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Avoid using the term "ex gratia"

Posted on 26th July 2011
Case law

This article explains why you should not describe a compensation payment as being "ex gratia".

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Simon Quantrill Simon
Quantrill
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"Ex gratia" simply means a 'gift'

Puplicis Consultants UK Ltd v O'Farrell UKEAT.04304/10

Background

Astute employment lawyers know that it is incorrect to describe a compensation payment, for example in a compromise agreement (now called a settlement agreement), as being "ex gratia". A termination payment, especially if all or part of it is going to be paid free of all tax deductions, should be described as a "compensation payment". Getting the terminology wrong can prove to be an expensive mistake for the employer.

The Employment Appeal Tribunal (EAT) held that a termination payment described by the employer as "ex gratia" did not stop the employee pursuing the employer for damages for breach of contract. In this case the employee, Miss O, was dismissed in breach of her entitlement to three months' notice. She was paid a severance package which was described in the termination letter as "an ex gratia payment equivalent to three months' salary". The contract of employment did not include a right to pay in lieu of notice. The employee claimed a breach of contract in the employment tribunal.

The decision

The EAT upheld the employment tribunal's decision that Miss O was entitled to three months' notice pay as damages. "Ex gratia" simply means a 'gift'. This is the straightforward and acceptable meaning of this expression. The EAT applied the "contra preferentem rule" of interpretation which meant that as the letter was drafted by the employer and, as it could be interpreted in two ways, had to be read in the way least favourable to the author.

In practice

The moral of the case is that great care must be exercised in how severance or termination payments are described. In relation to the expression "ex gratia" there is also the possibility that HM Revenue & Customs will regard the payment as a taxable gift - often this is of course not what the employer or the employee will want! You have been warned. 

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