An ex gratia payment (‘EGP’) covers any voluntary payment made to settle a dispute. Many people are skeptical of such a situation and perceive it as a form of hush money. Before jumping to any conclusions, keep reading this article to find out what is an EGP and what does it entail.
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When would you receive an ex gratia payment?
There isn’t a defined list of circumstances when an EGP would be made. Thus, it’s important that you are able to identify it. As ex gratia is Latin for “by favour”, you should consider whether:
- The payment is obligated by law; and/or
- There are any conditions attached to the payment.
If your answer is yes, then the payment is not ex gratia. An EGP must be voluntary, a gesture of goodwill.
For example, if your employment contract has been terminated and your employer has itemised your annual leave pay as an EGP, this is incorrect. Your employer is obligated by law to pay out any unused annual leave upon the conclusion of your employment. Similarly, if you are provided payment in return for agreeing to a restraint of trade provision, this is not an EGP because it is conditional on you refraining from work.
Who would generally provide an ex gratia payment?
The three main culprits are large corporations, the government, and insurance companies.
- Large Corporation – e.g. when laying off workers or receiving a complaint
- Government – e.g. when compensating victims in a class-action suit
- Insurance Companies – e.g. when a claim is out of scope but some form of financial payment is awarded anyway
When should you accept an ex gratia payment?
An EGP is usually provided in hopes of settling a dispute. Therefore, the question you should be asking yourself is what do you want from the situation? What is your ideal outcome?
If you are simply trying to recoup wasted expenditure, an EGP might be sufficient. Alternatively, if you believe that a serious injustice has occurred, compensation might not be enough. Accepting an EGP does not stop you from pursuing legal proceedings. Further, if a condition such as this applies, then the payment is not an EGP.
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Is my ex gratia payment tax-free?
This is only applicable to payment upon termination of employment. If you have received a voluntary payment from your employer on retirement or termination of employment, it is considered an employment termination payment (‘ETP’).
An ETP would be tax-free if it relates to
- employment before 1 July 1983; or
- invalidity.
If your ETP does not fall within one of the categories above, the ETP is taxable.
Conclusion
Although the thought of receiving free money may pose some concerns, it shouldn’t. Remember that an EGP is voluntary and shouldn’t come with any conditions. If your payment comes with conditions, then it is not ex gratia. If you are unsure about whether a payment is ex gratia, it may be wise to reach out to a lawyer. They’ll be able to assess the situation and provide you with advice on the payment.
