Full and Final Settlement Definition
Full and Final Settlement is a process used to calculate the dues owed to an employee who leaves, resigns, or is terminated by the company. This settlement encompasses various allowances and benefits but does not include the employee’s regular salary.
Table of Content
Guidelines for Full and Final Settlement
In India, full and final settlements are governed by rules and regulations. The Payment of Wages Act plays a role in overseeing this process.
This Act sets out the timing and methods of wage payments to ensure that employees are compensated.
According to the Act employers are required to disburse Full and final settlements within a timeframe within seven to ten days after the last working day.
This legal requirement aims to safeguard employees’ rights and provide them with access to their benefits.
Methodology for Full and Final Settlement
Accurate and maintained documentation is crucial during FnF settlements. Here’s a list of documents that both employers and employees should be aware of:
- Resignation Letter: The departing employees formal resignation letter serves as the step in the process.
- Offer Letter and Employment Agreement: These documents help verify employment terms, job roles and details related to compensation.
- Records: Keeping track of participation and leave records is crucial for calculating leave encashment.
- Pay slips: Pay slips provide a breakdown of compensation components ensuring calculations.
- Documents such as Form 16 are important for tax-related calculations.
- Repayment Documentation: Keeping track of repayment claims and receipts is important for finalizing repayments.
Key Elements and Tasks in the Full and Final Settlement
It is crucial to understand which elements should be considered when calculating the amount owed to the employee.
Let’s look at each task in detail:
Financial Independence
This involves any repayments expenses on company cards. The following are the elements to calculate the contribution owed to the employee;
Unpaid/Overlooked Salary
As per the Payment of Wages Act, 1936, the salary for the month should be cleared by the 7th or 10th of the month.
However, when an employee leaves a job their salary up until their resignation date needs to be calculated.
Unpaid salary also includes benefits to employees like LTA (leave travel allowance) or other pending payments.
Unused Bonus
According to the provisions of the Factories Act, 1948 any unused leaves and bonuses should be settled by the 7th or 10th of the month after resignation.
The leaves available to employees may vary from company to company depending on their policies.
Similarly, businesses can provide rewards to their employees for occasions or commendable performance.
Employee Provident Fund (EPF) or Pension
A certain amount is deducted from the employee’s salary every month. The business also contributes significant amount.
This pool of funds is maintained by the business as a Provident Fund and Pension Fund, for the employees helping to build a corpus.
Deductions from Final Settlement
Any tax or financial obligations arising from the settlement amount will be deducted from the sum.
Leave Encashment
Leave encashment in Final Settlement refers to converting unused earned leaves into a payout when an employee decides to leave the organization.
IT Clearance
This involves returning company assets such as computers, monitors, keyboards or mice. Anything that was provided to the employee on their working day. In case of any damage, it may be recovered from the employee’s settlement amount.
HR Policies
Different HR policies related to joining bonuses, learning and development opportunities and notice periods can vary across companies.
Based on the employee’s residency or company policy the joining bonus or the latest bonus of a company can be claimed during the Full and final settlement.
Administrative Privilege
This involves obtaining the employee ID card or other essential resources required for entry/access into the company.
When Does the Full and Final Settlement Take Place?
It’s important to note that an employee, whether they are leaving or being terminated, has the right to receive all their dues within a time frame.
It is customary to complete the process within 30-45 days (about 1 and a half months), from the employees working day.
If the employer fails to fulfill the Full and final settlement requirements the employee can legally challenge it. The employer will be liable to pay interest as a penalty on all dues.
Here are a few things for employers to keep in mind:
- Maintain records of all communication with the employee.
- Calculate the settlement value according to governing regulations.
- Ensure that Full and final settlement is made within a period.
- Deduct taxes (TDS) from earnings.
- Provide calculations and a Full and final settlement pay slip, to the employee.
Frequently Asked Questions (FAQs)
What is the process for notifying an employer about a Full and final settlement?
Answer: To notify an employer about a Full and final settlement an employee can send a notification through their lawyer. In this notification they can request the pending dues. Specify a timeframe for the settlement.
What happens if the employer fails to complete the Full and final settlement?
Answer: Legal Consequences: In cases where the employer may have the option to act against the employee to recover the unpaid settlement amount.
Is there a timeframe within which the Full and final settlement must be completed?
Answer: While there is no specified deadline, for completing a Full and final settlement as mentioned in any legislation it is generally considered ideal for employees to aim for a timeframe of 30-45 days to ensure completion of their Full and final settlements