Stung twice – the dangers of labelling contractual payments as ‘ex-gratia’.

Employers are often tempted, or sometimes persuaded by the exiting employee, to make termination payments ex-gratia if possible. This can be useful in circumstances where the employee is leaving in acrimonious circumstances and the employer wants to make the payment tax efficient, to the benefit of both parties.

However, employers must be careful when doing so, as the recent case of Publicis Consultants v O’Farrell. O’Farrell was dismissed and was entitled under the terms of the contract of employment to be paid three months notice. A letter from the Respondent recorded that she was being paid a sum equivalent to three months salary, ex-gratia. The Claimant took this money and then claimed that she had not been paid her notice pay.

The case went up to the Employment Appeal Tribunal which ruled that the employer had not paid the notice required by the contract and that the ex-gratia sum did not satisfy their obligation to do so. Although this was obviously a matter of ‘mis-labelling’, the Tribunal deemed that the ex-gratia sum was just that – not paid in satisfaction of any contractual obligation.

Employers are advised to;

• Refuse to make payments ex-gratia where these are in fulfilment of a contractual obligation. In some circumstances notice payments can be paid without deduction of tax, but they must always be labelled correctly in the covering correspondence or agreement.

• If the payment is made under a compromise agreement ensure that all of the possible claims, including those for sums due under the contract, are covered by the agreement, so that the employee may not make claims for these later.

For more information on the above or for advice on any other employment issue please contact our employment department on 020 7354 3000 or e-mail employment@colmancoyle.com

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