Ex Gratia Payment – Definition

Cite this article as:"Ex Gratia Payment – Definition," in The Business Professor, updated October 7, 2019, last accessed October 21, 2020, https://thebusinessprofessor.com/lesson/ex-gratia-payment-definition/.


Ex Gratia Payment Definition

Ex-gratia is a Latin word that means favor or goodwill. An ex-gratia payment of ex-gratia settlement that an employer, government, or insurance agency gives to a person as a sign of goodwill, rather than as a liability or an obligation. The person issuing the payment does not need to admit the damages or the liabilities legally.

A Little More on What is an Ex Gratia Payment

Ex-gratia payment is a voluntary act of kindness since it isn’t the obligation of the paying party to compensate an individual any losses. For example, the government can add a certain amount of money to a person’s retirement benefits to thank the employees for their good work. A government can also decide to compensate an investor’s losses by making ex-gratia payments even though it is not under an obligation to do so.

Most employers and organizations pay their employees the ex-gratia together with the employee’s annual bonus. According to the Payment of Bonus Act, the employer should give the employees up to 20% bonus annually. In case the employer wants to pay more than 20%, the extra cash becomes an ex-gratia.

Employees in industries that neither make profits nor losses like non-governmental organizations, always receive ex-gratia from their employers since the bonus act does not cover them. Ex-gratia payments may vary depending on the organization or the government institution where the employee works.

Differences between ex-gratia payments and bonus

Employers give ex-gratia payments as an act of compassion or kindness while they pay bonuses according to the performance and productivity of employees.

The amount the employee decides to pay in an ex-gratia varies, while bonuses range from 8% to a maximum of 20% according to the employee bonus act.

Employees who are not under the Bonus Act receive ex-gratia, while employees under the Bonus Act receive bonuses.

 Taxation of ex-gratia payments

Any payments that an employee receives from an employer are usually subject to income taxes, and HM Revenue and Customs define them as payments arising from the employment contract. The United States Income Tax Act of 2003 section 403 exempts ex-gratia payments below $30,000 from taxation. The US government does this because an ex-gratia payment is not part of the employee’s salary, but rather a gift from their employer.

However, the employee needs to report ex-gratia payments that are above $30,000 to the Internal Revenue Service to avoid tax liabilities. Holiday payments, lieu of notice payments, and normal contract payments are subject to tax even when the employer pays them through a settlement agreement.

 Including Ex-gratia into annual OTC

An annual Cost to Company is the total amount of money that a company spends on an employee in one year. If the money the company is paying the employee is an ex-gratia, then the company should not include it in the OTC.

Monthly payments cannot be in the category of an ex-gratia payment, and the employer should include it in the income. An ex-gratia payment is like an incentive that the employer pays by choice.

Examples of ex-gratia payments

A government or an organization may make ex-gratia payments under the following circumstances;

An organization may be compensating accident victims or sick employees but not admitting that they are the cause of the accident or illness.

A company laying off employees may compensate them by making ex-gratia payments in case the employee was performing exemplary at work over the years. The employer adds the ex-gratia payment on top of the normal statutory payment that the law requires them to pay to the employee.

In 1988, Iran Air Flight was fired upon by the USS Vincennes, killing 290 people. The president of the United States offered ex-gratia payments to the victim’s families as a sign of his condolences.

An insurance company can also decide to make ex-gratia payments to customers whose claims do not meet the requirements, as a sign of compassion and kindness.

In 2016, David Bain was awarded an ex-gratia payment of NZ$925,000 by the New Zealand government after he was proved innocent of killing his family.

During the 1988 constitutional crisis in Malaysia, some of the judges were affected. In 2008, the prime minister at the time offered ex-gratia payments to the affected judges.

 References for “Ex Gratia Payment”






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