What is The Full and Final Settlement (FnF)❓
Full and final settlement is a process that occurs when an employee resigns from your organization. At the time of the resignation, employees undergo the process, which is also known as the FnF settlement.
This involves the employee getting paid for the last working month, along with any bonus earnings or tax deductions. Exit interviews and feedback surveys are also a part of the FnF settlement in some cases. These reviews help the organization in evaluating their strengths and weaknesses. FnF also helps the companies to keep track of resources and privileges allocated to their employees (for example, company laptops) and recover possession of the same before the employee’s last day. Your company policy will dictate if the FnF process happens after you relieve your employees, or just after they have given their resignation.
The HR unit is usually in charge of handling this process. The FnF settlement process usually takes a month to be completed from the date of the employee’s resignation. The full and final settlement is a complex process, which requires extensive knowledge of the subject and experience.
What is The Period of FnF settlement❓
Period of settlement refers to the time between an employee’s resignation and the time when the ‘FnF’ or the full and final settlement is completed. This includes clearance of all dues and making any remaining payments to your employee.
Going strictly according to the rules, the final settlement needs to be cleared on the employee’s last working day in the organization. However, this is often not the case in practical situations, as clearances and paperwork take time. The period of settlement can be anywhere between 35 – 45 days from an employee’s last day at the organization. Gratuity has to be cleared within 30 days by the company. Any additional bonuses also have to be accounted for within the same financial year.
Employees must be given a sufficient notice period if they are being let go by your organization. Contrarily, your employees are expected to submit their resignation at least a month in advance if they plan to leave. Failure to do so will attract penalties during the FnF settlement process. According to the laws, whichever party does not live up to the commitments in the company contract has to be the one to compensate.
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Major Components of The Full and Final Settlement
During the FnF settlement, paying and recovering involves a variety of components. It’s a complex and time-consuming process, wherein all details and arrears have to be kept in mind. Most companies follow these basic steps for the process:
✅ The employee submits his/her resignation letter in writing to your company.
✅ Your company’s management team accepts the employee’s resignation letter after an overview.
✅ The employee also has to submit a no dues certificate from concerned departments and submit that letter to your company’s HR.
✅ The actual reimbursement amount is calculated, which includes several components such as gratuity, paid leaves, pensions, etc, which are explained in detail below.
✅ The FnF statement is prepared. The accounts department of your organization will then review this statement and clear/reject it. Once the statement is cleared by the accounting department, your company’s HR will create the final FnF statement and request a cheque for the balance remaining.
As stated above, the calculation of the final reimbursement amount is the toughest task. We have listed the major components, which result in making the FnF statement. We have also listed out their formulae for calculations. Let’s take a look at all these components in detail
1. Unpaid Salary 💸
Unpaid salary refers to the total number of days for which an employee has worked, after submitting the resignation. It is usually the time duration between an employee’s resignation date and the last working day. In some cases, unpaid salary may include payments from the past several months (for example, if your employee salaries are paid quarterly). Unpaid salary also includes any other arrears and LTA (i.e Leave Travel Allowance)
Unpaid Salary is Calculated As:
Example: (The number of days an employee has worked* gross monthly salary)/ 26 (or the number of paid days in a month)
2. Non-Availed Leaves & Bonus 😞
Your employee’s non-availed paid leaves are also subject to encashment. Any bonuses or special credits offered are also encashed and added to the full and final settlement sum. Regulation has mandated that when an employee resigns, all dues from an employee’s unpaid leaves must be paid on or before the 7th and 10th of the following months. Section 15 (3) of the Karnataka shops & Commercial establishment act also states that ‘All encashment dues must be cleared on or before the 10th of the following month.
The Amount Due For Non-Availed Leaves is Calculated as:
Example: (The number of days of unavailing leaves * monthly salary)/ 26 (or the number of paid days in a month). Non-availed leaves will include those which have been offered as a privilege (usually mentioned in your employee’s contract) and ones that have been earned.
3. Gratuity 💰
Gratuity is a cash benefit that employers provide to their employees, for service to their organization. If an employee has completed a minimum of 4 years or 240 days with your organization, then the gratuity amount has to be paid within 30 days of the employee’s separation from your company. The regulation states that your organization will have to pay gratuity with interest, if not paid within the first 30 days.
Gratuity is Calculated As:
Example: (15 days of last drawn salary for each working year*tenure of working)/26 (or the number of paid days in a month).
4. Deductions ✂️
Deductions include an employee’s Income tax, Provident Fund, any Professional taxes (if applicable), and any compensation for the notice period that was not served. Earned leaves which have been cashed, and gratuity is exempted from TDS dues. All other payments will attract TDS( i.e Tax Deducted at Source), according to the Income Tax Act. Segment 72 (5) under the E.P.F Act 1952, mandates that businesses have to forward the E.P.F(Employer’s Provident Fund) guarantee forms within 5 days of the representative presenting the case.
Exact tax deductions will vary according to a variety of factors. Provident fund and professional taxes most often depend upon your employee’s income, agreed-upon in-hand salary, and your organization, among other things.
Income Tax deductions will depend upon your employee’s income bracket. Employers earning up to Rs 2.5 LPA are exempted from Income Taxes in India. An annual income between 2.5-5 LPA is subject to TDS deductions of 5%, and so on.
Employees who have completed a minimum of 10 years of ‘ pensionable service’ with your organization are eligible for pensions. They can avail the pension benefits by providing their ‘Scheme certificate’ after their retirement (or 58 years of age). Most employees get a pension as a part of E.P.S(Employer’s Provident Fund). EPS specifies a minimum pension amount of Rs 1000 and it’s capped at Rs 7500.
The EPS Pension is Calculated As:
Example: (Pensionable salary*service period)/ 70
It should be noted here that an employee’s pensionable salary is capped at Rs 15,000 and the service period is capped at 35 years.
6. Leave Encashment ✨
Unpaid leaves of an employee have to be cleared and the payment must be made by or before the 7th and 10th of the following month of resignation.
Your HR policy will determine the encashment of non-availed leaves. These leaves might be earned or offered as a privilege. Most organizations use of the two ways to encash unpaid leaves.
Example: Per day Basic (Or Basic + DA OR other components)
Per Day Basic is Calculated As:
(number of days of non-availed leaves * basic salary) / 26 days ( Avg paid days in a month)
Fixed Amount Defined by The Company
The company may choose to fix an amount which can be encashed against a paid leave, which is not directly dependent on your employee’s salary.
What is Full and Final Settlement in Payroll❓
Full and final settlement is a complex, and often confusing process. Having money involved as a core factor leads to further complications. Your organization must have a set of clearly defined separation policies, which will make the task easier for your payroll team. We’ve listed out a few policies and strategies which companies often use to simplify their FnF settlement.
1. Clearly Defined Separation Policies:
It is important to define your separation policies clearly, both for individual employees and groups. There must be a specific set of rules with regards to the notice period, gratuity, paid/unpaid leave encashment among other things. These policies will help your payroll employees to avoid confusion. This will also reduce disputes in the FnF settlement.
2. Partial Payment in FnF
Some organizations prefer to continue their employee’s payroll process via their regular salary schedule, and withhold their salary for the month-of-exit (i.e their last working month in the organization). This is also called the partial FnF settlement process. You can adopt this strategy as it simplifies calculations. This way the payroll team has to only calculate the TDS and arrears for the last working month.
3. FnF in Bulk, or Individually
For organizations growing at a rapid pace, or organizations may be laying off many employees at the same time, calculating each employee’s payroll separately can become a hectic task. With an increasing volume of FnF settlements, companies opt for a bulk settlement process. Bulk settlements allow companies to process their employee’s arrears in batches, rather than one at a time.
How is Full and Final Settlement Calculated❓
HR employees and senior managers are often tasked with the process of calculating the full & final settlement of employees. Smaller companies may process each employee’s settlement separately, but larger companies often batch process their employee’s FnF settlements.
Full & final settlement is a combination of all the separate calculations that we have discussed above. It includes calculating your employee’s remaining salary, deducting taxes from it, clearing out your employee’s paid leaves, arrears, and Provident Fund accounts. Companies rarely do these calculations manually. They make use of robust and reliable software to calculate the reimbursement amount in a clean and organized manner. At the end of the process, and FnF settlement letter is used to summarise the entire process.
Full and final settlement is a detailed and organized process. When done properly, it helps a company let systematically go of its employees. The FnF settlement requires expertise in the domain of HR and precise calculations. In today’s day and age, companies make use of custom-made software. The use of software helps them to speed up their FnF process, and avoid any errors in calculations. FnF can also become easy if rules, policies, and frameworks, and clearly defined and stated in an organization. Furthermore, all disputes arising during an FnF process must be handled formally.
Adhering to all the rules and principles of FnF will help an organization to avoid unnecessary dues and achieve maximal growth. Companies with good FnF policies often set internal deadlines to achieve the FnF settlement. An ideal full & final settlement process is one wherein the HR department facilitates transactions between all stakeholders and resolves all pending issues before an employee’s last day at work.
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