Ex Gratia Payments In New Zealand: Employer Obligations And Risks

Sometimes, the “right” business decision isn’t strictly required by law.

You might be dealing with a redundancy, a resignation that didn’t end well, a difficult performance process, or a one-off workplace issue where you want to draw a clear line under things and move forward.

That’s where ex gratia payments often come in. They can be a practical tool for small businesses - but only if you handle them carefully and document them properly.

In this guide, we’ll walk you through what ex gratia payments are in New Zealand, when employers typically offer them, the risks to watch for, and how to structure them so they actually achieve what you want (certainty and closure).

What Are Ex Gratia Payments (And Why Do Employers Use Them)?

An ex gratia payment is a payment made “as a favour” or “out of goodwill” - meaning it’s generally not a payment you’re legally required to make under an employment agreement or the minimum standards in New Zealand.

From an employer’s perspective, ex gratia payments are often used when you want to:

• Resolve a dispute (or reduce the risk of one escalating) without admitting liability;
• Help an employee transition out of the business in a fair and respectful way;
• Protect the business by securing confidentiality and a full and final settlement;
• Maintain relationships and morale, especially in a redundancy or restructure;
• Create certainty and avoid the cost, time, and stress of a drawn-out employment process.

It’s common to see ex gratia payments discussed in the context of settlement agreements and exits - but they’re not automatically appropriate (and they’re not a substitute for a proper process).

Ex Gratia Payment vs Ordinary Final Pay

It’s important to separate an ex gratia payment from amounts you already owe an employee. In most exits, you’ll have some “standard” payments that are not optional, such as:

• wages/salary up to the termination date;
• payment for annual leave owing (and potentially alternative holidays/TOIL, depending on the situation);
• notice (or payment in lieu of notice) if required under the employment agreement.

An ex gratia payment sits on top of those amounts. If you blur the lines, it can create confusion later about what was owed vs what was “extra” - which is exactly the opposite of what you want when trying to close out an exit cleanly.

When Might A Small Business Offer An Ex Gratia Payment?

There’s no single “right” scenario - but there are a few common situations where ex gratia payments come up for New Zealand employers.

1. Redundancy And Restructures

Redundancy can be legally and emotionally complex. Even when you’ve got genuine business reasons and you follow a fair process, it’s still a high-risk time for disputes.

You might choose to offer an ex gratia payment to:

• support the employee during the transition;
• recognise service (where there’s no contractual redundancy compensation);
• help reach agreement on an exit date or handover period;
• reduce the likelihood of a personal grievance being raised.

That said, an ex gratia payment doesn’t replace the need to run a proper redundancy process. If you’re planning a restructure, it’s worth getting advice early and having the right documents ready - including a solid Employment Contract for each role, because what’s written there often shapes what you can and can’t do later.

2. Settlement Of Employment Issues

If there’s a dispute (for example, about performance management, alleged bullying, allegations of unjustified disadvantage, or the way a dismissal was handled), an ex gratia payment might be part of a settlement to bring the matter to an end.

Often, the payment is paired with terms like:

• confidentiality;
• non-disparagement;
• withdrawal of any grievances;
• a “full and final” settlement clause;
• an agreed reference.

These terms need to be drafted carefully. If your goal is certainty, you’ll usually want a formal Deed of Settlement (not just an email exchange) so the arrangement is clear and enforceable.

Also, if you want the strongest possible “full and final” protection in New Zealand, it’s worth understanding the Employment Relations Act 2000 (s 149) settlement process (typically through MBIE mediation), where a settlement signed by a mediator can be given special status and is harder to challenge later. In practice, employers will often also encourage the employee to obtain independent legal advice before signing - especially where there’s a significant payment or a broad waiver of rights.

3. A “Clean Exit” For A Resignation

Sometimes an employee resigns during a tricky period - and you want the relationship to end professionally, with minimal disruption. You might consider an ex gratia amount in exchange for an earlier finishing date, a handover, or simply to ensure the matter ends on agreed terms.

This can be particularly relevant if the employee resigns without notice (or wants to leave immediately). If that situation comes up, you’ll also want to understand your options and obligations around notice periods and final pay: resigning without notice.

4. Recognition Or One-Off Payments (Outside A Dispute)

Not all ex gratia payments are tied to a dispute. You might offer a goodwill payment to recognise exceptional effort, loyalty, or service - particularly where there isn’t a formal bonus scheme.

However, there’s a catch: if you pay something regularly (or in a way employees come to expect), it may start to look less “ex gratia” and more like an implied entitlement. That can create future expectations and employee relations issues.

Are Ex Gratia Payments Taxable In New Zealand?

In New Zealand, whether an ex gratia payment is taxed (and how) depends on what the payment is actually for.

In practice, many ex gratia payments made in connection with termination are treated as part of a person’s overall employment income/termination payment arrangements, meaning PAYE and other deductions may apply depending on the payment type and how it’s classified.

This guide is general information only and not tax advice. Because the tax treatment can vary based on the facts (and because getting it wrong can create compliance issues), it’s usually best to:

• talk to your accountant or payroll provider before you confirm the final figures;
• be clear in writing about what the payment represents;
• ensure your payroll records match the agreement terms.

From a legal perspective, clarity matters just as much as tax compliance. If you label something “ex gratia” but the agreement suggests it’s actually owed (or is compensation for something specific), you may unintentionally undermine the protections you were trying to get from the deal.

What Are The Legal Risks If You Get Ex Gratia Payments Wrong?

Ex gratia payments can be helpful - but only if you treat them as part of a properly managed employment process. Here are some common pitfalls we see with small businesses.

1. Accidentally Admitting Liability

Employers often want to offer a payment without admitting fault. But poorly drafted messages (or informal negotiations) can create the impression that you’re paying because you did something wrong.

That matters because admissions can be used later if the dispute escalates. Even if your intention is simply goodwill, it’s worth choosing your words carefully and documenting the purpose properly.

2. Paying For “Peace” Without Getting A True Full And Final Settlement

This is a big one.

If you pay an ex gratia amount but you don’t have a properly drafted settlement deed, the employee may still be able to raise claims later (depending on what was agreed, and how).

In other words: you might spend money but still keep the risk.

A well-prepared settlement document should clearly deal with things like:

• what the employee is being paid (and when);
• what entitlements are being paid separately (e.g. annual leave);
• what claims are being settled/released;
• confidentiality and non-disparagement;
• return of property and access (keys, laptop, client lists, passwords);
• what happens if the terms are breached.

And, where appropriate, you should also consider whether to formalise the settlement through MBIE mediation so it can be recorded as a s 149 settlement under the Employment Relations Act 2000 (which is designed to provide stronger finality).

3. Using An Ex Gratia Payment To “Fix” A Flawed Process

It’s tempting to think you can make a risky termination or restructure “safe” by paying extra.

But an ex gratia payment generally won’t cure an unfair process on its own. If you’re planning a termination (for performance, misconduct, or redundancy), you still need to run a fair and compliant process.

For example, if you’re managing performance issues, you should be careful about how you communicate concerns, what support and timeframes you provide, and whether you’ve met your good faith obligations. If you’re unsure, getting tailored advice early is usually cheaper (and less stressful) than trying to repair things at the end.

4. Setting A Precedent In Your Workplace

If you offer ex gratia payments in one exit, other employees may expect the same treatment in the future - even if their circumstances are very different.

This is especially relevant in small teams where “what happened last time” becomes an informal benchmark.

A good way to manage this is to:

• keep the reasons for the payment confidential where appropriate (and legally permitted);
• avoid describing the payment in a way that sounds like a “standard entitlement”;
• ensure any settlement includes confidentiality obligations.

How Should You Structure An Ex Gratia Payment?

If you’re going to offer an ex gratia payment, it’s worth slowing down and setting it up properly. The goal is to protect your business and give both sides certainty.

Step 1: Confirm What You Already Owe (Separate It From The “Extra”)

Start by calculating the employee’s minimum legal entitlements and contractual entitlements, such as:

• final wages;
• annual leave owing;
• notice (or payment in lieu, if applicable).

Once those numbers are clear, decide what (if anything) you want to offer as an ex gratia amount on top.

Step 2: Be Clear About The Reason (Without Creating Unnecessary Risk)

In many cases, the payment is offered as part of an agreed exit and settlement. It’s usually framed as a goodwill payment to resolve matters commercially, rather than compensation that implies wrongdoing.

What you say (in writing and in meetings) matters. If you’re negotiating, keep communications consistent and avoid casual messages that could be misinterpreted later.

Step 3: Put It In A Settlement Document With Proper Exit Terms

If you want finality, the ex gratia payment should be documented in a formal settlement agreement/deed that clearly records the deal.

This is also your chance to include practical protections like:

• confidentiality (including about the existence and terms of the settlement);
• return of company property and information;
• post-employment obligations (where enforceable and appropriate);
• agreed announcement wording for staff or clients.

And if you’re aiming for the strongest level of enforceability and finality in New Zealand, consider whether the agreement should be progressed through MBIE mediation so it can be signed as a s 149 settlement. It’s also often sensible to allow (and record that you encouraged) the employee to get independent legal advice before signing.

If confidentiality is important to you, it can also help to have strong confidentiality wording in your broader employment documentation too - for example, a well-drafted Confidentiality Clause in the employment agreement and/or workplace policies.

Step 4: Think About Timing And Conditions

You’ll usually want to specify:

• when the ex gratia payment will be paid (e.g. within X days of signing, or on the termination date);
• whether it’s conditional on meeting certain obligations (e.g. returning property, signing the deed, not breaching confidentiality);
• what happens if the agreement is breached (this needs careful drafting - especially if you want repayment provisions).

Conditions need to be reasonable and clear. If you’re uncertain how to structure them, it’s worth getting advice so the terms are enforceable and practical.

Step 5: Keep Records (And Align Payroll)

Finally, make sure your internal records match what’s been agreed:

• the letter/deed should match the payroll treatment (including deductions where required);
• your business should keep a copy of the signed settlement in a secure place;
• only people who genuinely need to know should have access (privacy and confidentiality matter here too).

If you collect and store employee information as part of employment records, it’s also worth making sure your broader privacy practices are tidy and up to date - including having an appropriate Privacy Policy where relevant to your business.

Key Takeaways

• Ex gratia payments are goodwill payments that employers usually make when they’re not strictly required to pay an employee, often to help resolve an exit or dispute.
• Make sure you clearly separate final pay and legal entitlements (wages, annual leave, notice) from any ex gratia amount, so there’s no confusion about what was owed vs what was extra.
• An ex gratia payment can help your business achieve certainty and closure, but only if it’s properly documented (often in a full and final settlement), and in New Zealand you may want to consider a s 149 settlement through MBIE mediation for stronger finality.
• Be careful not to use an ex gratia payment as a substitute for a fair process - especially in redundancy or termination scenarios, where process matters.
• Think about the workplace precedent you may set, and use confidentiality and clear wording to avoid creating an implied “standard entitlement”.
• Tax and payroll treatment can vary depending on the situation, so it’s smart to align the documentation and payroll records and get accounting advice where needed.

If you’d like help preparing a settlement arrangement or documenting an ex gratia payment properly, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.