Basic Knowledge and Format for Full and Final Settlement

What is Full and Final Settlement in payroll?

When an employee is leaving the company, he has to get paid for last working month. This procedure of paying or recovering during the resignation process is called Final Settlement.

Final settlement can be done on the last working payroll month or subsequent months. The employee can be settled first and then resigned or you can resign an employee and then do the final settlement at a later date.

What components are used to decide the final settlement sum?

Unpaid Salary (including annual benefits such as leave travel allowance) and arrears, which is calculated as the number of days for which salary is to be paid multiplied by the gross salary divided by 26 (paid days in a month)

Unpaid bonus

Payment for non-availed leaves, which is calculated as the number of days of non-availed leave multiplied by basic salary divided by 26

Apart from the usual components the following might be applicable:

Gratuity, if four years and 240 days have been completed

Pension

Deductions include profession tax (if applicable), provident fund, income tax and compensation for notice period not served.

What is the period of settlement?

As far as the period for settlement is concerned, the final settlement needs to happen on an employee's last working day at the organisation. However, as clearances take time, it is prevalent policy to do so within 30-45 days after the employee has left.

For gratuity, the stipulation is 30 days after leaving the company, while bonuses must be paid within the specified accounting year.

What necessary measures that an employee must do to ensure no complications?

Make sure to settle any advances taken or get it adjusted in the final settlement.

Get a copy of all the various clearances required from the different departments of the organisation that you were attached with.

Refer to the standing orders of the company, employee rule book, HR policy handbook etc. All such policies should be kept within the reach and knowledge of the employee. If these policies are not available with you may demand these and also try and obtain from some colleague.

Instead of making verbal communications you should address written representation under acknowledgment to your HR contact and narrate all representations by phone (mention phone numbers, date, time etc.) and minutes of discussion, followed by escalation to MD, Chairman, Company Secretary, with a copy to Head-HR and raise your queries.

  

Under which law can an employee seek relief?

Employee can seek relief under Industrial Employment Standing Orders Act, SE act applicable to the state, Payment of Wages Act, ID act as per explanation of employee under these enactments or thru civil court.

What is the general format of a Full and Final settlement letter?

The GM- HR,

......................(Name of Company)

Re: Issuance of Full & Final Settlement

Dear Sir,

Please refer to my resignation dt.......from the company. I am sorry to state that even after the expiry of .... days from my resignation, my full & final settlement is not made which is a cause of concern to me.

I therefore request that my full & final settlement be done & any amount due be sent to me along with the original Statement at the earliest.

thanking you in anticipation.

best regards,

..........(Name)

..........(Current Address)

Full and Final Settlement

Full & Final Settlements commonly known at the FnF process is the procedure required to be followed by the employer after the employee has resigned from his/her services. The procedure is fairly simple and is as per guidelines set out in the appointment contract.

As a leading HR & Payroll Company consulting small and medium businesses Pan-India on things HR, Payroll & Compliance related ; exit formalities are something most companies remain clueless about. This week’s post draws light on the major components that are  part of Full & Final Settlement Statement.

Major Components that are part of the Full & Final Settlements

1. Unpaid Salary

The full and final settlement includes the unpaid salary for the number of days for which the employee has worked for since his resignation date and his last working day. Unpaid salary including annual benefits such as LTA ( leave travel allowance) and arrears which is calculated as the number of days for which salary is to be paid multiplied by the gross salary divided by 26 (paid days in a month).

2. Non-Availed Leaves & Bonus

As per Section 79 (11) of the Factories Act 1948 all unpaid leave dues should be paid by or before the 7th & 10th of the following month of resignation. As per Section 15(3) of the Karnataka Shops & Commercial Est. Act leave encashment dues should be settled by or before the 7th & 10th of the following month.

Payment for non-availed leaves (earned or privilege leave), which is calculated as the number of days of non-availed leaves multiplied by basic salary divided by 26 days (paid days in a month).

3. Gratuity

As per Section 7 (3) of the PG Act 1972 Gratuity should be offered within 30 days of the separation or else it will have to be paid with interest if four years and 240 days have been completed by the employee.

4. Deductions

Deductions include Profession Tax (if applicable), Provident Fund, Income Tax and Compensation for Notice Period not served. Gratuity and cashed earned leave are exempt from tax deducted at source (TDS) as per Income Tax Act. All other payments attract TDS under Section 192 of the Income Tax Act. As per Section 72 (5) of the E.P.F Act 1952 the Employer shall forward the E.P.F claim forms within 5 Days of the employee submitting the claim.

5. Pension

Pension, as long as the employee has completed at least 6 months of service with the existing employer and 10 years of ‘pensionable service’ on providing a Scheme Certificate after retirement (58 years) age.

EXIT FORMALITIES

As an employer or an HR manager, at some point you’re bound to face the inevitable. A RESIGNATION – Yes, resignations are part and parcel of professional organizations, especially growing business. Sometimes, you might be able to take a resignation in your stride. However, every now and then you’re going to come across a situation where an unexpected resignation will affect certain important processes in your company.
Dealing with resignations appropriately and systematically avoids unnecessary stoppages or hindrances and may even work out in your favour. Here’s a step by step process on how you should handle a resignation to smoothen the transition for the employee and the company.

Dealing with resignations appropriately and systematically avoids unnecessary stoppages or hindrances and may even work out in your favour.  Here’s a step by step process on how you should handle a resignation to smoothen the transition for the employee and the company.

1. Acknowledge the resignation.

As soon as you receive a resignation from an employee (formal or informal), let the employee know that you have received it and have begun the process at your end.  This calms some initial nerves and keeps both parties on the same page.  Once, you’ve done this, follow the steps below:

1. The reporting boss and the HR manager coordinate to decide if they want to attempt to retain the employee or not.
2. Arrange for an informal meeting where you can discuss with the employee if there is any way you can retain him. Otherwise, confirm the notice period, handover process and any unfinished projects that you would want completed before the employee’s exit.
3. Also, determine whether you want to replace the employee with a new hire. In case you need to hire someone, it’s best to get started with that process as soon as possible.

2. Negotiating with the employee

If you think that the employee is worth going that extra mile to retain, then you’re going to need to understand what it’s going to take to retain him.  Usually, a hike or a promotion will make the employee rethink his decision.  However, if the issue is deeper and he/she cannot be convinced, then it’s best to show support towards their decision.

3. Notice Period and other formalities

Once the resignation has been mutually accepted, discuss what would be the last day of working for the employee. In most cases, notice periods are already decided when an employee joins. This has to be adhered to unless the employee and employer mutually decide otherwise.

Notice period buyouts are common these days and hence it’s a good thing to be prepared for that as well. The norm is usually a day’s salary for each day of the notice that the resigning employee doesn’t serve.  On many occasions, the buyout is done by the new company that the employee would be moving to. The right to decline the buyout remains with the employer but shouldn’t be exercised unless absolutely necessary.

Here are a couple more things you may want to discuss while confirming the notice period:

4. Pending Projects

If there’s anything on the employees plate that you would like to see completed before he leaves, make that clear.  This keeps the employee from getting lethargic during his final days and ensures delivery of work.  However, do make sure that you don’t overburden the employee with unrealistic deadlines.

5. The handing over process

The work handled by the employee resigning of course needs to be taken care of once he is gone.  Ask him to pass on his access and tasks at hand (wherever relevant) to a colleague or the new hire.

6. Notice period formalities

Depending on your company policy, you may have separate leave policies and access for employees on their notice period. It’s a good idea to reiterate them to the employee when you have the initial meeting.

7. The Exit Interview

Close to the end of the notice period, it’s important to conduct an exit interview to further smoothen the exit of the employee.  Having this interview close to the last day, helps the employee be bolder about his views. While this may also seem like a formality, when done systematically, it can answer some crucial employee management questions.

Here are some questions that you should ask while conducting an exit interview.

• Why he/she has decided to leave?
• What could you have done to avoid the resignation?
• Would he/she recommend your company to a friend?
• If Yes/No, then what are the reasons?
• Did he/have the tools to carry out their job well?
• What he/she liked most about the company?
• What he/ she disliked most about the company?

The answers to these questions should be documented for analysis later.  Keeping a log of the exit interview responses will help in identifying HR issues and reduce attrition rates.

8. Relieving Formalities

Finally before the employee completes his/her last day, ensure all exit formalities have been taken care of.  You may want to create a process where the employee needs to get an acknowledgement from relevant superiors before he leaves. This ensures that all pending tasks have been completed and the necessary handovers are done.

Also, ensure that all items given to the employee have been returned. Here’s a quick checklist of things you may have to take back before he leaves.

• Laptops
• Keys for Office/Drawers etc.
• IDs and Access Cards
• Company Cell phone
• Company Credit Card

As an extra step, it would also be nice gesture to mail employees on their last day wishing them luck.  This would leave the employee with a positive image of your company.

9. F&F and relieving letter

It’s finally time to process the employee’s full and final settlement.  Here’s a quick guide to what you need to include in it

• Unpaid Salary including LTA, reimbursements and bonuses
• Encashment of leaves that haven’t been taken
• Gratuity, if applicable
• Pension, if applicable

Once the amount has been processed, send the employee his/her relieving letter. Don’t forget to mention the tenure, designation and compensation in the letter.

Following a set procedure, avoids unnecessary delays smoothens the transition for the employee and for you. Try to keep things professional so that there are no burned bridges at the end of the ordeal.