Ex Gratia

Ex gratia means as a matter of favour. Applied to a payment, it asserts that the employer was under no obligation to make it and is making it anyway.

That assertion is about the basis of the payment rather than its size or its timing. An ex gratia payment can be large or small, annual or one-off, to one employee or to everybody. What makes it ex gratia is that nothing compelled it.

The reason the label matters is that it is often used to describe payments that closely resemble statutory bonus, made at the same time of year, calculated in a similar way, to the same people. Where the resemblance is close, whether the label holds becomes a real question rather than a formality.

The short answer is that the label describes the payment correctly where there was no obligation, and does nothing where there was one.

There are several situations where a payment is properly ex gratia, and they are worth separating from the doubtful cases.

• Employees outside the bonus provisions altogether. Chapter IV of the Code on Wages applies, under section 41(2), only to an establishment in which twenty or more persons are employed or were employed on any day during the accounting year. A smaller establishment paying an annual amount is paying it voluntarily.
• Employees above the wage ceiling. Section 26 makes bonus payable to an employee drawing wages not exceeding an amount determined by notification, so an employee above that figure has no statutory entitlement and anything paid is voluntary.
• Amounts above the statutory maximum. Where an employer chooses to pay more than the Code requires, the excess is not a statutory payment.
• Payments unconnected to the accounting year, such as a festival payment, a hardship payment, or a one-off amount on a particular event.
• Employees who have not met the qualifying period, since section 26 requires at least thirty days of work in the accounting year.

In each of these the employer is doing something it need not do, and describing it as ex gratia is accurate.

The label fails wherever the payment is in substance an amount the Code requires.

Section 60 provides that any contract or agreement by which an employee relinquishes the right to any amount or to bonus due under the Code is null and void so far as it purports to remove or reduce the liability to pay. An employer cannot therefore convert a statutory obligation into a gratuitous payment by naming it differently, by having the employee acknowledge it as ex gratia, or by obtaining agreement at the time.

This matters because the practice exists. Paying an amount, describing it as ex gratia, and treating the statutory bonus obligation as discharged is a recognisable pattern, and it does not work. The obligation remains, and the enforcement position is unfavourable: under section 45 the authority determining a claim may order compensation in addition to the amount, extending to ten times the claim.

The mechanism the Code actually provides is different and better. Section 38 permits the employer to deduct any puja or other customary bonus paid, and any part of the bonus paid before it became due, from the amount payable. That is the route to avoid paying twice, and it operates by set-off rather than by relabelling.

Using section 38 requires the employer to accept that the statutory obligation exists, which is precisely what the ex gratia label is often deployed to avoid.

The other way the label erodes is through repetition.

A payment made once, on a stated basis, at the employer's discretion, is plainly gratuitous. The same payment made every year for many years, at the same time, on the same calculation, communicated in the same terms, begins to look like a term of employment that the parties have adopted by conduct rather than a favour repeatedly granted.

The Code itself recognises the category of customary bonus at section 38, which is an acknowledgement that payments can acquire a character through custom.

Employers who wish a payment to remain discretionary can do several things about this, and mostly do none of them. Stating the discretionary basis each time it is paid, varying the basis of calculation, and not committing to it in advance all help. Documenting it once in a policy and then paying it identically for a decade does the opposite.

The practical judgement is whether an employee could reasonably have arranged their affairs on the expectation of receiving it. Where they plainly could, describing it as a favour becomes difficult to sustain.

A few disciplines keep the position clean.

• Establish first whether the statutory bonus obligation applies at all, which turns on the establishment size test in section 41(2) and the employee's wages and days worked under section 26.
• Where it applies, compute and record it as bonus. Pay anything additional as a separate, separately described amount.
• Where an amount has already been paid that the Code allows to be set off, use section 38 and record the set-off, rather than describing the statutory payment as ex gratia.
• State the discretionary basis in writing at the time of each payment, if discretion is intended to be preserved.
• Record the two categories separately in payroll. An amount that appears on the payslip under one label and in the accounts under another is difficult to defend later.

The recurring theme is that substance governs. The Code decides what is owed, and the description on the payslip is evidence of what the employer intended rather than determinative of what the employer owed.