What is Full and Final Settlement Process in Payroll

When an employee resigns or leaves an organisation, they have to undergo a full and final settlement. Generally, the organisation's HR department is responsible for this. It is a fairly simple and non-confusing procedure carried out as per the guidelines in the appointment contract. Read this article to know all about the Full and Final Settlement of employees.

What is FnF?

FnF full form stands for Full and Final settlement policy. FnF settlement, also known as the Full and final settlement, happens when an employee is leaving the organisation. The resigned employees have to undergo this process. The employees are paid salary for their last working month including any additional bonus and tax deductions. 

Your company decides whether the process shall begin after the employee is relieved or immediately after the resignation is handed over.

HR formalities such as exit interviews, feedback chains are also a part of the full and final settlement of the employee. The procedure of paying the employee and settling the calculation during the resignation process is called the final settlement process of the employee.

It may take up to a month to be completed since it’s a lengthy process that requires vast knowledge and experience for the same. 

Also Read: Salary Calculator in India

Important components of the Full & Final Settlement Calculations

• Unpaid Salary

Unpaid salary means the amount of salary payable to the said employee from the date of the resignation to his or her last day at work at the organisation. 

It includes any arrears of salary, annual benefits such as leave travel allowance (LTA), or any unresolved pending amount not processed due to some reasons. 

Calculation for Arrears of Salary:

Number of days for which compensation has to be paid X Gross Salary 

Divided by 26 (number of paid days in a month) 

• Non-availed leaves and bonus

According to the section 79 sub-section(11) of the Factories Act 1948, all unpaid dues regarding leaves should be paid before or by the 7th and 10th date of the following month. 

The Karnataka shops & Commercial establishment Act, Section 15 subsection (3), also states that ‘All encashment dues must be cleared on or before the 10th of the following month.

Payment for non-availed leaves

The company policy mentions how the payment for the non-availed leaves has to be made. There are two different methods for the same:

1. Per day basic (OR Basic Dearness Allowance OR other components)
2. Fixed amount defined by the company

Calculation of per day basic:

Number of days of unavailed leaves X Basic salary) 

Divided by 26 days (Generally, the avg working/ paid days in a month)

For example, if an employee has a basic salary of Rs 15,000 and has 24 earned leaves which are not availed and basic salary, then encashed amount will be

(24*15,000)/26 = Rs. 13,846.15

• Gratuity

The Payment of Gratuity Act 1972, section 7 sub-section (3), states that the gratuity amount should be paid within 30 days from the date of resignation. Failing to do so within the mentioned time will increase the interest payment. If the employee has completed 4 years and 240 days, then the gratuity amount must be paid within 30 days, or else it will gain an interest rate. 

• Pension

'Pensionable service' refers to the completion of a minimum of 10 years of work with an organisation. Employees who have completed such a time period are entitled to a pension. On producing the 'Scheme Certificate' after their retirement or at 58 years of age; whichever is later, by the employee, they can avail the pension benefits. As a portion of the employer's Provident Fund contribution, certain employees are given a pension. Also known as EPS, it specifies a minimum limit of Rs 1,000 and a maximum of Rs 7,500. 

• Deductions

Profession tax (if any), Income Tax, Provident Fund and unresolved compensation for the notice period not served are included in deductions. Tax deducted at source or TDS, which comes under the Income Tax Act, exempts gratuity received and leave encashments. All other benefits and payments shall attract TDS or relevant sections of the Income Tax Act. The EPF Act 1952, section 72 sub-section (5) states that within 5 days of the claim submitted by the employee, the EPF forms shall be forwarded by the employer. 

Income tax deductions also depend upon the income bracket the employee comes under. 

When does the Full and Final Settlement take place?

According to the full and final settlement law in India know as per the Payment of Wages Act, the final settlement needs to be done within 2 days from the employee’s last working day. However, receiving the final payment and clearance might take some time. It is a common company policy to finish the process within 30-45 days from the employee’s last working day. 

Also Read: Employees' Provident Fund Organisation - EPFO Login Portal & EPFO Latest News

Full and final settlement calculation sheet:

Pointers for employers to keep in mind:

The Full and Final settlement includes minor tasks that make the whole process complex which could get confusing at times, a few policies and procedures need to be kept in place. Your organisation must have a clear set of pre-defined separation policies that shall be mentioned at the beginning of the job and in the appointment contract. This shall make the task a little easier for the payroll department. Some policies and strategies for the same are mentioned below:

1. Crystal Clear Definition of Separation Policies:

Defining separation policies is essential, both for the employer and employee. The separation policy mentions the rules for full & final settlement, notice period to be served, gratuity amount, paid/ unpaid leaves, pending allowances and other set procedures of the organisation. This helps the payroll and HR departments to prevent errors and avoid ambiguity. It reduces unnecessary disputes when faced with the FnF settlement. 

2. Partial Payment in FnF

Specific organisations continue their employee’s payroll as per the regular salary schedule, where the salary for the last working month is withheld. This is known as the partial FnF settlement process. This strategy eases the calculations. The payroll department has to calculate the tax deductions and TDS for the last working month only in this method.

3. FnF in batches, bulk or individually

With organisations growing rapidly, or ones that might be laying off more than a couple of employees at once, calculating every employee's payroll, final settlement, arrears, etc., could become a tedious task. When faced with a large number of lay-offs, settlements are approached in batches. They are also known as bulk settlements. This method allows the organisations to clear and process the settlement amount of more than one employee at the same time. 

Also Read: Special Allowances in India- Taxation and Calculation 

Pointers for employees to pay attention towards:

For there to be no complications during the process, the employee should pay attention to these pointers:

• Settlement of advances taken or unresolved should be adjusted in the final settlement.
• To provide all the true and fair documents required for the FnF process. 

Asset Claim

Asset claim and exit interviews are a critical part of this process. At the time of joining, the employee is provided with some assets by the company, such as a laptop, phone, etc. And at the time of leaving, the provided assets shall have to be returned to the company. A track has to be kept of such resources by the employers. Managing these resources manually could become a problematic and tedious task when the employee strength increases. Therefore a professional HR and customised payroll software help organisations keep a track record of such assets. 

Final Step of the FnF Settlement

The HR employees and senior managers are assigned to calculate the full & final settlement for the employees. Smaller companies may process each employee’s final settlement individually; larger companies process them together in batches. 

A combination of all these separate calculations discussed earlier form a part of the Full & Final settlement. Along with the calculations mentioned above, calculation of the employee's balance salary, deduction of taxes, clearing of employee's unpaid leaves, any arrears and provident fund contribution is included in the FnF salary. Due to the high possibility of human error, these calculations are hard to do manually. It is recommended to use relevant technology so that the settlement can be done without any hindrance. An FnF settlement letter is drafted, which summarises the entire process at the end. 

Conclusion

Full and final settlement is a detail-oriented and systematic process; when settled correctly, it helps to relieve the employee from the organisation in an orderly manner. Proficiency in HR, along with accurate and error-free calculations, are essentially required. Customised software is used, which is popular among organisations nowadays. The software is easy to use and helps organisations accelerate their FnF process, which helps avoid and prevent any mistakes in calculations or minor details. If the organisation states the rules, policies, and procedures framed according to the law, the FnF might become an easy task. All complaints and grievances arising due to the FnF should be addressed formally in the correct order. 

Binding to the set rules, regulations and policies of FnF would assist an organisation in avoiding futile disputes and aid the organisation to grow exponentially. An organisation with a strong FnF framework generally sets deadlines internally to be met for the whole process. In a perfect full & final settlement process, the HR section would seamlessly facilitate all transactions necessary between the shareholders and resolve the unsettled issues before the last working day of the employee. 

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.