What is a full and final settlement?

The method of settling an employee’s monetary compensation entirely and finally by calculating various payable dues like salary, bonus, and deductions in the event of termination, retirement or resignation is known as full and final settlement. It is an essential part of an employee’s offboarding process.

During this process, the employer pays all dues to employees. The start of the process depends on the company’s full and final settlement policy. Some companies start the process during the serving period, and others begin after relieving the employee.

Essential components of a full and final settlement:

The following consists of the essential components of a full and final settlement:

Unpaid salary: After resigning, the employee has to serve a notice period, and the working days included in this period for which the employer is liable for reimbursement is termed as unpaid salary. This time duration also accrues benefits like DA, HRA and leave travel allowance.

Non-availed paid leaves and bonuses: In case the employee has remaining non-availed paid leaves, bonuses, and any other special rewards, they can be encashed, and added while calculating the dues.

Gratuity: If the employees have served four years, then the organization must pay them a certain amount of gratuity as per the company’s calculation rule. This needs to be done within one month after the last working day of the employee. If the company does not pay it within one month, they are liable to pay it with interest.

Deductions: From the remaining compensation, TDS (Tax Deduction at Source), professional taxes, and Employee Provident Fund that come under deductions must be deducted as per labor laws. Deductions for EPF and professional taxes varies depending on various factors, like your income, in-hand salary, and the type of employing organization.

Pensions: If an employee has worked for more than ten years, they will be entitled to a pension. They can get the benefits of pension under the Employee Pension Scheme just by submitting the ‘Scheme Certificate’ if they are 58 years or older. They can get a minimum amount of ten thousand rupees per month as a pension after retirement.

Important steps involved in the full and final settlement process

A company must ensure that the following steps are taken for an efficient full and final settlement process:

IT clearance: In this process, the employee has to return all the technical assets assigned to them, like a laptop, mouse, etc., on the last working day or a particular date given by the IT department. In case any of the assets have been damaged under your care, the damages may be charged and deducted from the FnF.

Financial clearance: It includes all the money-related concerns like outstanding salary, gratuity, leave encashments, pension, etc. Financial clearance takes more time than other clearances since it involves a lot of calculations.

HR clearance: This clearance depends on companies’ policies but is mainly related to L&D, joining bonus, and notice period. The HR department also does the exit interviews. Employees who have been with their company for an extended period or are subject to company policy may have their joining bonus recovered in the FnF settlement.

Admin clearance: It includes submitting employee ID cards and other particular access items. Before leaving the company, the employee must do these formalities to avoid any implications of illegal trespassing on the office premises in future.

Important things for employers to consider for a full and final settlement

• The companies must explain to the parting employees about separate policies: Separation policies should be clearly defined for individual employees and groups. The particular rules related to the gratuity, notice period, and paid/unpaid leave encashment must be explained to all the employees on the day they join and when they leave. This process will ensure that employees can avoid confusion and reduce disputes during the FnF settlement.
• The companies must describe the partial payment policy if they’re following one: Many organizations choose to withhold their employees’ salaries for their last month and choose to pay them as per their regular salary schedule. This is called a partial FnF settlement process. Using this strategy simplifies calculations because the payroll team only has to calculate tax on the last month’s salary, not every month of employment.
• The companies must tell that FnF will be done in bulk, individual, and batches: For companies experiencing rapid growth or making mass layoffs, calculating employee payroll can become cumbersome. To streamline the process, many companies opt for bulk settlements, which allow to process arrears in batches rather than individually.

Full and Final Settlement – FAQs

What is included in a full and final settlement payslip?

There is no specific format for full and final settlement payslips, but it is generated with the information of the employee and reason for leaving. Generally, the companies mention these details in these payslips:

• Employee’s name
• Employee ID
• Reason for leaving (Retirement, termination, and resignation)
• Date of leaving letter
• Details of the settlement

What is the period of full and final settlement?

Before July 2022, the practice of full and final settlement took 45 to 60 days from the last working day for employees, and some companies extended it up to 90 days.

But now, after the reform in the new wage code, which is in action from July 1st, 2022, every company has to pay and do all the formalities within two days from the last working day of the employee. One thing is important to remember that PF payout and gratuity do not come within this law.

What is the purpose of a full and final settlement?

Every organization must follow a detailed full and final settlement process. A well-managed process can help employers and employees avoid future legal or financial troubles. The HR department typically facilitates the process, including employee consultations and the collection of personal items. Companies can also opt for payroll and other HR software in taking care of all these operations.