What is Full and Final Settlement?

Legal Support under Shops and Establishments Act / Company Policy

The process of full & final settlement is guided by various Indian labour laws and internal company policies, including:

• Payment of Wages Act, 1936: Ensures the timely payment of all dues upon resignation or termination. In establishments with fewer than 1,000 workers, payment must be made within 7 days; in others, within 10 days. In case of termination, the payment should be made within 2 days. These timelines help avoid penalties. 
• Industrial Disputes Act, 1947: In cases of retrenchment or closure, dues become payable along with notice and compensation in establishments employing over 50+ workers.
• State-specific Shops and Establishments Acts: These acts ensure local compliance with wage payment schedules and settlement procedures.
• Provident Fund: During the FnF process, ensure the employee's PF contributions are either transferred to the new employer or refunded, as per their preference, to comply with the Employees' Provident Funds Act.
• Employees' State Insurance Corporation: Any outstanding ESIC dues should be cleared, and the employee's ESIC membership should be either transferred or closed in line with the relevant statutory provisions.

Additionally, most organisations operate under a full and final settlement policy under labour law as part of their HR manuals. These policies typically include detailing timelines, documentation and approval procedures that enhance compliance to promote trust and transparency.

When Does F&F Settlement Occur?

This phase occurs at a critical moment in the employment cycle. Timely processing is essential for seamless closure.

Timeline

The full and final settlement procedure is initiated at the end of an employee's tenure - resignation, termination, retirement, layoff or expiry of the contract. Payment of Wages Act mandates statutory guidelines for the settlement of dues on the last working day or within two working days of termination. In practice, organisations might take 7 45 days in case of leave disputes and loan recoveries to complete the full and final settlement of the employee. Delays beyond this point can cause court action.

Early Processing

There are some organisations that might go for FnF online or prior FnF processing, in which the full and final settlement form is filled out and the amount is paid even on the last working day. It is followed as per company policy, particularly if the notice period is exempted or all clearance formalities have already been done in advance, most prevalent in instances of senior designation or sensitive resignations.

Full and Final Settlement Components

The total & final settlement comprises a comprehensive calculation of all payment dues and statutory deductions:

• Unpaid Salary (up to last working day): Compensation for every day worked during the last month, including authentic allowances like DA, HRA, LTA and overtime.
• Leave Encashment (earned leaves): Compensation for earned but not availed paid leaves, per company rules and regulatory rules.
• Gratuity (where due): Payable under the Payment of Gratuity Act, 1972, to the employee for service exceeding five continuous years, based on last drawn wages and service length.
• Bonus/Incentives (when earned): Pro-rated performance bonuses, commissions or incentives payable up to the exit date.

• Deductions:

• Income Tax (TDS), PF, ESIC: Final settlements for Provident Fund and Employee State Insurance contribution and tax deducted at source.
• Loan Recoveries or Notice Pay: Settlement of default loans or salary advances and notice pay in the event of failure to serve the notice.
• Company Property Damage or Pending Dues: Settlement for unreturned assets or damaged company properties (such as laptops, ID cards) or any pending dues.

Full and Final Settlement Process

Accuracy and compliance are maintained through a systematic full and final settlement process. Several steps are followed to settle all obligations. Let’t understand them in detail:

Step-by-Step Overview

• Exit Formalities and Clearance: The resignation notice or notice of termination is issued. The employee then submits clearance forms to departments like IT, Admin, Finance, and HR for verification of asset returns and to clear any pending dues.
• Calculation by HR/Payroll: HR collects the last working day, attendance, leave balance, bonus, loans and other information, then computes the final pay payable using payroll software or manually.
• Finance Department: The Finance Department confirms the calculation by documenting and validating the payment.
• Settlement Statement Issuance: A Full and final settlement statement or letter is issued, listing earnings, deductions and the net due payable.
• Payment and Documentation: Payment is made by bank transfer or cheque. Payslip, full & final settlement letter, relieving letter and experience certificate are submitted to the employee for closure.

Checklist for Employers

Organisations require careful attention at the point of employee departure. Careful compliance avoids future troubles. Employers should follow the checklist below to make a full and final settlement a success:

• Carry out the exit interview and note performance feedback.
• Collect all company property (laptop, ID cards, access cards) and inspect them for damage.
• Obtain written clearance from all departments.
• Verify final attendance and leave accounts.
• Cross-verify all the outstanding dues like PF contributions, loan repayments and tax deductions.
• Prepare and issue a relieving letter, an experience certificate and a full and final settlement letter.

Checklist for Employees

Employees need to be appropriately prepared and proactive at the time of their exit from service. Every detail has to be taken care of to preserve rights. The following are the key steps employees need to take to have a smooth exit:

• Submit resignation and serve notice period, or receive waiver confirmation.
• Hand over duties in a documented sheet for a smooth transition.
• Return all company assets and obtain clearance.
• Verify the full and final settlement statement or form carefully and raise any discrepancies.
• Gather all exit documents, i.e., relieving letter, experience certificate, final settlement letter and Form 16 for tax purposes.

Taxation and Compliance

Regulatory compliance protects both parties. Tax obligations have to be dealt with.

• TDS Deductions: Income tax is deducted from the source for salary, bonus and other taxable elements against applicable income tax slabs.
• Issuance of Form 16: Employers issue Form 16, indicating income and tax deduction for the financial year, to be filed with ITR.
• ESIC Compliance: Employers must comply with the Employees' State Insurance Corporation (ESIC) regulations, which include contributing to the ESIC fund for eligible employees, providing social security benefits like medical care and ensuring timely contribution.
• Issuance of Form 16A: Employers issue Form 16A for TDS deducted from non-salary payments such as interest, rent, or professional fees, as it is important for taxpayers to claim the TDS while filing ITR.
• Compliance of PF and Gratuity: Organisations must comply with the Provident Fund being settled or transferred to a new employer and gratuity under the Payment of Gratuity Act.

Common Problems and How to Resolve Them

Below are common problems which occur and must be addressed carefully. Reasonable resolution steps facilitate smooth relations.

• Delay in Payment: In case of delay beyond industry norms (usually 7–10 days), employees should seek internal mediation or HR-facilitated arbitration. In case of no resolution, grievances can be lodged with the Labour Commissioner or under the Payment of Wages Act.
• Disputes regarding Leave or Dues: Any leave encashment, bonus or deduction dispute must be resolved with internal HR mediation along with leave records and payslips. Outstanding disputes can be challenged legally.
• Legal Remedies: Continuous non-settlement or settlement disputes can be brought before labour courts or the Commissioner. Defaults on the employer's side are punishable and employees are eligible to recover their rightful dues.

Conclusion

Smooth, complete and timely full and final settlement is a prerequisite for lawful reconciliation and professional closure of the work contract. It involves payment of all statutory benefits and contractual dues, safeguards the rights of the employer and employee alike and maintains the organisation's reputation. Clear documentation, accurate computations and rigid adherence to legal timelines are the best ways to keep disputes away and ensure a smooth exit for both.