Full and final settlement, commonly known as the F&F settlement is a process followed by organizations to settle all the outstanding dues with an employee who is leaving the organization for the following reasons -
The full and final settlement process involves calculating and paying the employee's last month's salary, tax deductions, bonus earnings, unused leaves, and any other outstanding dues such as reimbursements, gratuity, and provident fund.
This settlement becomes crucial to ensure that both the employee and the employer settle all the outstanding financial obligations to each other before parting ways. It helps maintain a healthy relationship between the employer and the employee and avoids any legal disputes that may arise in the future.
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In India, the process of Full and Final Settlements is regulated by legal standards and directives.
A key law in this area is the Payment of Wages Act, which sets forth clear guidelines on how and when wages should be paid. This legislation plays a crucial role in making sure employees receive fair compensation.
According to this act, it is mandatory for employers to process Full and Final Settlements within a predetermined period, usually within seven to ten days following the employee's final working day. This stipulation is designed to protect the rights of employees, ensuring that they receive their rightful dues promptly.
However, most companies settle this as per their company policy, which is usually between 30-45 days after the employee’s exit.
The Full and Final Settlement policy in Human Resources serves as a guide which helps an organization settle all outstanding dues and process all relevant paperwork during an employee’s exit.
Also read: Exit Policy in HRM
This policy is crucial for ensuring a smooth transition for both the employee and the employer.
Here's what it typically includes:
1. Calculating the final pay
This involves calculating the employee's final salary. This includes prorated earnings for the part of the month worked, any pending bonuses, overtime pay, and leave encashment.
Any deductions that need to be made from the final pay usually, any unpaid loans or advances taken by the employee, are taken into account.
3. Expense Claims
The FnF policy also includes the settlement of any pending expense claims that the employee may have raised while working for the organization.
4. Provident Fund and Gratuity
Settlement of PF contributions and gratuity, if applicable is considered.
5. Tax Deductions
All the necessary tax deductions are made before the final settlement calculation. The employee should have the necessary tax documents, like Form 16 in India.
6. Return of Company PropertyThe FnF policy also outlines the process for the employee to return any company-owned property, such as ID cards, laptops, or any other devices.
It involves preparing and handing over documents like the experience letter, relieving letter, and any other necessary documents to the employees.
8. Following the timeline
The policy specifies the timeline within which the full and final settlement must be completed. Full and final settlement is governed by the Payment of Wages Act in India.
9. Exit Interviews and Feedback
Some organizations include exit interviews as part of the settlement process, to gather feedback from the departing employee.
10. Compliance with Legal Requirements
The FnF policy also states the importance of complying with the legal requirements mentioned in the labour laws of India.
A full and final settlement process can be time-consuming. However, these are the basic steps followed by any organization. Please note that the following steps can change according to the company policy.
The Full and Final Settlement calculation can be tedious with a lot of components involved for calculation. The net payable full and final settlement amount is calculated based on inclusions, which are basically the earnings and deductions, which are deducted from the earnings mentioned.
Let us have a look at the major components involved in the full and final settlement calculation.
Unpaid salary is the salary that an employee has earned for the days worked between the date of resignation and the last working day.
In other cases, the full and final settlement is calculated based on how the employees are paid during the notice period.
For instance, if an employee serves a notice period of 2 months, the organization can pay the employee his/her salary for 1 month and use the full and final settlement for the next month. Or, the company can use the full and final settlement for the entire 2-month notice period.
This includes any pending salaries for the previous months. Additionally, any other outstanding payments like arrears and Leave Travel Allowance (LTA) are also included in the unpaid salary calculation.
26 (or the no. of paid days in a month)
Non-availed leaves and bonus
Non-availed leaves and bonuses are also included in the Full and Final Settlement amount. These must be encashed and added to the full and final settlement of the employee.
According to regulations, all dues from unpaid leaves must be paid to the employee on or before the 7th and 10th of the following month.
26 (or the no. of paid days in a month)
Note: Earned leaves and leaves offered in the employee’s contract can also be considered non-availed leaves if unused.
Organizations typically encash unpaid leaves in two ways, they leave encashment based on per day’s basic salary and a pre-defined fixed amount (decided by the organization).
The company may choose to fix an amount that can be encashed against a paid leave, which is not dependent on the employee's salary directly.
Deductions refer to the various payments that are deducted from an employee's final dues, this includes
Income tax deductions
The exact deductions vary based on factors such as the employee's income, in-hand salary, and organization, among others. Provident fund and professional taxes are typically based on the employee's income, while income tax deductions depend on their income bracket.
The TDS (Tax Deducted at Source) deductions are exempted for encashed leaves and gratuity, as per the Income Tax Act.
In India, employers earning up to 2.5 LPA are exempted from income tax. However, employees earning between 2.5-5 LPA are subject to TDS deductions of 5%, and so on.
Gratuity must be paid within 30 days of the employee's separation from the company. If not paid within the stipulated time, the company may have to pay gratuity with interest.
Gratuity is a cash benefit that employers provide to employees who have completed a minimum of 4 years or 240 days of service.
26 (or the no. of paid days in a month)
Check: Gratuity calculator in India
When an employee completes 10 years of "pensionable service" (minimum) with the organization are eligible for pensions.
A "Scheme certificate" is provided after retirement or upon reaching 58 years of age to avail the pensions. Most employees receive a pension as part of the E.P.S. (Employee Pension Scheme), which specifies a minimum pension amount of Rs 1000, which is around Rs 7500.
As per Segment 72(5) of the E.P.F Act 1952, businesses must submit the E.P.F (Employer’s Provident Fund) guarantee forms within 5 days of the employee's claim.
Full and Final Settlement, often abbreviated as F&F Settlement, is a critical HR process used by organizations to finalize all financial transactions and obligations with an employee who is exiting the company.
This process is applicable in various scenarios, including resignation, retirement, or termination.
To calculate the full and final settlement, you have to follow this process:
1. Calculation of the employee's salary for the final working period, which may include prorated payment for the part of the month worked.
2. Appropriate tax deductions are made from the final salary, adhering to the prevailing tax laws and regulations.
3. Payment of any pending or pro-rata bonuses that the employee is entitled to.
4. Compensation for unused leave days, if the company's leave policy permits encashment of such leaves.
5. This could include reimbursements for business expenses incurred by the employee, pending allowances, or any other financial obligations the company has towards the employee.
6. Payment of gratuity, where applicable, which is a form of long-service benefit paid to employees who have served a certain number of years.
7. Settlement of the employee's Provident Fund contributions, ensuring that these savings are properly disbursed as per legal requirements.
Or you can use Pazcare’s full and final settlement calculator to calculate your FnF settlement.
The Full and Final Settlement process is typically initiated and completed after an employee has left the organization. The timing of this settlement can vary depending on the company policy and the labor laws. Usually, 30-45 days is the maximum time taken by any organization to complete the full and final settlement to the employees.