The true meaning of the termex gratia was considered by the
Employment Appeal Tribunal in a judgement handed down this
week.
In many circumstances where an employee is exiting their
employment, it is common for a negotiated settlement to be agreed.
This can often include a payment in lieu of working a notice period
(commonly termed a 'PILON payment'), and sometimes an additional
payment that the employer has no contractual obligation to make,
termed an ex gratia payment. The former is often taxable, but the
latter is not, provided it does not exceed £30,000. The different
tax treatment can sometimes lead employers to rebrand a payment in
lieu of notice as an ex gratia payment. In other cases the terms
are used almost interchangeably. In either scenario there can be
implications for the employer.
The issues that can arise were highlighted by the recent
decision handed down by the Employment Appeal Tribunal (EAT) in
Publicis Consultants Limited v O'Farrell.
In this case an employee, who was entitled to three months'
notice, was dismissed with only a few days notice. The dismissal
letter set out her severance package and stated "Ex Gratia Payment:
you will receive an ex gratia payment equivalent to three months'
salary..." The claimant claimed for breach of contract for a
failure to give her three months' notice of termination, or
alternatively to make a payment in lieu thereof. The employer
argued that the ex gratia payment was, correctly construed, clearly
intended to be payment in lieu of notice. The Employment Tribunal
found in favour of the claimant.
This decision was appealed, but the EAT upheld the Tribunal's
decision. In dismissing the employer's appeal, the EAT found that
the ordinary construction of the words 'ex gratia' describes a
payment made freely and not under obligation, and that there was
nothing in the letter which suggested that the ex gratia payment
was intended to meet the employer's legal obligations under the
contract. Had the EAT concluded that the terms of the letter were
at all ambiguous, they also noted that any such ambiguity would in
any event have been construed against the employer as the author of
the letter and the party relying upon the ambiguous clause.
This case amply demonstrates the consequences of not using
precise language, even in straightforward termination letters. What
then should an employer do to avoid such difficulties? Obviously,
precise use of language and correct use of terms are of paramount
importance. In addition, employers would be well advised to make
full use of the protection afforded by compromise agreements, even
in situations where there is not an immediately obvious matter in
dispute.
Should you require any further information, advice or assistance
on this topic, or on any other employment issue, please do not
hesitate to contact one of our team.