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How full and final settlement works: a comprehensive guide

Full and Final Settlement
IN THIS ARTICLE

For any business to run smoothly, a satisfied workforce is paramount. Employee engagement and satisfaction automatically lead to higher customer satisfaction – as, directly or indirectly, employees are the ones who interact with your consumers and deliver services. Hence, a smooth employee life cycle ensures employee engagement and satisfaction.

 

The employee life cycle has two bookends: onboarding and off-boarding. The cycle starts when an applicant accepts a job offer and ends when they leave the company. Most of an employee’s experience occurs in between—relationships with coworkers, projects started and finished, triumphs and failures, professional advancement, and personal improvement. However, the beginning and conclusion greatly influence their overall experience, including what occurs after the off-boarding, just as in any long-term relationship. It brings us to Full and Final Settlement (or FnF), one of the major components of sound and smooth off-boarding.

 

Full and Final Statement (FnF)

 

Full and Final Settlement is calculating all payable dues to an employee who is resigning, superannuated, or terminated from an organisation. It also includes tax deductions and bonus earnings. 

 

The FnF process also requires employees to return all the company assets – laptops, mobile, computers, books, or any other thing – in their possession. The company may also recover some amount from the F&F settlement in case of damage. 

 

5 Major Components of Full and Final Settlements

  • Releasing the Unpaid Salary

 

The full and final settlement includes disbursing salary for the days the employee has worked since his resignation and last working days. Unpaid salary includes annual benefits such as LTA/LTC (leave travel allowance/concession).

 

Calculation for unpaid salary:

 

Number of days of unpaid work × Basic salary ⁄ 26 days (paid days in a month)

  • Non-Availed Leaves & Bonus

 

An employee’s unavailed leaves are subject to encashment. The company policy determines how the payment for unavailed leaves has to be made.

 

Calculation of leave encashment (for unavailed leaves):

 

Number of days of Unused or unavailed leaves × Basic salary ⁄ 26 days

 

Suppose the payment of unavailed leaves is a fixed amount specified by the company. Then, it will be added to the final payouts with any bonuses as stated by the company’s policies. 

  • Gratuity

 

Gratuity refers to the lump sum an employer pays the employee at the time of termination of services as a token of appreciation for services rendered. However, gratuity payment only applies if an employee has served an organisation for at least five (05) years. The Payment of Gratuity Act 1972 governs other terms and conditions for payment of gratuity.

 

While computing the gratuity for an employee, it should be noted that employers are categorised into two types based on their coverage under the Gratuity Act.

 

  • For organisations covered under the Gratuity Act 1972 (with 10 or more employees)

 

Gratuity payable = Number of years of employment X (Last wage drawn including Dearness Allowance) X (15/26) *

 

*The number of working days each month is stated as 26 days, and the gratuity is calculated at the rate of 15 days’ wages.

 

  • For organisations not covered under the Gratuity Act

 

Gratuity payable = Number of years of employment X (Last drawn wage including Dearness Allowance) X (15/30) **

 

**Employees covered under the act are given the advantage of a lower denomination, increasing the gratuity amount. Hence, working days for the employees not covered under the act are taken as 30, not 26.

 

Gratuity should be paid to the employee within 30 days of the last day at work.

  • Provident Fund and Pension

 

During an employee’s employment period, both employer and employee contribute a fixed percentage of the employee’s basic salary towards the Provident Fund. The provident fund amount is released to an employee at the time of retirement or termination of services.

 

If an employee switches jobs, the PF/pension may be transferred to the new employer or paid to the employee. The employee receives the full fund balance upon retirement.

 

Pension is payable to employees who have completed at least 10 years of ‘pensionable service’ with the organisation. Most employees get a pension as a part of the EPS (Employee Pension Scheme).

 

Calculation of EPS Pension:

 

(Average salary*service period)/ 70

 

Here, the average salary is defined as the sum of basic salary and dearness allowance. 

 

Under the EPS scheme, the employer contributes 8.33% of an employee’s salary (basic+ DA) towards the pension fund. However, the social saving scheme allows this 8.33% contribution on a maximum of INR 15,000, even when an employee draws a higher salary.

  • Deductions

 

Deductions include payable taxes like professional tax and income tax and contributions like provident funds, etc. Employees are liable for salary deductions in case of the unserved notice period.

 

Please note that encashed earned leaves and gratuity are exempted from TDS (tax deducted at source). According to section 72 (5) under the EPF Act of 1952, all other payments are liable under TDS. Employers are required to submit an EPF claim form to the concerned office within 5 days of the employee submitting the claim/applicant.

 

Full and Final Settlement Procedure

 

Following are the steps the Human Resource Management department and the employee must follow during the Full and Final settlement process:

 

  1. Employee resigns in writing to the concerned department.
  2. After receiving the employee’s resignation letter, management returns the acceptance letter to the employee.
  3. The employee must obtain a no-dues certificate and the acceptance letter and submit it to the HR department.
  4. HR verifies earned or privilege leave balance, gratuity payable, and bonuses payable and calculates the unpaid salary. The HR department can use an automated time and attendance payroll system to compute exact amounts for each component.
  5. The Human Resource Management department sends the final unpaid amount to the Finance & Accounts department for processing.

 

Once everything is done, a cheque for the due amount is prepared and issued to the employee along with the service certificate.

 

Wrapping Up

 

Providing employees with excellent employee experience throughout their lifecycle is pivotal for all organisations. When done right, businesses reap the rewards of enhanced employee satisfaction, which boosts engagement, retention, and, ultimately, revenue. Even at the end of an employee’s job, it is paramount that the employee’s experience is good. Managing their Full and Final settlement is crucial to employee experience during off-boarding. Complying with all the guidelines and procedures of FnF helps organisations avoid unnecessary dues and achieve maximal growth. 

 

Want to make your FnF settlement smooth and seamless? sumHR offers a biometric attendance and payroll management system that can help organisations achieve a systematic approach towards employee off-boarding. Being one of the best attendance and payroll software in India, it takes care of all the tedious calculations related to FnF settlement, including leave encashment and gratuity calculation.  

 

FAQs

  • Is there a timeline specified for Full and Final Settlement?

 

Previously, the settlement of full and final payment was completed 45 to 60 days after an employee’s last working day, and in some cases, this period would even extend up to 90 days. However, after implementing the new wage code, the employer must make the full and final settlement within two days of an employee’s last working day.

 

To fasten the settlement process, the HR department can use a biometric attendance system with payroll software that does the tedious calculations while adhering to guidelines and timelines.

  • What happens if an employer fails to process a Full and Final Settlement on time?

 

If an employer does not pay the amount due for Full and Final Settlement, the employee can take legal action and demand the payment of a penalty for the delay. Additionally, if an employer intentionally avoids paying the FnF amount, the employee can file a complaint with the police.

  • What happens if an employee does not pay the recovery amount due to the company?

 

If an employee fails to pay the recovery amount due to an unserved notice period or damage to the company’s assets, the company can seize the Full and Final Settlement amount. Additionally, the employer can provide negative references and mention the same in the employee service certificate.

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