Full and Final Settlement

    Full and Final Settlement

    An efficient employee is the strength of any company, and if you are retaining them, it means their contribution is enough to stay ahead of the competitors. Every company must make them valuable by providing the best employee experience, even the exit experience, to bring them back after years.

    Presently, employers are making a lot of efforts to strengthen a great experience during employment, but sometimes they lack during the employee exit. That’s when the full and final settlement concept comes into the picture so that companies can give the support that their employees deserve after years of dedicated work.

    What is the full and final settlement?

    A method of settling entirely and finally in terms of calculating the various payable dues like bonus earning, deductions, and cutting all the ties from the employment, whether the company fired the employee or they resigned and retired with their will, is known as full and final settlement. In this process, the employer pays all the dues to employees and does some official formalities to give the best-leaving experience. 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.

    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.

    Essential components of the full and final settlement.

    Unpaid salary: After resigning, the employee has to serve the notice period, and the working days included in this period for which the employer would be paying is termed as unpaid salary. The time duration for which an employee works from the date of resignation to the last working day and includes the leave travel allowances.

    Non-availed paid leaves and bonuses: In case the employee has some remaining non-availed paid leaves, bonuses, and any other special rewards which can be encashed, it would be added while calculating all the dues. According to the Indian regulation, it is mandatory to clear the dues before the 10th of the month.

    Gratuity: If the employees have served 240 days or four years, then the organization must pay them a certain amount of gratuity per their calculation rule of the company within one month after the last working day of the employee. If the company does not pay it within one month, they have to pay it with interest.

    Deductions: The remaining compensation, TDS (Tax Deduction at Source), Professional taxes, and Employee Provident Fund come under deductions. Deductions for EPF and professional taxes differentiates depending on various factors, like your income, in-hand salary, and the type of organization you work for.

    Pensions: If an employee worked for more than ten years, they would 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 of 58 years. They can get a minimum amount of ten thousand rupees per month as a pension after retirement.

    Leave encashments: If the employees have an account of unpaid leaves, then the company generally encash those leaves before the 10th date of the month. It works according to the HR policy of the company, and it is one of the great ways to get it in the form of money.

    Important types of clearances are involved in the full and final settlement.

    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. Since you had the asset, if something is damaged during your working period, it will be deducted from your settlement.

    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 considers 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. Before leaving the company, you must do these formalities to part with the company to get rid of all the issues for the future of illegal access to the office campus.

    Things employers should remember for full and final settlement.

    The companies must explain 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 at the day they join and also when they leave. These policies will help your employees avoid confusion and reduce disputes during FnF settlement.

    The companies must describe the partial payment: Many organizations choose to withhold their employees’ salaries for the month of exit and continue to pay them via their regular salary schedule. This is called the 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.

    The format of the full and final settlement payslip.

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

    1. Employee’s name
    2. Employee ID
    3. Reason for leaving (Retirement, termination, and resignation)
    4. Date of leaving letter
    5. Information on settlement

    Conclusion

    Every organization follows the full and final settlement process. A well-managed exit 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. Sometimes it gets hectic for managing the entire process, in that scenario payroll software can be very helpful in taking care of all these operations.

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