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  FROM THE EMPLOYMENT TEAM                                                               June 2011 |
                                                                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
When is a PILON payment not a                                   suggested that the ex gratia payment was intended to
PILON payment?                                                  meet the employer’s legal obligations under the contract.
                                                                Had the EAT concluded that the terms of the letter were at
The true meaning of the term ex gratia was                      all ambiguous, they also noted that any such ambiguity
                                                                would in any event have been construed against the
considered by the Employment Appeal Tribunal                    employer as the author of the letter and the party relying
in a judgement handed down this week.                           upon the ambiguous clause.
In many circumstances where an employee is exiting their        This case amply demonstrates the consequences of not
employment, it is common for a negotiated settlement to be      using precise language, even in straightforward
agreed. This can often include a payment in lieu of working     termination letters. What then should an employer do to
a notice period (commonly termed a ‘PILON payment’), and        avoid such difficulties? Obviously, precise use of language
sometimes an additional payment that the employer has           and correct use of terms are of paramount importance.
no contractual obligation to make, termed an ex gratia          In addition, employers would be well advised to make full
payment. The former is often taxable, but the latter is not,    use of the protection afforded by compromise
provided it does not exceed £30,000. The different tax          agreements, even in situations where there is not an
treatment can sometimes lead employers to rebrand a             immediately obvious matter in dispute.
payment in lieu of notice as an ex gratia payment. In other
cases the terms are used almost interchangeably. In either      Should you require any further information, advice or
scenario there can be implications for the employer.            assistance on this topic, or on any other employment
                                                                issue, please do not hesitate to contact one of our team.
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.
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