Full and Final Settlement: See how to run termination payroll

Full and Final Settlement: See how to run termination payroll

The workforce is the fuel for any business, as it helps run each component of the business smoothly. Irrespective of the industry, employees are the most important asset for any company. Satisfaction in your workforce will automatically lead to higher customer satisfaction – as directly or indirectly, they are the ones who manage all touchpoints with your consumers.

While most organizations efficiently manage the ongoing tasks and processes related to their employees, sometimes the employee experience is not the best at the time of their exit.

It is of paramount importance that even at the end of their tenure, the employee experience is good – in fact, I would say that it is more important to ensure that the employee’s experience with the organization ends on a high.

To ensure this, the most critical process is around managing their full and final settlement. When employees leave your organization, you must quickly assess and follow the detailed FnF (full and final settlement) process to determine the employee reparation as per the policies. 

 

What does Full and Final settlement mean?

Full and final settlement is the process followed by an employer when an employee resigns from the company. These proceedings include the employee’s last month’s salary plus any other additional earnings or deductions.

Companies carry out these calculations based on the guidelines, as defined under the company’s policy and state laws. It usually takes about a month to process F&F settlement in India.

However, this could change soon, as according to the code on wages, notified on August 8, 2019, an employer has to pay all the wages, because of the relieved employee, within two days after their last working day.

Final settlement meaning

As discussed earlier, a full and final settlement is a process where an employee has to be paid his/her due salary, including any incentives or bonuses. It is a significant process where the employee gets his/her retirement benefits, gratuity, incentives, and bonuses, as accrued until their last working day with the organization. This assessment needs to happen on the last working day of the employee. However, it may take 30 to 45 days before the final clearance.

Also Read: [Employee Offboarding] 11 step guide for an effortless process

 

How does termination pay work?

There are some laws, regulated by the respective State Governments, for paying the employees within a certain period. You should check your state laws to ensure that you are following them.

Your organization can decide whether the settlement will happen before the termination of the employee, or it may also happen after the exit.

Develop a procedure for salaried employees. There is a tradition, and even a contractual obligation, for employees to give notice before quitting an organization.

While this ensures that the company has adequate time to find a replacement, this also gives the employer enough time to work out the final settlement with the employee.

You can decide to develop a policy around the notice period for every employee who joins your company and make it compulsory.

You also need to ensure that you pay the employee for the entire duration of the notice period. However, as an organization, you have a choice whether you want the employee to come to work during this period or not.

An employee must have the following entitlements in their final pay.

  • All outstanding wages for hours worked, including allowance and penalties
  • Any accumulated earned leave

 

What are the rules for a full and final settlement?

According to the rules, a full and final settlement must be issued to the employee within 10 days from the employee’s last working day, as per the notice given by the employee.

The process of exit clearance should start 5 to 6 days before the last working day of the employee.

Starting the clearance process helps in building a mutual understanding between the employer and the employed by clarifying if there have been any dues or outstanding amounts during the employee’s working period.

 

Full and final settlement law in India

Wages, as defined under the Payment of Wages Act 1936, mean the total remuneration paid to the employee, except for special inclusions under the Act.

At present, there is no clarity regarding the timeline of full and final settlement, as companies have their own policies.

 

Full and final settlement under the Payments of Wages Act

Under the Payments Wages Act 1936, there is no specified time limit for a full and final settlement if an employee resigns. The Act does not explicitly mention the timelines for making the payment in case of resignation by an employee.

Nature of Termination Timeline for Settlement
Termination of an employee by the employer Prior to the expiry of the second working day from employee termination
Termination due to closure of the establishment  Prior to the expiry of the second working day from employee termination
Any railway, factory, or any other establishment that has less than 1000 persons employed before the expiry of the seventh day from the last day of the wage period.
Any railway, factory, or any other establishment that has over 1000 persons employed Before the expiry of the tenth day from the last day of the wage period

 

Policy for full and final settlement 

The full and final settlement will start only when the employer accepts the employee’s willingness to leave the company, and the employee also has to ensure that he/she follows the company policy right up to the last working day.

The employee must give an adequate notice period – Employees must give a proper notice period to the employer in order to provide training and smoothly transfer responsibilities to the new employee.

Handover all company property – Collect the ‘No Dues’ form from your HR and hand back all the company assets.

Also, take an acknowledgment signature on the form to confirm that you have handed over the company property.

Salary, Leave encashment, and Retirement benefits – Once the management acknowledges that you have handed over all the dues then they will calculate your unpaid salary, leave encashment, and other benefits such as gratuity. HR will then issue a FNF statement to you.

Once you have checked and agreed on the same, they will hand over the cheque for remuneration to you.

full and final settlement get started

 

When does full and final settlement take place?

According to the rules, the final settlement should take place on the last working day of the employee. However, clearances usually take time, and it is the norm to do so within 30-45 days after the employee’s last working day.

For gratuity, the timeline is 30 days after the employee leaves the company. Also, to pay any bonus or variable payment, the employer must clear it within the same accounting year.

Period of settlement

The period of settlement refers to the timeline between the day of the employee’s resignation and the day of a FnF settlement. This involves all processing of clearance and repayment of any dues to your employee.

As discussed, the clearance will take time as it involves paperwork. It will take around 30 to 45 days for the process to complete.

Employees should provide advance notice to their employer, which normally is around one month before they decide to leave the company. If they cannot inform their employers before the timeline, they are liable to face penalties mentioned under the company rules.

 

Components of the full and final settlement?

FnF settlement pay involves different components. It is a time-taking and laborious process, as all the details have to be kept in mind. Here are some components that must be included in the FnF:

Calculation of final remuneration is a tough task. Mentioned below are the components that make the final statement. Let’s have a look:

  • Unpaid salary: Settlement includes the amount of salary that has to be paid to the employee for the working days that he/she has worked between resignation and the last day of working. There are also certain cases where employees are given a part of their salary in a particular timeframe (quarterly or half-yearly). These need to be settled along with the annual benefits, such as LTA and other balances.

Calculation of unpaid salary

Calculated as the number of days of compensation multiplied by the gross salary divided by 26 (Avg. number of working days per month).

  • Non-availed leaves & bonuses: Non-availed leaves and any bonus or credits, which as per the Company policy, can be encashed by the employee during the settlement.

According to the regulations [section 79 (11)] of the Factories Act,1948 all the unpaid dues should be paid by the 7th or 10th of the following month of resignation. As per section 15 (3) of the Karnataka Shops and Commercial Establishment Act, Leave Encashment dues should be settled by the 7th of the following month. Payments for non-availed leaves have to be calculated based on company policy.

Calculation of non-availed leaves and bonuses

The number of days of non-availed leaves multiplied by the basic monthly salary, divided by 26 (Avg. number of working days per month). Or, as per the company policies, it could also be a fixed amount for every non-availed leave, as defined by the organization.

  • Gratuity: It is a cash benefit given to an employee by the employers for providing their long-term service to the organization. If the employee has completed 4 years and 240 days with the company, then the organization should pay the gratuity amount within 30 days of separation from the company. If the organization cannot pay the amount within the defined time frame, they will be liable to pay the same with accumulated interest.

Calculation of Gratuity 

Fifteen days of last drawn salary for each working year, multiplied by the tenure of working, and divided by 26 (Avg. Number of working days per month)

  • Deductions include payable taxes like professional tax, income tax, and contributions like provident funds, etc. Employees could also face salary deductions for the shortfall in their notice period. Please note that Earned Leaves that are encashed and the Gratuity that gets paid to the employee are exempt from tax deducted at source (TDS). All the other payments are liable under TDS according to section 72 (5) under the E.P.F Act, 1952.
  • Pensions: Employees who have completed at least 10 years of pensionable service are eligible for this. They can avail the pension benefits by providing their certificate after their retirement (or after 58 years of age). Employees get this pension, as defined under the E.P.F. scheme, with a minimum pension amount of 1000.

Calculation of E.P.F. pension: Pensionable salary multiplied by the service period divided by 70. 

Also Read: 12 Provident Fund Lessons I Learnt – #12 will surprise you

 

Process for full and final settlement 

The FnF settlement involves a series of steps between the HR department and the employee

Step 1: Resignation in writing The first step in the process has to be the submission of resignation by the employee in writing to the concerned department.

Step 2: Acceptance letter After getting the resignation from the employee, management will send the acceptance letter back to the employee

Step 3: Process within HR Management will ask the employee to get a No-dues certificate, along with the acceptance letter, and forward it to the HR department.

Step 4: Check leave balance, gratuity, bonuses, unpaid salary. HR should verify EL/PL, Gratuity payable, Bonuses to be paid, and then calculate the unpaid salary.

Step 5: FnF statement This is prepared by the HR department, and is then further processed by other departments, such as Finance & Accounts.

After getting it signed, the Accounts department will prepare a cheque for the due amount. They will issue a cheque along with the service certificate to the employee.

 

Full and final settlement in payroll

A full and final settlement can be a back-breaking process, in the absence of clearly defined policies. Define your policies and document them so that it makes the task for the payroll team simple. Here are 3 tips for you to follow to simplify the payroll processing:

Clear termination policy: As we have learned, it is important to have a clearly defined termination policy for individuals and groups.

These rules must also specify the timelines for the notice period, leave balance calculation, gratuity, and other things that need to be included.

These policies will avoid any confusion with the payroll team and disputes in the FnF settlement process.

Partial payment in FnF: Some organizations prefer to continue their employee payroll process through their regular salary schedule and withhold the salary for the month of exit.

We also refer to this as partial payment in FnF. In this process, the payroll team only has to calculate the TDS and balances for the last month.

Also Read: How To Run Your Payroll In Excel

 

How is the full and final settlement calculated?

One of the last hurdles in employee termination is calculating the termination pay. The sheer number of components involved makes it even more difficult. You must follow a simple checklist to ensure that you don’t find yourself in difficult situations.

Calculating outstanding wages:

If an employee has performed any work during that period, then he/she must receive payment for the hours worked, along with any outstanding amount and reward, if any.

Payment in lieu of notice:

Under the Fair Work Act 2009, employers may pay an equivalent amount instead of getting work by the employee during the notice period.

You must pay this amount at the full rate of pay for the employee, assuming that he/she would have worked had the employment continued until the end of the notice period.

Annual leave:

Unlike casual/personal leave taken by the employee, which is not applicable for encashment, Annual Leaves that are still unused are eligible for payment.

Additional payment:

This includes other salary components, as defined under the Company Policy, like redundancy pay, long service leave encashments, contractual entitlements, etc.

full and final settlement get started

 

Letter for full and final settlement 

Source of the letter format

To,
Human Resources Manager,
(Name of the Company),
(Address)

Date: __ (Mention Date)

Subject: Request for full and final settlement

Respected Sir / Madam,

I would like to bring into your kind concern that my name is (Name) and I was working at your (Company/ Organization) from _ (Date) till _ (Date) in __ (Department) department as (Designation) bearing employee id __(Employee Id).

That on ________(date) I have submitted my resignation letter, which is duly approved by __________(Name of the approver) and also served my notice period.

I am writing this letter to state that on _ (Day) i.e. (Date); I got relieved from your _ (Company/ Organization) but my full and final settlement has not run, Kindly request you to run the full and final settlement and send me all my dues (if any). I also request you to please share the original statement with me as soon as possible.

If you have any questions about my request, please call me at ___________(contact number).

Thank you for your time and your attention to this matter.

I shall be highly obliged.

Kind Regards,
 (Signature)
(Name),
(Address)
(Employee ID)

 

How does Asanify automate the full and final settlement process?

Asanify helps automate the termination payroll process with a series of steps:

  1. Adhere to the company policy to make the termination smooth. Create a custom termination policy for your organization.
  2. Make tax adjustments for any time period in compliance with the laws with all other components included in the statement.
  3. You can calculate one-time deductions while making an FnF statement and running the termination payroll.
  4. Run payroll in the middle of the month and calculate the gross salary and generate payslips. 
  5. You can revert to the termination process with a single click if the employee is off boarded by mistake. 

Start automating your Termination Payroll with Asanify!! Click here to GET STARTED!

 

Conclusion

A full and final settlement is a long, and tedious process with a series of steps involved. If not done properly, it will affect employee satisfaction, leading to a negative impact on the employer’s reputation.

You can achieve a systematic approach towards employee termination through custom software like Asanify.

You can speed up the entire process and avoid errors altogether. A FnF process can also become easier if you clearly state and define your policies in your company.

When you follow all the policies and frameworks that result in no dues and achieve maximum growth. The ideal FnF settlement process is one where the HR department handles all the transactions between all the stakeholders

It also resolves all the issues before the employees’ last day of work.

Check out the asanify termination payroll module to make your termination process smooth.

 

Frequently Answered Questions

  • Is gratuity payable in case of termination?

 Gratuity is payable only with the termination of an employee after completing five years of continuous service.

  • Does an employee get compensation after termination?

If the employee has worked before getting relieved then he is eligible to get paid. You should also refer to the Employment Act of your state for further reference.

  • What does the termination payment include?

Termination pay includes components such as unpaid salary, non-availed leave, gratuity, deduction, and pension.

  • How do you ask HR for a full and final settlement?

You can write a letter or email your HR about your resignation and FnF settlement.