages which has to be satisfied.
Unpaid leave entitlements are another payment an employee should receive when exiting a business, and this is not an ex gratia pavement. Employees and employers should review contracts, wage records and leave balances when an employee is terminated so that all contractual obligations are satisfied. When this is done so and an additional payment is extended, this is a goodwill ex gratia payment.
Ex gratia negotiations and conditions
There are some industries where ex gratia payments are expected, even if it is not written into a contract or a legal requirement. For example, a recruiter may be leaving an organisation, and the employer can negotiate an ex gratia amount under the condition that the employee does not work for a competitor or take clients with them. A professional working in a sensitive industry wherein intellectual property carries significant weight may also receive an ex gratia payment to be negotiated as a non-disclosure.
Ex gratia compliance
The ATO has defined the terms and thresholds of ex gratia payments, and if they are satisfied then these payments can be tax-free to an employer, provided it is a one-time payment and the employee is exiting the business. A gesture of goodwill to an active employee or a payment that occurs in multiple parts will be taxed. When working with one of i3Groups payroll software and professionals, ex gratia taxes and caps can be calculated to ensure that the best outcome is achieved for both parties.
Are there any benefits to ex gratia payments?
The circumstances surrounding the ex gratia payments are going to determine whether this is a beneficial outcome. Employers may find that a nominal financial sum extended to an employee is a lesser cost to a business than any negative publicity would have. Alternatively, to be regarded as an employer that acknowledges the commitment and work of an employee might make that employer an attractive option for skilled candidates. Consider the lifecycle and impact of that employee before deciding on an ex gratia payment or policy.
Interested in other ex-gratia resources? Check out our ex gratia FAQs.
i3Group have been assisting small and large businesses with payroll systems all over Australia. Talk to our team today about your payroll processes that need refining, and allow our experienced team to provide a tailored approach.