Full and Final Settlement Process (FnF): In-Depth Analysis
FnF Settlement process is a series of steps undertaken by management and employees to settle the outstanding dues and obligations while the exit of an employee irrespective of resignation, termination, or retirement from the Organization. It ensures the settlement of all financial obligations of employees and terminates employment relationships.
FnF Settlement Guide
What is the FnF settlement process?
The full and final settlement process is the clearance of dues that have been earned by an exiting employee during their term of service from the resignation letter date to their last working date. Irrespective of the type of exit – voluntary resignation, retirement, or termination – the company is liable to release different payable dues of their salaried employees after their exit.
It is an essential stride in the HR workflow to evaluate and remunerate employees’ dues after their exit from the organization as it results in satisfied employees and enhances the company’s internal and external image.
After an employee resigns, from that particular day till their term in the company ends is considered as the ‘notice period’ of the employee. When the employee accomplishes the notice period term with the proper handover of documents, assets, and knowledge acquired during their term of service along with no contractual obligation, they are entitled to receive the full and final settlement clearance from their company.
How Does the Full and Final settlement process work?
A company is comprised of diverse departments and when an employee decides to exit, they have to get clearance from the concerned departments to get their full and final dues.
The departments responsible for making clearances generally include IT, administration, HR, and finance departments.
1. IT Department Clearance Specifics:
Recovery of company assets includes mobile phones, laptops, and other gadgets provided to the employee during the term of their employment.
The department should ensure the gadgets are robust and there are no damages. Besides, access to all official logins is blocked.
In case of non-recoveries, the IT team can stop the FnF processing and in case of damages, it can recover the damaged amount from FnF.
2. Admin Department Clearance Specifics:
The admin head is the responsible person who verifies the entire process of recovery and has the authority to let up the processing of full and final settlement payment until recovery.
3. Accounts Department Clearance Specifics:
Various components are taken into consideration while calculating the FnF like the outstanding expenses, expenses on the company’s card, additional expenses incurred, and others.
4. HR Department Clearance Specifics:
The HR department has the final job to process the FnF settlement.
What are the Components and their Calculations in the Full and Final Settlement Process?
There are multiple major components that are taken into consideration in evaluating the FnF, namely:
- Unpaid Salary
- Additional Earnings:
- Non-availed privileged leaves and bonuses
- Added Incentives
- Accumulated Interest
- Gratuity Payment
- Deductions including:
- Pensions
- Employee Provident Fund
- ESIC
- Salary Deductions (in case of advance taken)
- Loss of Pay Days
1. Unpaid Salary
Unpaid salary is the outstanding wages of employees that are not paid on time during their employment. Salary earned in the month of notice or any salary due from the preceding month of employment is considered unpaid salary.
According to The Payment Of Wages Act 1936, employees are entitled to receive their salary on time for their term of employment, and if the company or employer refuses or fails to pay the amount, the employer is liable to pay an interest amount along with the due salary.
▸ Calculations of unpaid salary:
The number of days of compensation is multiplied by the gross salary divided by the average number of working days in a month.
The No. of Days of Compensation x Gross Salary/ 26 ( Avg. working days in a month) = Unpaid Salary.
2. Additional Earning
It includes various allowances and bonuses provided apart from the basic employee’s salary during his term of service like:
- Personal Development Allowance
- Transport Allowance
- City Compensatory Allowance
- PL (Leave Encashments)
- Statutory Bonus
- Incentives
- Redundancy Pay and more
NON-AVAILED Privileged Leaves (PL) and Bonuses
Apart from casual leaves, employees are also entitled to privileged leaves (PL). If PL has not been availed by the employee during their tenure, leave encashment is paid during their exit and is added to the full and final payment.
The leave encashment of privileged leaves varies as per the company policy and norms. It is never the same for all companies as every company’s policy is different.
In addition, employers provide bonuses to employees on special occasions (e.g. Diwali Bonus), statutory bonuses, or due to their meritorious performances and significant contribution in their job role. The cash equivalent to the bonuses is added to the full and final settlement payment during the exit of the employee.
▸Calculation of PL:
As mentioned, PL for leave encashment varies as per the company policy, so approximately,
If the PL is considered 21 Calendar days a year, the calculation will be:
(Basic Salary + D.A.) / 30 (No. of working days to be enchased).
If Pl is considered 21 working days a year, then the calculation changes to:
(Basic Salary + D.D) / 26 (No. of working days to be enchased).
▸Calculation of Statutory bonuses:
A statutory bonus is an annual or monthly incentive given to an employee whose income is less than 21,000 a month. The Payment Of Bonus Act, of 1965 provides a minimum bonus of 8.33 percent and maximum annual benefits of 20 percent of wages to the employees.
The Act applies to all establishments with more than 20 employees. Some companies choose to pay this out in advance. The calculation is undertaken using the formula:
Statutory bonus = Salary (Basic + DA) * Bonus Percentage
Note:
- If the basic salary + DA is more than the minimum wage for a bonus then, only the basic salary is considered.
- Statutory bonuses are only provided by those companies which are covered under The Payment of Bonus Act.
▸Redundancy Pay
These are the termination payments undertaken by the company to the employees during a layover.
The reason for employee termination could be numerous, ranging from Non-requirement of personnel for a particular job role to termination due to liquidation of the company, or any other reason.
An employee is eligible for this payment only when they have completed 2 years of service in that particular company.
▸Calculation technique:
Employee aged of more than or equal to 41 years = 1 and half weeks pay for each full year
Employee aged more than 22 and less than 41 = 1 week pay for each full year
Employee aged under 22 =half a week’s pay for each full year.
3. Accumulated Interest
These are the unpaid and accrued interest that has not been paid over the duration of time.
4. Gratuity
The Payment of Gratuity Act of 1972 has laid certain rules for the payment of gratuity amounts. It is paid to employees who have completed 5 years of continuous term in an organization without any gap in between.
The company is liable to pay the gratuity amount within 30 days of the employee’s exit. By law, the government has made it mandatory for organizations to pay gratuity within 30 days of an employee’s exit else a simple interest is required to be paid from the due date till the date of payment by the employer.
Most companies deduct 4.81% from the employee salary and pay it during the exit of an employee as the gratuity amount.
As the gratuity paid to employees is a part of their salaries, it is eligible for income tax deductions. However, it is subject to limited deductions due to various exemptions laid by the government.
▸Calculation of Gratuity:
If the company policy is covered under Gratuity Act:
Gratuity = n*b*15 / 26
If the company policy is not covered under Gratuity Act:
Gratuity = n*b*15 / 30
Note:
- n = no. of gratuity eligible working years
- b = basic pay + D.A.
5. Deductions
Any tax liability that is eligible for income tax is deducted from the full and final settlement payment.
In accordance with the Income Tax Act, of 1962 a TDS (Tax Deducted at Source) is deducted from the components that are qualified for taxation.
Deductions include Provident Fund, ESI (if applicable), Employee’s Income Tax, etc. However, gratuity and leave encashments are exempted from TDS.
▸Provident funds & Pensions
Provident funds are the invested funds made out of partial payment from both the employer and employee for long-term savings to back up the employee’s retirement.
Most confuse provident funds with pension benefits. A provident fund is the combination of the employer’s and employee’s contributions for retirement benefits whereas, a pension fund is the employee’s contribution for retirement purposes.
Pension funds are eligible for withdrawal when an employee completes 10 years of continuous service. So, it is important for the employee to obtain the EPS certificate and hand it over to the new employer to maintain continuity of employment.
Under the Employee Pension scheme, the minimum Pension amount is ₹ 1000 to ₹ 2000 per month for India.
▸Calculation of EPF
The employee has to contribute 12 % of (basic salary + DA) towards the PF contribution.
The PF percent varies from 10-12 % for employees and 12% for the employer.
From the employer’s contribution, 8.33% is shared towards an employee’s pension scheme and 3.67% is shared towards the EPF scheme.
▸Calculation of Pension
Employee’s monthly salary = ( pensionable salary * pensionable service) / 70
Note:
- Pensionable salary is the last drawn salary (basic + DA) of an employee for 60 months before they decide to exit from EPS
- Pensionable service is the duration of employment of an individual.
▸ESIC (Employee's state insurance CORPORATION)
ESIC benefit deductions are applicable for employees whose monthly salary is less than ₹ 21,000.
The ESIC Act, of 1948 has fixed a percentage of contribution for both employer and employee.
The ESIC rate is revised from time to time. Currently, the employer contribution for ESIC is 3.5% of the salary and the employee’s contribution is 0.75%.
▸Calculation of ESIC
The calculation of ESIC is done on the basis of 26 days and not calendar month.
▸Salary Deductions
This is the amount deducted from the gross salary of the employee in case of advances drawn from the company in any preceding month.
The Full and Final settlement calculation process includes the deduction of such an amount from the employee during his exit.
▸Calculation Technique
Total gross salary (including all earnings) – advances received.
What is the Full and Final Settlement Law in India?
In India, there are no specific regulations for undertaking the Full and Final Settlement (FnF). Every company has its own policy and rules for the FnF process.
However, according to the Payment of Wages Act 1935, an employee is entitled to payment according to their terms of service.
There are certain state laws like the Commercial Establishment Act, Wage Code, New Wage Code, Labour Law, and more, that can be referred to during the FnF process.
Ideally, the maximum duration for making a full and final settlement is 30-45 days after the last working day of the employee. The day when the notice period ends is considered the last working day.
FnF Settlement Payslip Format
The FnF settlement payslip does not have any specific format to be uniformly followed by all the establishments.
The basic full and final settlement payslip format includes the following details:
- Name of Employee
- Designation of Employee
- Employee Code
- Bank Account Number
- No. of LOP Days
- No. of Paid Days
- Full and Final Settlement Components Evaluation
- Total amount to be received excluding the exact tax deductions, payable taxes and other deductions.
- All the transactions of the FnF settlement process (including deductions and additions from net salary, gross salary, and more).
Process of Full and Final settlement
The process of full and final settlement has the following steps:
1. Accepting Employee's Resignation
Accepting the employee’s resignation is the first step of the full and final settlement process in which the company should accept the request of the employee to leave the organization.
Giving a response to the resignation showcases the ideal conduct of management towards human resources.
2. Acceptance Letter
After receiving the resignation letter from the employee, the employer sends an acceptance letter to acknowledge the exit date and process the final settlement accordingly.
3. Handover of Assets and Process of Clearances
Next in the queue is the handover of all official gadgets and access provided to the employee during their term of employment.
The employee is expected to return the asset intact and the login access maintaining the confidentiality policies of the establishment.
Different departments like IT, HR, Finance, and Admin provide clearance after verifying the returnables from the employee.
It ensures zero data theft and maintains the credibility and confidentiality of the company.
4. FnF Settlement Letter and Service Certificate
After getting clearances from different departments, the full and final settlement is processed and released within 30-45 days of the employee’s exit after serving the notice period.
Later, the experience certificate is also provided to the employee for investing their knowledge and skills in the company.
It enhances the employer’s reputation for both existing as well as exiting employees.
What is the Importance of Full and Final Settlement for Employer?
It is extremely vital for the employer to process the final settlement as it has an advantageous output for both the employer and the organization.
The benefits might be indirect but are prolong and vivid. Various benefits of clearing FnF include:
▸Healthy Working Environment
Employee satisfaction reflects the work environment’s culture and how the workforce is treated.
A smooth and quick final settlement process not only enhances the reputation of the company but also boosts the morale of the internal employees.
It showcases the strong work culture and positive work environment of the establishment.
▸Enhances Credibility
When an employee leaves a company with hassle-free exit procedures and a streamlined FnF process, it creates an optimistic experience which, as a result, enhances the organization’s reputation.
It is a basic human tendency to discuss previous companies’ pros and cons with the current ones. As a result, the staff tend to discuss the quick and streamlined FnF settlement procedures with others which not only magnify the employer’s image but also attract the finest candidates to associate with the organization.
▸Smooth Auditing Procedure
The financial year (i.e. 1st April to 31st March) auditing to evaluate the company property, assets, and liabilities are conducted every year to keep a watch on the processing and functioning of the organization.
Accumulating the FnF amount of employees ultimately affects the functioning of the organization during the audit. It puts the company’s evaluation in trouble and degrades the credibility of the company. In contrast, when the full and final settlement is streamlined, it smoothens the audit process and frames a clear picture of the flow of investments and expenses incurred.
Wrap up
The FnF settlement procedure is a tedious process for the payroll team specifically since its evaluation of adding the cash benefit, calculating the face salary deductions, and more. Automation in FnF settlement procedure not only quickens the process but also eases the task and benefits in managing time better. FnF is calculated on the regular salary schedule and a streamlined FnF procedure exemplifies the vigorous and supportive management team.
FAQs
No legally specific time period is mentioned as per the Wages Act for the voluntarily resigned or retired employees, but ideally, as per experts, a maximum of 30-45 days after an employee’s exit is preferred suitable for clearance and fnf settlement time period.
The Wages Act of 1964 states that terminated employees are entitled to receive their fnf within 2 working days after their termination.
In case of failure of payment of fnf by the employer, the employee can legally sue the employer and approach the labour commissioner. If fraudulent avoidance prevails from the employer then, the employee can even lodge a police complaint.
The New Labour Law states that the Employer has to pay the complete salary settlement within 2 days of the employee’s exit (last working day) day from the organization irrespective of voluntary resignation, termination, dismissal, or retirement.
Yes, if the employees resign from their jobs or are terminated, and have completed the period of notice they are entitled to receive gratuity within 30 days of exit. In case of delay, they are entitled to receive simple interest on the gratuity amount.
