Full and Final Settlement (FnF) | A Definitive Guide (2024)

An employee who joins an organization one day has to leave. There are many ways an employee can take an exit or has to take an exit, such as retirement, resignation, or termination. In any case, when an employee leaves, a settlement has to be made, which is called a full and final settlement. In simple words, this settlement means the clearance of any dues with the employee, but it’s not as simple as it sounds. 

Especially a newly founded company must know the importance and complexities of this process as it can be a legal weapon against you if you make any mistake in this process. But don’t worry about this happening to you, as here’s a blog that will help you understand this important process in a business and everything related to it. 

What is the Full and Final Settlement?

A full and final settlement policy is a process that takes place when an employee leaves your company. It includes clearing all the dues that the company owes to the employee. So, unpaid salary, bonuses, gratuity, and other pending payments are included in this settlement. The settlement ensures that both you and your employee agree that all the financial obligations have been met.

Typically, the process starts when your employee submits a resignation letter. After this, your company’s human resources or finance department will start calculating the final dues. Besides, your employee may also need to return company property like laptops or ID cards. 

Also, they need to complete any pending tasks that they have. Once everything is settled, your company can process the final payment, which may take a few weeks. A full and final settlement format is very important because it legally ends employment on a good term. Hence, it prevents any future disputes over unpaid dues.

Full and Final Settlement Policy in India

A new rule has been added to the full and final settlement policy in India. It states that when an employee leaves a company, the company must pay all the money that they owe to the employee. The most important part is that this money should be paid within 2 days after the employee’s last working day.

The law states that this rule applies if an employee is:

• Fired or dismissed from their job.
• Let go because the company is saving money.
• Resigned or quit their job.
• Unemployed because the company has closed down.

Good to Read:- What is salary arrears? | Arrears Payment

Components of FnF Settlement

During the full and final settlement, paying and recovering money includes various components. This process is complex and time-consuming. Besides, it needs a lot of careful attention to all details and arrears. So, here is an outline of the main components involved in creating F and F settlement. 

1) Unpaid Salary

It is the total amount owed to an employee for the days they worked after submitting their resignation. Typically, it covers the period from the resignation date to the last working day. In some cases, it can also include payments from previous months, such as when salaries are paid quarterly. Besides, unpaid salaries also include any arrears and leave travel allowance (LTA).

2) Non-Availed Leaves & Bonus

When an employee resigns, their unused paid leaves are also eligible for encashment. So, they are also included in the full and final settlement. Similarly, any bonuses or special credits offered to employees also need to be added to the settlement amount. As per the full and final settlement policy, all dues from an employee’s unpaid leaves must be settled by the 7th or 10th of the following month. 

3) Gratuity

Gratuity is the cash benefit that an employer provides to their employee. It is offered to the employees for their service to the organization. So, if an employee has completed at least 4 years and 240 days with your company, the gratuity amount must be paid within 30 days of their separation. As per the regulations, if the gratuity is not paid within this 30-day period, your organization will have to pay it with interest.

4) Deductions

It includes income tax, PF, professional taxes (if applicable) and any compensation for the unserved notice period. Moreover, cashed earned leaves and gratuity are exempt from TDS. But, all other payments are subject to TDS under the Income Tax Act. Also, exact deductions vary as they are based on income, salary agreement and organizational factors.

5) Pension

Employees with at least 10 years of ‘pensionable service’ are eligible for a pension. So, they can access these benefits by presenting their ‘scheme certificate’ upon retirement or 58 years of age. However, most employees receive a pension through EPS (Employer’s Provident Fund). Typically, it guarantees a minimum pension of Rs. 100 and ranges up to Rs.7500.

6) Leave Encashment

As per the FNF policy, all unpaid leaves should be settled after resignation. Moreover, all dues must be cleared by the 7th or 10th of the following month. Also, a company’s HR policy will define how the non-availed leaves are encashed. So, it can be either treated as a privilege or an earned benefit.

What is a Full and Final Settlement letter to an Employee?

A full and final settlement letter to an employee is a letter which states that all the dues from the side of the company to the employee have been paid. It is important to document the full and final settlement as otherwise; the employee may try to legally challenge you. 

You can use a standard full and final settlement format for the letter, which you can easily find online. In totality, what your full and final settlement format for the letter must have is the amount paid for the settlement, the cheque of the settlement, dates of resignation and cheque handover and the account statement to keep track of the payment. 

Good to Read:- What Is Notice Period Recovery? | Recovery Calculation | Formula

Full and Final Settlement Calculation

The last step in the full and final settlement is the calculation of the settlement amount with the employee. So, let’s see how the full and final settlement calculation is done:

1) Outstanding Wages

First up, you need to calculate the wages of the employee including everything mentioned above. 

2) Notive Period Wages

You also have to calculate the wages of the employee in the notice period. It is mandatory as per the Fair Work of 2009, which states that an equal wage should be paid to employees for the notice period they serve. 

3) Annual Leave

While there are leaves that can’t be encashed, like casual and sick leaves, annual leave can be encashed and should be calculated in the full and final settlement. 

4) Extra Payments

At last, calculate any extra payment in the full and final settlement. Once done, it’s time to hand over the full and final settlement cheque to the employee. 

Conclusion

In conclusion, understanding and implementing a Full and Final Settlement (FnF) process is crucial for every company. It ensures that all dues are cleared when an employee leaves, preventing future disputes and maintaining a good relationship. By following the guidelines and components outlined, businesses can handle FnF settlements smoothly and fairly, ensuring compliance with legal requirements and fostering trust with their employees.