Termination payments: What does ex-gratia mean?

In Publicis Consultants UK Ltd v O’Farrell, the EAT confirmed that an ex-gratia payment did not satisfy the employer’s contractual obligation to pay notice pay.  

Summary of the case

When Ms O'Farrell was dismissed, she was not permitted to work out her 3 month notice period in full even though there was no right in her contract for the company to pay her pay in lieu of notice.  She received a severance package, which included a payment described as "an ex gratia payment equivalent to three months' salary".   Ms O’Farrell claimed breach of contract at the Employment Tribunal.  The Employment Appeal Tribunal confirmed on appeal that there was no reason to believe that the payment was anything other than a gift as it was described as being an “ex-gratia payment”.  Therefore the company had not discharged its contractual obligations as Ms O’Farrell had not been allowed to work out her notice, nor had she received specific compensation for their breach.  The EAT applied the contra preferentem rule and found that as the letter was drafted by the company and could be interpreted in a number of ways, the letter had to be read in the way least favourable to the company.

What does this mean?

Had the employer clearly stated that the payment was made in lieu of notice, rather than as a gift (or an ex-gratia payment), Publicis would have been on much safer ground.  Care should be taken when drafting termination letters - the description of the payment should be accurate and clear, so that there is no room for misunderstanding.  Payments made on an ex-gratia basis cannot be set off against any future payments which the employer is required to make as they are deemed to be a gift; this is unlike a compensation for loss of employment or statutory redundancy payments.