Ex Gratia Payment Letter Template: What To Include

Sarah runs a cafe in Brisbane. One of her managers is leaving after a difficult few months, and Sarah wants to offer an extra $3,000 as a goodwill payment so everyone can move on respectfully.

She knows the payment is discretionary, but she isn't sure what the letter should say. Can she call it a final settlement? Should she ask the employee to sign something? Does super apply? And how does she avoid making it sound like the business has done something wrong?

If you're looking for an ex gratia payment letter template for Australia, the wording matters. A simple letter can work in some cases, but if the payment is connected to a dispute, termination or release of claims, you'll usually want more than a one-page note.

Can You Offer An Ex Gratia Payment To An Employee In Australia?

Yes, you can usually offer an ex gratia payment to an employee in Australia, as long as it's genuinely extra and you still pay all legal and contractual entitlements.

An ex gratia payment is a discretionary payment. In plain English, it's a payment you choose to make even though you say you aren't legally required to make it. Employers commonly use them:

• on termination, as a goodwill payment
• as part of a negotiated exit
• to settle a workplace concern without admitting fault
• to recognise long service or help with transition
• to resolve a dispute where both sides want certainty

The key point is that an ex gratia payment should sit on top of what the employee is already owed. You can't use it to replace minimum entitlements under the Fair Work Act 2009, a modern award, enterprise agreement or employment contract.

For example, if your employee is owed annual leave, wages up to their last day and notice, those amounts should be dealt with separately. The ex gratia amount should be labelled as an additional discretionary payment, not a substitute for final pay.

Your letter should also avoid language that suggests you're admitting liability. Phrases like we accept we underpaid you or we agree the dismissal was unfair can create problems if the matter later ends up before the Fair Work Commission or another regulator. Neutral wording is usually safer.

When Should You Use A Letter And When Do You Need A Deed Of Release?

It depends on what you want the payment to achieve. A simple letter may be enough for a low-risk goodwill payment, but a deed of release is usually better if you're settling a dispute or asking the employee to give up claims.

A termination ex gratia payment letter is often suitable where:

• there's no dispute between you and the employee
• the employee is receiving all final pay separately
• you aren't asking for broad confidentiality or non-disparagement promises
• the payment is a genuine goodwill gesture
• you mainly need a written record of the amount, timing and tax treatment

A deed of release is usually more appropriate where the payment is part of a settlement. For example, you may be resolving an underpayment allegation, a performance management dispute, an unfair dismissal risk or a general protections concern.

A deed can do things a letter usually shouldn't try to do on its own. It can include a formal release of employment-related claims, confidentiality obligations, return of property, non-disparagement wording and payment conditions.

There are a few practical reasons for this. A deed has particular signing requirements, and if your business is a company, you may want it signed in a way that lines up with the Corporations Act 2001, such as under section 127 where appropriate. Deed formalities can also vary by state and territory, so it's worth having the document tailored.

If you're asking the employee to release claims, don't rely on a generic settlement payment letter to an employee. Templates often miss the details that make the arrangement workable, especially around timing, confidentiality, tax, superannuation and what happens if either side breaches the deal.

What Should An Ex Gratia Payment Letter Include?

Your ex gratia payment letter should clearly set out the amount, why it's being offered, when it will be paid and the conditions attached to it.

Here is a fill-in outline you can use as a starting point. It isn't a finished legal document, and a lawyer should tailor it before you use it, especially if the employee is leaving after a dispute.

1. Parties: name your business, the employee and their role.
2. Background: briefly state the context, such as resignation, redundancy, termination by agreement or settlement discussions.
3. Final employment date: confirm the last day of employment, if relevant.
4. Separate final pay: say that wages, accrued leave, notice and any other statutory or contractual entitlements will be paid separately.
5. Ex gratia amount: state the gross amount of the discretionary payment and whether it's inclusive or exclusive of any required withholding.
6. No admission of liability: say the payment is made without admission of wrongdoing, liability or breach by your business.
7. Payment timing: explain when payment will be made, such as in the next pay run or within a set number of business days after signed documents are returned.
8. Tax and superannuation: state that required withholding will be applied and that superannuation will be dealt with based on payroll advice and legal requirements.
9. Conditions: list any conditions, such as signing a deed of release, returning business property or keeping the arrangement confidential.
10. Confirmation: include a place for the employee to sign and date the letter, if acceptance is needed.

Keep the tone calm and respectful. You don't need to include a long history of what happened, and usually you should not. The more detail you add about workplace issues, the more room there's for disagreement.

It's also sensible to match the letter to your payroll records. If the letter says the payment is ex gratia, your payslip, payroll coding and internal notes shouldn't describe it as ordinary wages unless that's actually what it is.

How Do Tax, Super And Final Pay Work?

Tax and super treatment depends on the character of the payment, so you should check this before you send the letter or deed.

From an employment law perspective, it helps to separate the payment into buckets:

• Final wages: pay up to the employee's last day of work.
• Accrued annual leave: pay out unused annual leave, including any applicable leave loading if required by an award, enterprise agreement or contract.
• Notice: provide notice or payment in lieu if required.
• Redundancy pay: pay statutory redundancy if it applies under the National Employment Standards, unless an exemption applies.
• Ex gratia payment: pay the extra discretionary amount separately and describe it carefully.

Minimum notice under the National Employment Standards is based on continuous service: 1 week for 1 year or less, 2 weeks for more than 1 year and up to 3 years, 3 weeks for more than 3 years and up to 5 years, and 4 weeks for more than 5 years. Employees over 45 with at least 2 years of service get an extra week. A contract, award or enterprise agreement may provide more.

For tax, many termination-related payments are treated differently to ordinary wages. Some may be employment termination payments, often called ETPs, and PAYG withholding may apply. Your payroll provider or accountant can help you classify the payment correctly and report it through Single Touch Payroll.

Since 1 July 2026, super guarantee is generally calculated on qualifying earnings, which includes ordinary time earnings and some other amounts. Genuine employment termination payments and unused leave payments may be treated differently, so get payroll or accounting advice before stating whether super applies to the ex gratia amount.

Your letter shouldn't promise a tax outcome. A safer approach is to say the payment is gross, subject to any required deductions or withholdings, and that your business will process it consistently with applicable payroll and superannuation obligations.

What Does A Termination Ex Gratia Payment Look Like In Practice?

A termination ex gratia payment should look like a clean set of numbers plus a clear paper trail, not a vague handshake deal.

Say Mike runs a cleaning business in Sydney. His admin coordinator, Dana, resigns after raising concerns about unpaid overtime. Mike doesn't agree with Dana's calculation, but he wants to avoid a drawn-out dispute and end things respectfully.

Dana's final pay is calculated separately:

• 38 hours of final wages at $32 per hour, being $1,216 gross
• 24 hours of accrued annual leave at $32 per hour, being $768 gross, plus any leave loading if required
• no payment in lieu of notice, because Dana worked her notice period
• a proposed ex gratia settlement payment of $2,500 gross

Because the $2,500 is connected to a workplace dispute, Mike doesn't just send a short letter saying full and final settlement. He prepares a deed of release with a covering letter.

The deed says the $2,500 is paid without admission of liability. It also says Dana will keep the settlement terms confidential, return her laptop and swipe card, and release employment-related claims up to the signing date, except for rights that can't legally be released.

Mike also gets payroll advice before promising anything about tax or super. The final wages and annual leave are processed through payroll. The $2,500 is coded separately based on payroll advice, with PAYG withholding applied if required.

This is the kind of structure you're aiming for: the employee can see exactly what they're being paid, and your business has a written record if questions come up later.

Common mistakes to avoid include:

• calling the payment ex gratia when it's really unpaid wages or leave
• forgetting award, enterprise agreement or contract entitlements
• using wording that admits liability when you're trying to settle without admission
• asking for confidentiality or a release without using a deed
• pressuring the employee to sign immediately, especially after termination
• promising tax or super treatment before checking with payroll or an accountant

Timing also matters. Employees generally have 21 days to lodge an unfair dismissal application in the Fair Work Commission after a dismissal takes effect. General protections dismissal applications also generally have a 21-day deadline. If you're offering a settlement around termination, build in enough time for the employee to consider the document and get advice.

Key Takeaways

• An ex gratia payment is a discretionary payment, but it shouldn't replace wages, leave, notice, redundancy pay or other minimum entitlements.
• A simple letter may work for a low-risk goodwill payment, but a deed of release is usually better for a settlement or disputed exit.
• Your letter should cover the amount, timing, tax withholding, super treatment, conditions and a clear no admission of liability statement.
• Keep final pay and the ex gratia amount separate in your documents and payroll records.
• Don't promise a tax or super outcome without checking the character of the payment with payroll or an accountant.
• If the exit is sensitive, tailored documents can help you avoid confusion, protect confidentiality and reduce the chance of a dispute later.

If you'd like help with an ex gratia payment letter, a deed of release, termination wording or settlement documents for an employee exit, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.