Ex Gratia Payments: What are They & When do Employers Pay Them?
“Ex gratia” is a Latin term which translates to “by favour”. An ex gratia payment is a voluntary payment made to an individual even though the party making the payment is not obligated to do so. Such payments are generally regarded as a gesture of goodwill to maintain good relations.
In the context of employment laws in Singapore, an employee may receive voluntary payment from an organisation, government ministry, or company which he works for without any contractual obligation. This generally takes place when the employment relationship ends, for example, upon the employee leaving the company.
This article will cover:
What is the Difference Between Severance Payments and Ex Gratia Payments?
Severance pay is a compensation and/or retrenchment benefit that an employer offers an employee upon termination of their employment contract. Such payments are typically offered when employees are retrenched or laid off due to a company restructure or downsizing.
Severance payments may be contractually provided for in an employee’s contract and is a legal requirement under the Employment Act for employees who have worked for a company for more than 2 years. On the other hand, an ex gratia payment is wholly dependent on the goodwill of the company and is generally not referenced in employment contracts.
This means employees working for the company for less than 2 years and whose contract does not provide for severance payments, can only rely on the ex gratia payments of the company to reward them for their work done.
When Do Employers Pay Ex Gratia Payments?
An employer may offer an ex gratia payment for several reasons, including to:
- Reward an employee’s good performance
- Recognise an employee’s service
- Resolve or settle a legal dispute with an employee out of court
The employer typically offers an ex gratia payment when the employee leaves the company. For example, where the employment contract does not state that the employee is entitled to severance payments, the employer may still pay the employee ex gratia payments in recognition of the employee’s service.
Alternatively, the payment may arise as a result of a negotiated settlement following a legal dispute (e.g., where the employee claims unfair dismissal or workplace discrimination by the employer). In order to resolve this legal dispute with an employee, an employer might make an ex gratia offer. Even if the employment relationship ends, the aim might be to prevent unfavourable publicity for the company or avoid costly litigation. In such cases, the employee would usually be expected to sign a settlement agreement to receive the ex gratia payment to ensure that the employee would not pursue any further legal claims against the employer.
How Much Ex Gratia Payment is the Employee Entitled to?
The ex gratia payment amount is not fixed and can vary from company to company according to the employer’s wishes. Various factors may be taken into consideration such as:
- The employee’s contributions – the employer may consider the significance of the employee’s contributions to the company and make an offer that adequately rewards such contributions.
- Whether the employee suffers any actual or perceived loss – if possible, the employer would use the monetary sum of the loss to assess how the ex gratia payments would measure up against the financial loss suffered by the employee. E.g., if the employee is involved in an unfortunate work accident that affects his ability to work, the loss in earning capacity suffered by the employee is the difference between the employee’s pre-accident earnings and the amount that he earns after the accident. The employer would use the loss of earning capacity to calculate the ex gratia offer in order to compensate the employee for his loss.
- Commercial considerations, including budget – how much financial resources the employer has to pay the employee.
- Reputational risks – the employer may weigh the costs of a legal dispute with the employee not being kept confidential. E.g., the employer may offer ex gratia compensation to the employee in order to settle the dispute out of court and avoid any negative press.
- Legal risks – where the employee intends to pursue a valid legal claim against the company, the employer may assess the costs of possible litigation when considering how much ex gratia payment to offer. The employer may arrive at the conclusion that it is more cost-effective to offer ex gratia payments compared to hiring a lawyer to deal with the legal claim. E.g., the prospective costs of litigation, including filing fees and legal fees, are estimated to be $10,000. The employer can use this amount as a gauge of how much ex gratia payment should be offered to avoid such litigation costs. It would be financially sensible to offer an amount of ex gratia payment to the employee that is less than $10,000.
- The employee’s salary/remuneration – the employee’s salary would serve as an indicator of how significant the ex gratia offer is.
Since ex gratia is a voluntary payment, there is no fixed method on how to calculate these payments. Unlike a legal claim, where employees can file a claim with the Ministry of Manpower or take the case to court, employees do not have a legal avenue of recourse to dispute the amount of ex gratia payment. There is no governing body overseeing the proper calculation of gratuity amounts or legal action that they can bring.
Legally Entitled Payments vs. Ex Gratia Payments
Generally, companies are not obligated to offer ex gratia payments and they are viewed as a gesture of goodwill. This should be in addition to what the employee is legally entitled to, meaning that ex gratia payments made in place of what is already owed to the employee are not genuine ex gratia payments.
For example, an employee who recently resigned has an annual leave balance that amounts to $1,000. This $1,000 that is paid in addition to the employee’s final salary payment before the employee leaves is not an ex gratia payment, but the employee’s legal entitlement by law (i.e. the encashment of unused leave).
On the other hand, any additional payment of retrenchment benefits above and beyond what the employee is entitled to is a payment made out of goodwill and considered ex gratia. For example, in the employee’s retrenchment agreement, the employer may offer $1,000 in recognition of the employee’s contributions during the period that he was in the company. This is not a sum that the employee is originally entitled to and is considered a genuine gesture of goodwill.
Differentiating between legally entitled payments and ex gratia payments will determine whether the employee can bring a legal claim for the sum of money. If the sum is part of the employee’s legal entitlement, the payment is not ex gratia and the employee can bring a legal claim for that amount.
CPF deductions of Ex Gratia Payments
As an employee, any payment of wages attracts CPF contribution. Under the CPF Act, wages are defined as remuneration in money, including bonuses that are due or granted to a person in respect of their employment. Whether an ex gratia payment also requires the payment of CPF contributions is dependent on the nature of the ex gratia payment.
Ex gratia payments given in respect of the employee’s employment are subject to CPF contributions, such as where the payment is to:
- Reward your employee’s good performance,
- Reward your employee for the completion of a contract/project,
- Entice your employee to remain in employment, or
- Recognise your employee’s service with you.
Conversely, if the ex gratia payment is given for termination or loss of employment, CPF contributions are not payable. These payments are not considered wages and are not CPF-deductible as they are not given for service or work done by the employee.
Tax Payable on Ex Gratia Payments
According to the Income Tax Act, income tax is meant to be levied on gains or profits from any employment, including wages, bonuses and gratuity.
Hence, to determine if the payment is taxable, one has to examine the nature of the payment itself. Generally, payments made by an employer to an employee as compensation for loss of employment, such as during retrenchment, or where the employment term has come to an end, are not taxable in Singapore. Such payments are considered capital receipts, which means that it is an incoming cash flow from non-operating sources. This is differentiated from income which is earned for active work done by the employee. Conversely, if the payment is not for loss of employment and are ex-gratia payments for past services, these payments are considered payment for services and are therefore taxable.
In practice, however, the intent and nature of payment may be difficult to determine. The taxability of payments should be based on nature, characteristic and intent rather than how the payment is termed or written in the contract.
Confidentiality of Ex Gratia Payments
Depending on the intent of the ex gratia payment, the employee may be asked to sign a settlement agreement or confidentiality agreement as a condition for accepting and receiving the payment.
One example would be when an ex gratia payment is offered to settle a legal dispute; the employer might ask the employee to sign a settlement agreement not to commence legal proceedings against the employer as a condition of the settlement payment. In addition, the employee might also be asked to sign a confidentiality agreement where the employee would agree not to disclose details of the dispute to the media or future employers so that the employer can avoid any negative publicity.
Once a legally binding document (such as a settlement agreement or confidentiality agreement) is signed, the employer may take legal action against the employee if they breach the terms of the agreement. If the employer’s case succeeds, the employer may be able to obtain damages for the loss suffered or even an injunction against the employee not to breach the signed confidentiality agreement.
Does Accepting Ex Gratia Payment Mean That an Employee Cannot Take Further Legal Action Against the Employer?
This would depend on whether the employee has signed a contract and the specific terms of the contract. If the ex gratia payment has been accepted and a legally enforceable settlement agreement is signed, the employee would unlikely be able to take further legal action, as they would otherwise risk being in default of the settlement agreement. In such a case, the employer may commence legal proceedings to enforce the settlement agreement.
For example, in a 2022 High Court case, the next of kin of an employee who had tragically passed away following a workplace accident were given ex gratia payments as part of a settlement agreement. The parties signed a deed that discharged the employer from any further payment in contract, tort or other law. However, the next of kin of the deceased employee subsequently lodged a claim for compensation with the Commissioner for Labour (Commission) under Workplace Injury Compensation Act (WICA). Under the WICA, the Commission can assess the amount of compensation as part of alternative remedies apart from those in contract, tort or other law. The issue was whether the Commission should take into account the ex gratia payment made by the employer to the employee’s next of kin when assessing the amount of compensation payable under WICA.
The court decided that WICA was meant to facilitate quicker payment of compensation to workmen as compared to legal claims. Although WICA does not explicitly require the Commissioner to take the ex gratia payment into account, WICA does not allow an employee (in this case, the employee’s next of kin on behalf of the employee) who has already received a settlement payment from his employer to also obtain compensation in respect of the same injury. The court also found the ex gratia settlement payment amount to be fair and adequate. As such, taking the ex gratia settlement payments into account, the court decided that no further compensation was payable to the employee’s next of kin.
Nevertheless, whether the employee has a valid claim would depend on the statute that the employee is claiming under and whether the statute would allow for claims other than that in law. This area of law may be contentious and the employee is advised to seek legal advice regarding his particular case before commencing any legal proceedings.
In summary, ex gratia payments are voluntary payments that an employer can offer to its employee, usually at the end of their employment. Unlike legally entitled payments, ex gratia payments are made on a voluntary basis. Nevertheless, the intent behind making the ex gratia payments will determine whether they are subject to CPF deductions and taxes. Likewise, the option of pursuing legal action after the ex gratia payment is accepted would also depend on the precise circumstances of the case and the terms of any agreement that may have been signed by the parties concerned.
Since any possible legal claims would depend on the facts of the case, you should seek advice from an experienced employment lawyer for further guidance on this topic. If you are an employee, a lawyer can help to evaluate your specific case and suggest possible avenues of action that you may wish to take against your employer, if any. A lawyer can also advise an employer on making ex gratia payments and protecting their interests in the event they are the subject of a legal dispute concerning ex gratia payments.
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