Final Settlement (Full & Final – FnF)
Table of Contents
Full and Final Settlement or Final settlement refers to the procedure where all payable and collectible accounts are settled by the time an employee leaves the organization. This concept comes into play whenever an employee exits from the organization due to any reason, whether resignation, termination, or retirement.
Commonly included items in FnF can be back salaries, encashment of leaves, reimbursables, bonuses or incentives wherever applicable, notice period salary, gratuity wherever applicable, and arrears if approved. Additional recoverable amount, if any, would include notice period salary shortfall, salary advance paid to employees, outstanding loan amount, asset recovery, excess payment or others allowed by company policy and law.
New FnF rule in India
According to Section 17(2) of the Code on Wages, 2019, if the termination of employment is made by removal, dismissal, retrenchment, resignation, or unemployment caused by closure of the establishment, then wages payable will have to be paid within two working days after the termination of such employment. Officially, wages payable are paid within two working days.
The Press Information Bureau further elaborates on the time period for wage payments according to the Code on Wages, where it states that on termination of employment or resignation, the wage payment period shall be within two working days.
The HR and Payroll department need to be aware of one important thing here. The ‘wages within two working days’ is only applicable to wages payable according to the Code. Certain portions of the FnF benefits, like Gratuity, have their own timelines as per law. This is clear from the fact that the handbook of the Ministry of Labour for employers mentions both separately.
Why FnF needs process control
This procedure is sensitive since it occurs towards the end of the employee lifecycle. Any kind of delay or mistake could lead to employee disputes, rework, and non-compliance.
Before any FnF process, the HR and Payroll departments have to ascertain the date of the last working day, attendance details, leave balance, notice period status, asset clearance, pending claims, tax implication, and recovery details. If these details are provided via email or spreadsheet, the entire process is bound to be lengthy and complicated.
A simple FnF flow looks like this:
Exit confirmation → Last working day update → Clearance checks → Attendance and leave validation → Payroll calculation → Recovery adjustment → Final approval → Payment and settlement statement
Example of FnF
In the event of an employee leaving and his last working date verified, HR initiates the exit record verification process. Management verifies handover, IT/admin verifies asset turnover, and the payroll department verifies the remaining salary, holiday pay, deductions, and reimbursements for the employee. After all verifications, the payable balance is processed and communicated to the employee.
Key takeaway
Final settlement cannot be considered as just another procedural step for the employee’s exit. This is the payroll closing exercise which requires proper attendance records, leave details, recovery details, clearance, and pay information. Given the two working days for wage payments under the Wage Code, companies must have improved coordination in these areas.
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