In today’s competitive world, the key to success in any business relies on client satisfaction.
As an outcome, customer relationship management becomes an indispensable aspect of an organization.
Your client knows your company but speaks with your employees. Your employees are the face of your organization.
Thus, when client satisfaction holds a value in your business, employee satisfaction needs much more than that.
For any set of business, employees are the biggest assets.
Right from employee on-boarding to employee exit, there are gigantic tasks associated with managing the employee life cycle in an organization.
No matter how big or small the company is, every organization has certain obligations towards its employees, both long term and short-term employees.
Full and Final Settlement is one of them.
When an employee decides to end his/her services, the employer must follow the FnF procedure to settle the employee’s compensation as per policies.
Full and Final settlement includes various activities like documentation, deductions, arrears, receivables, pending salary, earnings and exit interviews.
What is Full and Final Settlement in Payroll?
Full and Final Settlement commonly known as FnF process is followed by the employer when an employee resigns from an organization.
In this process, the employee has to get paid for the last working month + any additional earnings or deductions.
The procedure is fairly simple and is as per guidelines set out in the appointment contract.
The procedure of paying to the employee and settling the calculation during the resignation process is called the Final Settlement of the employee.
Employers can either relieve the employee first and then do the FnF OR do the final settlement first then relieve the employee. It depends on company policy.
What are the Rules for FnF Settlement?
The new labor law for Full and Final Settlement (FnF) payments states that the company must pay the complete salary settlement within two days after the employee’s last working day.
However, there is no formulated date for the full and final payment settlement, and usually, 30-45 days is ideal to pay the total and absolute compensation.
An organization’s HR is generally in charge of handling the FnF settlement process, which usually takes a month to be completed from the date of the employee’s resignation.
It is important to note that the full and final settlement is a complex process that requires extensive knowledge of the subject and experience.
Full & Final Settlements under The Payments of Wages Act
The new age code mandates that employers pay full and final settlements to employees within two days of their last day of employment. This applies to terminated, discharged, economized, resigned or unemployed employees due to the company’s closure.
According to the law, if an employee has been
(i) terminated or discharged from service;
(ii) economized or has resigned from the organization; or
(iii) unemployed if the company has closed, all salary settlements related to the employee must be paid within two days.
Policy for Full & Final Settlement
When an employee leaves a company, the full and final settlement process begins only when the employer accepts the employee’s willingness to leave the company.
As part of this process, the employee must provide an adequate notice period to the employer. Additionally, the employee must hand over all company property and take an acknowledgment signature on the form.
The management will then calculate unpaid salary, leave encashment, and other benefits such as gratuity. Once this is done, HR will issue a full and final statement to the employee and hand over the cheque for remuneration. The employee must check and agree on the same before receiving the payment.
Full and Final Settlement After Termination
When an employee leaves a company, the employer is expected to make a full and final settlement (FnF) of their accounts. This settlement should take place on the employee’s last working day. Clearances usually take time, so it is the norm for the FnF to be completed within 30-45 days after the employee’s last working day.
Gratuity is usually one of the payments that need to be made to settle the employee’s accounts. It should be paid within 30 days after the employee leaves the company. Other payments, such as bonus or variable payments, must be cleared within the same accounting year.
How Does the Full and Final Settlement Work?
The full and final settlement (FnF) is a legal process regulated by the respective State Governments in India that ensures that employees are paid within a certain period of time when they leave their jobs. Depending on the organization’s policy, this settlement can happen before or after the employee’s exit.
There is also a traditional and contractual obligation for employees to give notice before quitting, depending on each company’s policy. Typically, this notice period is two weeks, but it can vary according to the company. The employee must be paid for the entire duration of the notice period as part of the settlement.
In addition to the payment for the notice period, the employee’s final pay must include all outstanding wages for hours worked, allowances, and any applicable penalties. It should also include any accumulated earned leave the employee may have unused when leaving.\
5 Major Components included in Full & Final Settlements
1) Unpaid Salary
The full and final settlement incorporates unpaid salary for the quantity of days for which the employee has worked for since his resignation date and his last working day.
Unpaid salary including annual benefits such as LTA (leave travel allowance) and arrears which is calculated as the number of days for which compensation is to be paid multiplied by the gross salary divided by 26 (paid days in a month).
2) Non-Availed Leaves & Bonus
As per Section 79 (11) of the Factories Act 1948, all unpaid leave dues should be paid by or before the 7th & 10th of the following month of resignation.
As per Section 15(3) of the Karnataka Shops & Commercial Est. Act leave encashment dues should be settled by or before the 7th & 10th of the following month.
Payment for non-availed leaves (earned or privilege leave) has to be calculated based on company policy. So, the different options for leave encashment are:
Per day Basic (Or Basic + DA OR other components)
Fixed amount defined by company
Calculation of per day basic:
(number of days of unavailed leaves * basic salary) / 26 days ( Avg paid days in a month).
For e.g., If an employee has 25 earned leaves which is not availed and basic salary = 5000, then encashed amount will be
(25*5000)/26 = Rs. 4807
As per Section 7 (3) of the PG Act 1972, Gratuity should be offered within 30 days of the separation or else it will have to be paid with interest if four years and 240 days have been completed by the employee.
Pension, as long as the employee has completed at least 6 months of service with the existing employer and 10 years of ‘pensionable service’ on providing a Scheme Certificate after retirement (58 years) age.
Deductions include Profession Tax (if applicable), Provident Fund, Income Tax and Compensation for Notice Period not served. Gratuity and cashed earned leave are exempt from tax deducted at source (TDS) as per Income Tax Act.
All other payments attract TDS under Section 192 of the Income Tax Act. As per Section 72 (5) of the E.P.F Act 1952 the Employer shall forward the E.P.F claim forms within 5 Days of the employee submitting the claim.
When Does the Settlement happen?
According to the rules, the final settlement needs to happen on an employee’s last working day at the organization.
However, clearance usually takes time, it is a policy to do so within 30-45 days after the employee’s last working day.
For gratuity, the stipulation is 30 days after leaving the company, while bonuses must be paid within the specified accounting year.
A few pointers for employees to keep in mind:
There are few things that employees must keep in mind to ensure there are no complications in the process.
- Make sure to settle any advances taken or ensure it gets adjusted in the final settlement.
- Make sure to provide all required documents for the process of FnF.
Another critical aspect of the full & final settlement part is asset reclaim and exit interview.
When an employee joins a company, he/she is provided with certain assets namely phone, laptop, etc. Employers must keep track of all the assets provided to the employees.
If managed manually, it can get difficult with the time as when the company grows, employee strength increases. A professional HR and Payroll Software will definitely help organizations to streamline such activities smoothly.
How to Process Full and Final Settlement?
The process of FnF settlement requires several steps that involve communication and coordination between the employee and the HR department.
Step 1: The initial step in the process requires the employee to submit their resignation in written form to the relevant department.
Step 2: Once the employee submits their resignation in writing, the management will acknowledge it by sending an acceptance letter to the employee.
Step 3: As part of the FnF settlement process, the HR department will request that the employee obtain a No-dues certificate and submit it to HR along with the resignation acceptance letter.
Step 4: HR should confirm and calculate the employee’s leave balance, gratuity, bonuses, and unpaid salary.
Step 5: The HR department is responsible for preparing the FnF (Full and Final) statement, which will subsequently be reviewed by other departments, such as Finance & Accounts, for further processing.
The Accounts department will prepare a cheque for the outstanding amount owed upon obtaining the necessary signatures. Along with the cheque, the employee will receive a service certificate.
F&F settlement is a chaotic task and subsequently, implementing a reliable cloud-based HR solution set up is like a blessing in disguise for the human resource team.
They can collect without much of a stretch track all the vital forms as well as documents pertaining to the layoff of a particular employee using the fnf settlement system.
Prepare for a smoother and quicker exit process for both the employer and the employee!
It ensures there are no complications or delays in the procedure. Also, the system makes sure to settle any advances taken or get it adjusted in the final payment.
FAQ on Employee Full and Final Settlement (FnF):
Q1) How do you calculate full and final settlement?
A full and final settlement is the combination of all the calculations like unpaid salary, non-availed leaves and bonus, gratuity, pension etc. Additionally, it also includes tax deductions, clearing out paid leaves, provident fund accounts etc.
Q2) Can employer stop full and final settlement?
No, an employer cannot stop full and final settlement from their end. If they do so the employee can take legal actions and ask for penalty regarding delay in the process.
Q3) How long does it take to process?
It usually takes around 30-45 days from the last working day of the employee in the organization.
Q4) Do you pay tax on the settlement?
Yes, any tax liability related to the settlement is chargeable as per the full and final settlement law in India.
Q5) What is the employee full and final settlement policy?
According to the Payments of Wages Act, “if an employee has been – (i) terminated or discharged from service; or (ii) resigned from the organization or has been employed if the company has been closed all the related salary settlements has to be paid.