Ex gratia payments can be a practical way to resolve a workplace issue, support an employee through a difficult period, or finalise a dispute without admitting fault. But because they sit outside standard entitlements, they also raise a lot of questions about process, tax, superannuation, and legal risk.
In this guide, we’ll break down what ex gratia payments are in Australia, when they’re commonly used, how to structure them properly, and the key legal considerations to keep in mind. Whether you’re an employer considering an offer or an employee thinking about accepting one, understanding the basics will help you make confident, informed decisions.
What Is an Ex Gratia Payment?
An ex gratia payment is a discretionary, “goodwill” payment made without the payer admitting legal liability and without a strict legal obligation to pay it.
In employment settings in Australia, ex gratia payments are often used to help resolve claims, smooth an exit, or recognise circumstances that fall outside strict legal entitlements. They are additional to minimum entitlements under the Fair Work Act and any applicable award, enterprise agreement or Employment Contract-so they are not a substitute for what’s already legally owed.
Key features of an ex gratia payment include:
- Discretionary: It’s a voluntary amount, negotiated case-by-case.
- No admission of liability: Typically documented as part of a settlement, expressly stating there’s no admission of wrongdoing.
- Separate from entitlements: It does not replace statutory or contractual amounts such as wages, accrued leave, notice or redundancy (those must still be paid if owed).
Common Scenarios in Australia
There’s no one-size-fits-all reason to pay ex gratia. However, some scenarios come up frequently:
- Settlement of a dispute or potential claim: To resolve an unfair dismissal or general protections dispute early, the parties might agree to a once-off ex gratia payment plus a release.
- Enhancing a redundancy package: Employers sometimes offer an additional sum on top of statutory or contractual redundancy to support the transition or acknowledge service.
- Compassionate circumstances: For example, where a long-serving employee faces hardship and the business wants to assist.
- Commercial certainty: Even where you believe your position is strong, a modest ex gratia payment can reduce risk and cost by avoiding protracted proceedings.
It helps to distinguish what is discretionary versus what is owed as a matter of law. If you’re calculating minimum entitlements following a restructure, use a redundancy calculator as a starting point and then consider any ex gratia amount on top of that if appropriate.
How Should You Structure an Ex Gratia Payment?
The biggest mistake with ex gratia payments is treating them as a casual handshake. In practice, you want clear documentation so everyone understands the deal and you minimise future risk.
Use a Clear Settlement Document
Most ex gratia payments are wrapped into a written settlement, typically a Deed of Release. A deed is preferred because it can be enforceable even without “consideration” in the strict contractual sense, and it allows you to cover important protections such as a release of claims, confidentiality and non-disparagement.
Where appropriate, have your lawyer prepare or review a tailored Deed of Settlement so the wording suits your situation (for example, specific claims being released, mutual obligations, and any conditions).
Separate Out Statutory and Contractual Entitlements
List legally owed amounts (wages to last day worked, accrued annual leave, long service leave if applicable, notice or payment in lieu of notice) separately from the ex gratia amount. This avoids confusion later and helps ensure payroll and tax are handled correctly.
Be Clear About Tax Treatment
Tax treatment depends on the nature of each component. Some termination payments may qualify as genuine redundancy or employment termination payments (ETPs) with concessional tax treatment, while others are taxed as ordinary income. Because this is fact-specific, it’s wise for both parties to obtain independent tax advice. Employers should ensure amounts are coded correctly in payroll and reported in the right payment summaries.
For example, whether superannuation applies will depend on the character of each amount. Many ex gratia sums do not attract super, but certain amounts (such as ordinary time earnings or specific allowances) might. Our guide on superannuation on termination payments explains why the classification matters.
Consider Non-Financial Terms
Money is only part of the story. A well-structured settlement often covers:
- Confidentiality of the settlement terms (subject to permissible disclosures, such as to immediate family or advisers).
- A mutual non-disparagement clause.
- Return of company property and data security confirmations.
- Post-employment obligations (for example, restraint or confidentiality reiterations, if applicable in the Employment Contract).
- Mutual release of claims, carefully scoped so you don’t inadvertently release non-waivable rights.
Decide on Timing and Conditions
It’s common to pay the ex gratia sum within a set timeframe after the deed is signed and any conditions are met (for example, return of property or completion of a proper handover). Staging payments can also be useful where handover or further cooperation is required.
Legal Implications Employers Should Consider
Even though an ex gratia payment is “discretionary,” the way you handle it carries legal consequences. Here are the main issues to weigh up before you proceed.
1) No Admission of Liability (But Be Consistent)
Settlement documents usually state the payment is made without admission of liability. Keep your communications consistent with that position. Avoid phrasing that suggests wrongdoing while negotiations are ongoing.
2) Don’t Contract Out of Statutory Rights
Employees cannot waive non‑waivable rights under the Fair Work Act, safety laws or discrimination laws. A Deed of Release can be effective for known or potential claims, but it won’t override rights that legislation protects or matters that arise after the deed is signed. Careful drafting is key.
3) Unfair Dismissal and General Protections Risk
Offering an ex gratia payment does not insulate you from claims if the termination or proposed action is otherwise unlawful or harsh, unjust or unreasonable. That’s why the context matters: process, reasons, and documentation should be sound.
4) Tax and Payroll Reporting
Label and report each component correctly (accrued leave, notice in lieu, ETP categories, ex gratia). Misclassification can trigger compliance issues or unexpected tax outcomes. If you’re unsure, involve your payroll provider early and encourage the employee to seek independent tax advice.
5) Superannuation and Other On-Costs
As noted above, some termination-related amounts may attract super while others won’t. Review the categories carefully and apply the rules to each component. Again, our article on superannuation on termination payments outlines key considerations.
6) Interaction With Notice and Redundancy
Ex gratia payments should be in addition to (not instead of) statutory or contractual entitlements. If you’re paying payment in lieu of notice or redundancy, set these out separately. If you’re restructuring, use a redundancy calculator to estimate minimum entitlements before negotiating anything discretionary.
7) Documentation and Evidence
Keep a clear paper trail of the rationale, approvals, and the signed deed. This is especially important for audit, corporate governance, and consistency with internal policies.
8) Confidentiality and Communications
Once the deed is signed, stick to the agreed messaging. If confidentiality is part of the bargain, ensure internal and external communications align with those obligations.
Step-By-Step Process (For Employers And Employees)
Every matter is unique, but this step-by-step outline shows how ex gratia payments are typically handled in Australia.
Step 1: Identify the Issue and Objectives
Clarify what you’re trying to achieve. Are you resolving a dispute? Encouraging a mutually agreed exit? Recognising hardship? Your objectives will inform the amount and the non‑financial terms you propose.
Step 2: Check Entitlements First
Calculate and confirm statutory and contractual entitlements (for example, wages, unused leave, long service leave if applicable, and any notice or redundancy). Ex gratia sits on top of these amounts-it’s not a substitute.
Step 3: Consider the Offer
For employers, decide what you’re offering and why. Think about risks, likely costs of dispute, and the value of certainty. For employees, weigh the offer against potential claims, the time and cost of pursuing them, and personal circumstances.
Step 4: Draft the Settlement Terms
Ask a lawyer to prepare a concise deed covering the key points: payment breakdown, timing, release of claims, confidentiality, return of property, and any ongoing obligations. If appropriate, the deed can sit alongside a broader separation agreement that addresses references, handover, or garden leave arrangements.
Step 5: Encourage Independent Legal Advice
It’s common-and wise-for both sides to get independent advice before signing. This helps ensure the deed is enforceable and reduces later disputes about pressure or misunderstanding.
Step 6: Execution and Payment
Once signed, process payment according to the agreed breakdown and timing. Use the right payroll codes for each component and provide the correct statements (for example, ETP summaries where relevant).
Step 7: Close Out and Keep Records
Collect company property, close system access, and record the settlement documents securely. Ensure future communications align with any non-disparagement or confidentiality terms.
Practical Questions We’re Often Asked
Is an Ex Gratia Payment the Same as a “Golden Handshake”?
“Golden handshake” is a colloquial term for a generous termination payment, often in executive contexts. It may include contractual entitlements and ex gratia components. The same principles apply-separate entitlements from discretionary amounts, document it clearly, and consider a deed. For senior roles, boards will often align discretionary payments with policy and governance frameworks to manage optics and stakeholder expectations.
Can We Offer Ex Gratia Instead of Notice or Redundancy?
No. Minimum entitlements still apply. You can, however, offer an ex gratia amount in addition to notice in lieu or redundancy, and document everything in one deed. Make sure your payroll treatment and documentation explain each category clearly.
Do We Need a Deed or Is an Email Exchange Enough?
You should use a deed. An email chain won’t usually give you the robust protections you want (for example, comprehensive release, confidentiality, and mutual obligations). A short, well-drafted Deed of Settlement is a small investment that can prevent bigger issues later.
Be careful not to undermine your position. Your settlement communications should be separate from performance management records. When the matter resolves, ensure your files reflect the agreed position and that any references or separation certificates are accurate and consistent with the deed.
Could We Use a Mutual Exit Instead?
Absolutely. In many cases, a mutual exit with a neatly documented package is the most constructive outcome. This often takes the form of a short separation agreement plus a deed (or a combined document) that sets out the practical arrangements and the financial terms. Where appropriate, some employers use a mutual separation agreement-style approach to align expectations and reduce friction.
Tips For Negotiating Ex Gratia Payments
- Focus on the “why”: It’s easier to agree on terms when both sides understand the business and personal drivers (certainty, timing, reputation, transition support).
- Keep it simple: A short, plain-English deed that clearly outlines the breakdown and obligations beats a complex document every time.
- Be specific about timing: State calendar dates for handover and payment where possible.
- Protect confidentiality the right way: Tailor permissible disclosures so people can speak with family or advisers without breaching the deed.
- Avoid mixed messages: Ensure HR, payroll and management communicate consistently-especially about the reason for departure and agreed references.
How Ex Gratia Fits With the Rest of the Exit Paperwork
Ex gratia payments are often one piece of a broader exit suite. Depending on the circumstances, you may also need:
- Termination documentation and a termination documents suite to ensure a compliant process.
- Reference or announcement wording that aligns with any confidentiality or non-disparagement terms.
- Confirmation of post-employment obligations already in the Employment Contract (for example, confidentiality and intellectual property ownership).
- For executive exits, board approvals and alignment with remuneration policies.
If the exit is contentious, consider whether a simple Deed of Release on its own will suffice, or whether you need the deed plus practical schedules (for example, return of property checklists). If there’s short notice, reflect this properly with a clearly identified payment in lieu of notice and separate ex gratia line items.
Key Takeaways
- An ex gratia payment is a discretionary “goodwill” amount, typically used to resolve a dispute or support a smooth exit, and it sits on top of statutory and contractual entitlements.
- Document the arrangement in a clear deed-ideally a tailored Deed of Settlement-covering payment breakdown, a release of claims, confidentiality and practical handover items.
- Separate legally owed amounts (wages, accrued leave, redundancy, and any payment in lieu of notice) from the ex gratia component to avoid confusion and ensure correct payroll treatment.
- Tax and super can vary by component; classify amounts correctly and review your obligations around superannuation on termination payments.
- Be mindful of legal risks: you can’t contract out of non‑waivable rights, and process still matters for unfair dismissal or general protections exposure.
- A short, plain-English deed and consistent communications will reduce the chance of disputes and help both parties move on confidently.
If you’d like a consultation on structuring or documenting an ex gratia payment, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
