Leaving an old job to start a new stint? Severing all the ties with the old firm? Bidding goodbye to the place to start afresh? All of these feel great, and leaving behind the old firm means finally settling all the dues with the old organization in the form of a full and final settlement. Letting the employee enjoy the last few days in the organization when the management takes care of all the leaving formalities is a great thing, and full and final settlement plays the most crucial role. So, here in this article, we will discuss the process and components of the full and final settlement offer and how it is carried out.

What is a full and final settlement?

The full and final settlement also known as the FnF settlement, is done when an employee submits his/her resignation from the firm and is a process that is undertaken during this period. This process is carried out based on the guidelines which have already been drawn upon in the appointment contract. During this time, the employee has to be paid for his services to the firm for the last month, bonuses, additional deductions, or earnings. This entire process of paying and recovering during the resignation process of employees is included in the FnF settlement. The company can either conduct the FnF process and then release the employee or can do vice-versa. It depends on the company’s policy.

Sometimes, exit interviews and surveys from the leaving candidates also form a part of the FnF process. These help the firm in assessing their strengths and weaknesses and how they can improve better. It also helps the firm keep track of the number of resources handed to the employees and helps the firm in collecting them back. The H.R. department generally takes care of this process as its completion requires extensive knowledge in this domain.

How does the company carry out the full and final settlement process?

It is a complex and time-consuming process. So, most of the firms follow a basic procedure to get through this settlement process.

STEP 1: The employee comes forward and informs the company about his intention to resign from the firm and thus submits a resignation letter.

STEP 2: The management team of the company accepts the resignation of the employee after overviewing it.

STEP 3:  The resigning employee has to submit a no dues certificate to the H.R. department from the department he/she is from and other concerned departments.

STEP 4: The company prepares the reimbursement statement that the employee will receive from the company, which includes paid leaves, pensions, gratuity amounts and many more.

STEP 5: The FnF statement is prepared, which includes both the reimbursement and recovery amounts, and this is then sent to the accounts department to review. The accounts department then accepts/rejects it and then the H.R. creates the final statement and asks for the cheque for the final clearing.

What are the major components of the FnF settlement?

The FnF settlement has many components that the H.R. needs to take care of before handing over the full and final settlement to the leaving employee. It involves paying and recovering many components. Preparing the reimbursement statement is a mammoth task and has to be done critically. So, let us see the different components of the FnF settlement process in detail.

• Unpaid Salary: The most important component refers to the time duration between the day the employee submitted the resignation and his/her last working day. It can also include the salaries of past previous months, for which salaries have not been provided yet. It also includes the Leave Travel Allowance (L.T.A.) and other arrears.

Unpaid salary = (# days the employee worked * gross monthly salary)/26 (or the # paid workdays in a month)

• Non-availed leaves and Bonus: All the leaves the employee is entitled to but has not taken need to be encashed. All the bonuses and credits are also added to the FnF settlement. As per Section 79 (11) of the Factories Act 1948, when the employee resigns, all of his/her unpaid leaves must be paid on or before the 7th & 10th of the coming month. Also, according to Section 15 (3) of the Karnataka Shops and Commercial Establishment Act, all the encashment dues should be paid by the 10th of the next month.

Non-availed leaves and Bonus = (# of days of unavailing leaves * monthly salary)/26 (or the # paid workdays in a month)

• Gratuity: It is the cash benefit provided by the employers to the employees for their continued service to the firm. The regulation states that the gratuity amount has to be paid within 30 days of the employee leaving the company if the employee has completed a minimum of 4 years of 240 days in the firm, or else interest has to be paid on the amount if 30 days pass without the company paying the gratuity amount.

Gratuity = (15 days of last drawn salary for each working year * total tenure of the employee working in the firm)/ 26 (or the # paid workdays in a month)

• Deductions: It includes provident fund, Income tax, professional tax (if applicable), and compensation if the notice period is not served. Gratuity amounts and encashed earned leaves are exempted from T.D.S. as per the Income Tax Act. All the other payments attract T.D.S. Segment 72 (5) under the E.P.F. Act 1952 makes it mandatory for all the businesses to forward the Employer’s Provident Fund (E.P.F.) guarantee forms within 5 days of the employee submitting its claim.

Income tax deductions depend on the bracket in which the employee’s salary falls. Like employees with a salary of 2.5LPA are exempted from Income Tax, salary between 2.5-5 L.P.A. attracts a deduction of 5% and so on.

• Pension: Employees who have completed 10 years of their pensionable service with the organization are eligible for pensions and can claim them by providing their “Scheme Certificate” after 58 years of age or their retirement. Most of the time, pensions are provided as a part of E.P.S., and it specifies a range of pensions between Rs. 1000 – Rs.7500.

Pension = (Pensionable salary * period of service)/70

When does the Full and Final Settlement Process occur?

According to the rules, the final settlement must happen on the employee’s last working day in the firm. However, clearance from the various departments takes time, so it must be done within 30-45 days after the employee’s last working day at the firm.

Gratuity must be paid within 30 days of the employee’s last day, while the bonuses must be paid within the current accounting period. Employees must be given a specified period if they are being removed from the company so that they can use the time to think about their future, and the same goes for the employees that they must inform the firm beforehand if they plan on leaving the organization. Failure to do this will attract penalties during the FnF settlement process.

In conclusion, FnF is a detailed process that has to be done with full concentration. It is H.R.’s domain, but most companies use specialized soft wares for carrying out the FnF process. Going by the rules, the FnF will help the firm to achieve maximum growth and avoid employee dues.