Full and Final Settlement – Salary Components Considered during Separation

When an employee severs ties with an organisation either in the form of resigning or being terminated, the computation of all dues due to the employee and what the employee owes to the organisation in return is termed as Full and Final Settlement. This settlement fulfils the parties' financial obligation (the employer and the employee) towards each other.

The employer carries out the settlement procedure after the employee resigns from their services and after serving the Last Working Day (LWD) at the organisation. The complete process may take about 30 to 45 days. It is after this that the employee is paid what is due to them if any.

Full and Final Settlement consists of:

  • Dues due to the employee
  • Dues from the employee


Dues due to the employee:

Relieving month salary

Salary for the last month of service in the organisation is generally not paid in separate but clubbed with the Full and Final Settlement.



Example: If an organisation follows payment cycle of 1st to 1st and employee quits the organisation during the last week of the month, say 26th, salary for the period from 1st to 26th is generally clubbed with the Full and Final Settlement payment rather than being paid on the immediately following 1st.



Notice period salary

An organisation or company follows the procedure of employee having to serve notice period during resignation. In such cases, the employee is not paid salary in the regular payment cycle. Even if the monthly salary payment date may fall in between the notice period.

Example: An organisation follows the payment cycle of 1st to 1st and a notice period of 1 month. Suppose the employee expresses willingness to resign from services on 28th January and agrees to serve the required notice period. The employee will not receive a salary on 1st February but during the Full and Final Settlement payment, including salary from 1st January to 28th February.



Earned leaves

Companies follow the practice of awarding paid time offs to employees, also called as Earned leaves. Unutilised earned leaves standing to the credit of the employee is paid during the Full and Final Settlement.

Calculation of amounts payable against such earned or privilege leaves which have not been utilised can be done on the basis of:

  • A fixed amount defined by the company
  • Per day Basic

Per day Basic calculation:

= (Number of unutilised earned leaves x Basic salary) / Average paydays in a month

Where average paydays in a month are the number of days considered for payroll calculations by the organisation.



Example: If an employee's Basic salary is Rs.7000 and has a balance of 20 unutilised earned leaves, then earned leaves amount payable will be calculated as (20 x 7000)/26 = Rs.5,385, considering a 26 working day principle. (assuming four weekly holidays in a month)



LTA (Leave Travel Allowance)

Amounts towards expenditure incurred by an employee for the purpose of a holiday or personal travel are provided by companies as Leave Travel Allowance (LTA) or Leave Travel Concession (LTC). Any unclaimed amounts of such benefits can be encashed during Full and Final Settlement if the company policies do not prohibit it.

For further information, refer to our article Leave Travel Concession (LTC)



Gratuity

An eligible employee for gratuity can apply within 30 days from the date on which it becomes payable. The organisation must pay gratuity within 30 days of the employer receiving such application form. If gratuity payment is not made within the said time, gratuity will then be payable along with simple interest.

For further information, refer to our article Gratuity Calculation Guide – Payroll Simplified



Bonus

As per the Payment of Bonus Act, 1965, the company should pay a bonus within eight months from the end of the accounting year followed by the establishment. Any unpaid bonus or bonus declared by the company or organisation but not paid yet is included in the Full and Final Settlement.

For further information, refer to our article The Payment of Bonus Act 1965 – Payroll Perspective



Miscellaneous unpaid salary

Any other forms of unpaid salary accrued to the employee but not paid yet is also considered at the time of Full and Final Settlement. This sum includes any annual benefits, revision in the pay scale affected but not paid yet, arrears of salary, accrued benefits (incentives) etc.



Dues from the employee:

Un-served Notice period compensation

An organisation or company follows the procedure of serving notice period in case of resignation or termination from services. The employee does not want to serve the said period; then, the employee can compensate the company in financial terms. This arrangement is also called Notice period buy-back or Buy-Back of the Notice period. Such damages or compensation is deducted from the Full and Final Settlement due to the employee.



Statutory contributions

Employee's share of contributions towards statutory funds such as Employees' Provident Fund (EPF), Employee State Insurance (ESI) wherever applicable, are deducted when disbursing salaries regularly, and the Full and Final Settlement payment is no exception.



Taxes

Taxes due to the Central government in the form of Income Tax and Tax Deducted at Source (TDS) are to be mandatorily made from the amount payable as Full and Final Settlement to the employee. Wherever applicable, taxes due to the State government in the form of Professional tax is also made.

For further information, refer to our articles TDS and PT



Miscellaneous compensation or damages

Where an employee is terminated from the services of an organisation for wrongful acts committed or those which has caused financial damages to the organisation; with an intent to commit fraud or acts which bring disrepute to the organisation, the management seeks adequate compensation in the form of damages in return from the employee.

Note:

All 'Dues due from the employee' mentioned above are withheld or reduced from the 'Full and Final Settlement' payable to the employee. In cases where 'Dues due from the employee' exceeds the 'Full and Final Settlement' payable to the employee, the employee has to make good for such loss out of their funds.

The complete settlement procedure process may take about 30 to 45 days or as per company and industry norms. However, maintaining an excellent cordial relationship with the organisation during the working tenure and providing all necessary documentation required by the management in time can fasten the process.