What is Ex Gratia Payment?
An ex gratia payment is a voluntary payment made by an employer to an employee. It is not required by law, not written into the contract, and not something the employee can demand. The employer chooses to make it as an act of goodwill.
The term comes from Latin, meaning “from grace” or “by favour.” In HR practice, ex gratia payments go above and beyond what the law demands. They are completely separate from the employee’s regular salary, their benefits package, and the mandatory end-of-service gratuity that UAE Labour Law requires.
Employers pay them to show appreciation, resolve a dispute without going to court, or simply support someone through a difficult moment. It is a human gesture, not a legal checkbox.
Types of Ex Gratia Payments
Ex gratia payments take different forms depending on the situation. Here are the most common ones you will encounter:
| Type | When It Is Given | Real-World Example |
|---|---|---|
| Termination Bonus | On top of mandatory gratuity during redundancy | AED 20,000 paid to a 10-year employee beyond their legal gratuity entitlement |
| Goodwill Settlement | To resolve a dismissal dispute before it escalates to MOHRE | A quiet settlement to avoid a formal labour complaint |
| Recognition Bonus | Exceptional performance or a major milestone | A one-time payment for closing the biggest deal of the year |
| Hardship Payment | When a company decision causes personal disruption | Extra pay for an employee relocated on very short notice |
| Early Termination | Employer ends a fixed-term contract before its end date | Additional payment beyond statutory notice when a project role is cut short |
Ex Gratia Payment vs End-of-Service Gratuity in the UAE
This is one of the most common points of confusion for UAE HR teams, so let us clear it up.
End-of-service gratuity is mandatory. The law sets the formula and every eligible employee gets it. There is no room for employer discretion. An ex gratia payment, on the other hand, is entirely your call. No law forces you to pay it, no formula dictates the amount, and the employee cannot chase you for it. It is a choice made out of goodwill.
| Feature | End-of-Service Gratuity (UAE) | Ex Gratia Payment |
|---|---|---|
| Legal Requirement | Mandatory under UAE Labour Law | Voluntary. No legal obligation. |
| How It Is Calculated | 21 days basic salary per year (years 1 to 5). 30 days per year after 5 years. | The employer decides the amount. No set formula. |
| Who Qualifies | All employees with at least 1 year of service under UAE Labour Law | Whoever the employer chooses. No eligibility criteria. |
| Tax in UAE | Tax-free in the UAE | Tax-free in UAE. May be taxable in the employee’s home country. |
| Payroll | Paid via the Wages Protection System (WPS) | Processed through payroll for a proper audit trail and WPS compliance |
When Do UAE Employers Give Ex Gratia Payments?
There is no single trigger, but these are the situations that come up most often in UAE businesses:
- Redundancy and restructuring: When a role is eliminated, many companies top up the mandatory gratuity with an ex gratia amount for long-serving staff. It costs far less than a legal dispute and does a lot for company reputation.
- Settling a dispute quietly: Before a layoff or termination complaint reaches MOHRE, a well-structured ex gratia payment can close the chapter fast.
- Recognising exceptional work: When an employee delivers results that go well beyond their KPIs, a discretionary bonus outside the usual structure sends a powerful message.
- Early contract termination: If you end a fixed-term contract before its natural completion, an ex gratia payment fills the goodwill gap beyond what the law requires.
- Genuine hardship: Serious illness, bereavement, a sudden family crisis. Sometimes the right thing to do is simply to help, and ex gratia gives you the flexibility to do that.
How to Document and Process Ex Gratia Payments
Getting this right protects both you and your employee. Follow these five steps and you will not go wrong:
- Put it in writing. Issue a clear letter stating the payment is ex gratia, voluntary, and does not create any future obligation or contractual right for the employee.
- Include a release clause. If you are settling a potential claim, have the employee sign a settlement agreement confirming they waive further claims against the company.
- Run it through payroll. Even voluntary payments need a proper audit trail and must go through your WPS-compliant payroll process in the UAE.
- Get legal sign-off. For any settlement payment, have your legal team review the wording. A poorly worded letter can create liabilities you did not intend.
- File everything. Store the signed agreement, management approval, and payroll records in the employee’s personnel file.
Frequently Asked Questions
Is ex gratia payment mandatory in the UAE?
No. Ex gratia payments are entirely voluntary. The only mandatory exit payment in the UAE is the end-of-service gratuity under Federal Decree Law No. 33 of 2021. Anything above that is the employer’s choice.
Is an ex gratia payment taxable for employees in the UAE?
There is no personal income tax in the UAE, so the payment is tax-free locally. But if your employee is a tax resident in the UK, India, the USA, or another country, their home country’s tax rules may apply to that payment. Advise them to check with a local tax advisor.
Can an employee demand an ex gratia payment?
No. Because it is voluntary, employees cannot legally demand one. They may negotiate for it as part of a mutual separation agreement, but the decision rests entirely with the employer.
Does an ex gratia payment affect the gratuity calculation?
Not at all. The two are completely separate. Gratuity is calculated on basic salary and years of service only, regardless of any ex gratia amounts paid.
What is the difference between ex gratia and a severance package?
A severance package covers everything the employee is legally owed on exit: notice pay, gratuity, accrued leave. The ex gratia portion is specifically what is paid on top of those legal entitlements, voluntarily, as a goodwill gesture.
Managing ex gratia and end-of-service payments without the spreadsheet headaches? WorkPlus HCM’s payroll module automates gratuity calculations, keeps your audit trails clean, and ensures every payment is fully WPS-compliant.