Employee Full and Final Settlement: All you need to know

Employee full and final setttlement

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.

Major Components included in Full & Final Settlements

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).

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

Gratuity

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

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

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.

Asset Claim

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.

Conclusion

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!

With the implementation of a professional and right cloud-based HR management system, the organization can smoothly overcome all the milestones that come in the way of human resource management. 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.

Contributing Author
Keka Editorial Team

A bunch of inspired, creative and ambitious youngsters- that’s Keka’s editorial team for you. We have a thirst to learn new subjects and curate diverse pieces for our readers. Our deep understanding and knowledge of Human Resources has enabled us to answer almost every question pertaining to this department. If not seen finding ways to simplify the HR world, they can be found striking conversations with anyone and everyone , petting dogs, obsessing over gadgets, or baking cakes.