An ex gratia payment is made to an individual by an organization, government, or insurer for damages or claims, but it does not require the admittance of liability by the party making the payment. Ex gratia means ‘by favor’ in Latin, highlighting the voluntary nature of such compensation.
Key Insights
- An ex gratia payment is made to an individual by an organization, government, or insurer for damages or claims, without the need to admit liability.
- These payments are voluntary; the party making the payment is not obligated to compensate the individual.
- In the U.S., ex gratia payments are typically subject to federal and state income taxes.
Delving Deeper into Ex Gratia Payments
Ex gratia payments stand apart from legally-mandated payments due to their voluntary nature. Entities such as organizations, governments, and insurers usually provide compensation only when legally required. Therefore, ex gratia payments are relatively uncommon.
For instance, when an insurance company compensates a policyholder for a covered injury, it does so due to legal obligation—this is not an ex gratia payment. Conversely, ex gratia payments arise from a desire to offer goodwill, without any admission of liability.
A company might make an ex gratia payment in response to a loss experienced by a recipient, though such a gesture is not considered an admission of liability. For example, providing a one-time credit due to a service disruption qualifies as an ex gratia payment, as it is related to a specific loss.
Organizations may utilize ex gratia payments as part of long-term strategies to maintain good relations with recipients. For instance, a large retailer might offer a severance pay exceeding the legal requirement to alleviate negative publicity surrounding layoffs. British Airways, for example, frequently issues ex gratia payment cards to past customers who were inconvenienced, aiming to sustain positive customer relations.
Special Considerations
In the U.S., ex gratia payments are typically subject to federal and state income taxes. However, in the United Kingdom, ex gratia payments under £30,000 are not taxable, provided the payment is not for work executed or services rendered.
Although the first £30,000 of an ex gratia payment is tax-free in the UK, recipients must inform Her Majesty’s Revenue and Customs (HMRC) of the payment at the tax year’s end to ensure exemption from income tax or national insurance.
With thoughtful application, ex gratia payments can serve as powerful tools in maintaining goodwill and mitigating any adverse effects from potential losses or damages.
Related Terms: compensation, liability, goodwill, severance, insurance claim
References
- British Airways. “Ex-gratia payment card dispute form”.
- GOV.UK. “Redundancy: your rights”.
- Cavendish Employment Law. “Ex Gratia Payment Solicitors for Employees & Executives London”.
