Resigning from your current job to join a new company for a new opportunity or role feels like starting a new chapter. Still, before you completely turn the page to a new chapter, there is an important process that every employee goes through or should go through. The name of that process is Full and Final Settlement (FNF). Simply put, as FnF. It is a formal process where your employer calculates and clears all the pending due payments to you. These dues include unpaid salary, leave encashment, bonuses, gratuity and any deductions like advance taken or notice period recovery.
This process is not just paperwork; it is the right of every employee to get what they have duly earned till their last working day. However, many employees unfortunately do not know what should be included, how long it takes or what to check before signing those final documents.
In this blog, we will break it down for you to understand the Full and Final Settlement (FNF) process step by step. What it covers, timelines, legal aspects and practical tips that make sure you leave your current job without leaving your dues behind.
What is Full and Final Settlement (FNF) in HR?
In terms of HR, FNF, short for Full and Final Settlement, is the process of calculating and disbursing all the outstanding dues to an employee who is leaving the organisation, whether it is resignation, termination or retirement. It makes sure that all the financial obligations between the employee and the employer are resolved, which also includes the salary, bonuses, leave encashments and other benefits, as well as applicable deductions.
Below is a more detailed explanation of the process of FnF.
- Purpose: The FnF aim to finalise all the financial aspects of an employee’s departure and also makes sure that there is a clean break and also makes sure that there are no future disputes between the employee and the employer.
- Components of an FnF: The total FnF settlement typically includes the following:
- Salary: This is the payment that the employee gets every month, but when they resign or leave the company for any reason, their salary for the last working month is kept on hold and cleared at once.
- Unused Leave Encashments: This is the payment that is given to the employee who is leaving the company through resignation, retirement or any other reason. While settling their FN F, the leaves that are not taken by the employee during his tenure are accumulated and then paid to him in monetary terms.
- Bonuses and Incentives: The bonuses and incentives are the hard work done by the employee to achieve the set targets and goals. Therefore, this is the money they receive as a reward for their hard work.
- Gratuity: If it is applicable, this is the payment of gratuity in accordance with the employee’s service period.
- Provident Fund: PF is the handout from the employee’s and employer’s side, which is primarily for after-retirement planning. So before they leave the company, it is settled with them.
- Other Benefits: This is the settlement of the other eligible benefits, like travel allowances, reimbursements, etc.
- Deductions: Since there can be various reasons and tax deductions in a tenure of the employee working in the company, before settling the whole FnF, it is important to check that all the outstanding dues are included.
A short explanation of the steps that are used to settle the FNF:
The FnF process usually involves the following steps:
- Calculation: The HR department is responsible for calculating all the dues and deductions based on the company policy and the employee’s contract.
- Documentation: This is the document that is prepared while outlining all the settlement details.
- Payment: After all the deductions and dues are checked and confirmed, the total amount is disbursed to the employee’s bank account.
- Clearance: All the necessary clearances are given by the various departments involved in the FNF settlement for an employee.
The Importance of FnF:
The Full and Final Settlement (FNF) is very important for both the employee and employer, as it makes sure that the employee receives their rightful dues, and the company takes this action seriously because it avoids future legal issues.
The Time Duration of FnF:
The scheduled time of the FnF settlement can be non-identical, but it is normally completed within a certain period after the employee has served their notice period in the company, as per the company policy or legal requirement.
Components Included in an FNF Settlement
The constituents of an Full and Final Settlement (FNF) include the following:
Unpaid Salary: As per the Payment of Wages Act, enterprises that have less than 500 employees should pay their wages before the 7th day, which comes after the last day of a wage period. In the companies that have more than 500 employees, salaries should be paid before the 10th day, which comes after the last day of a wage period. However, in the case of an employee stepping down, termination or retirement, the companies must calculate their salary until their exit date and pay that amount along with the final settlement.
Leave Encashment: The Leave Encashment is the financial value that is paid by an employer to an employee to redeem any remaining unused paid leave provided by an organisation. The calculations for leave encashment will vary from company to company because of different leave policies. The encashment amount is settled with the final pay when the employee transitions from the company.
Bonus and Incentives: There are many organisations that offer bonuses and other incentives earned by an employee’s performance and the company’s revenue. So when the employee leaves the company, the employers award them their outstanding dues along with the bonuses and incentives.
Gratuity: Gratuity is a lump sum payment capital benefit, which is paid to long-serving employees. According to the Payment of Gratuity Act, 1972, personnel who have completed five years of regular service with one employer are permitted to receive gratuity pay. When an employee who is eligible for the gratuity leaves your organisation, you have 30 days to pay the gratuity amount to them. If there is any keeping back in the payment, then the company has to pay the interest compounded along with the amount due to your employee.
Employee’s Provident Fund: The employee’s provident fund (EPF) is a retrial benefit scheme that is run by the Employees’ Provident Fund Organisation (EPFO), they are a community-based reliability corporation of India. All companies with more than 20 personnel should willingly list themselves for the EPF under this scheme. The workforce and the appointer of the workforce both must contribute a minimum of 12% of the employee’s PF wage each month to their retirement fund.
When we talk about the FnF settlement, it is the responsibility of the employer or the HR department that looks into the offboarding process of the employees to let the workmen have an idea about the standing of their PF account while finalising and culminating all the final dues. At the time of retirement, the fund is supposed to be credited to the employee.
Deductions: The company has the full authority to cut the per-day wage of the employee if they have taken any leave during serving of the notice period, right before they leave the organisation. The company shall subtract all the applicable taxes that are applied to a salaried employee or a self-employed individual. The employers can also subtract the right amount from the culminating settlement if the employee has any outstanding loans from the company.
The entrepreneurs and the Payroll Professionals shall calculate and subtract the tax from the closing settlement amount. The tax on fringe benefits and unused leave payout is fully or partially excused based on the time provided by the labour law. The remaining FnF amount is charged tax in alignment with the income tax slab the workmen fall under. Once the payroll department makes the relevant deductions, the FnF amount is credited to the employee.
Legal Framework: FNF Rules and Compliance in India
In India, the Full and Final Settlement (FNF) culmination is the settlement of all the outstanding dues for an employee leaving the company for various reasons. The legal laws are governed by the various labour laws and regulations. The Payment of Wages Act, 1936, is a legal rule that makes it compulsory for the company to disburse wages and the Code on Wages, 2019. This also stipulates that FNF settlements should ideally be completed within two working days.
Many components are included in the FnF settlements. They include the unpaid salary, leave encashment, gratuity (if eligible) and deductions like the notice period pay or loans. Failure to comply can lead to consequences, including penalties and interest on delayed payments.
The key aspects of FnF settlement in India:
- Legal Framework: The Payment of Wages Act, 1936 and the Code on Wages, 2019, are the primary legislation governing FnF settlements.
- Timely Payment: If we follow according to the law, then the whole Full and Final Settlement (FNF) should be done within two days; however, private companies take 30 to 45 days to give their ex-employees their FNF as per their policies. Some HR platforms note that modern organisations are adopting even faster settlements through HRMS.
- Components: Full and Final Settlement (FNF) generally include the unpaid salary, leave encashment, gratuity (if applicable), bonuses and deductions like notice pay, loan repayments and other legitimate deductions.
- Compliance Timelines: The companies should aim to complete the settlement within t0-45 days to avoid legal issues.
- Consequences of Non- Non-Compliance: Delayed or non-payment can result in legal action from the employee, including complaints to the Labour Commissioner or the Labour Court. Penalties and Interest on delayed payments may also be imposed.
- Importance of Clear Policies: The companies should have clear Full and Final Settlement (FNF) policies that ensure there is proper documentation and accurate calculation of dues to avoid disputes.
When the Policies and regulations of the Private Companies are compared to those of the legal laws embedded in our Indian Constitution, you will get to know that, according to the law, the HR department should settle all FNF settlements in two days. However, the private companies settle the Full and Final Settlement (FNF) of the employees in 30 to 45 days according to their company’s policies.
Step-by-Step FNF Process for Employers
There is a series of steps to finalise an employee’s departure before finalising the Full and Final Settlement (FNF). These steps include the exit formalities, dues calculation, payment and documentation. This process makes sure that all the outstanding financial obligations to the departing employee are settled, and all the company assets that are with the employee are returned to the company to protect against breach of information.
Below is the step-by-step breakdown of the Process of FNF for the employers:
- Resignation Acceptance and Exit Formalities:
- The employer acknowledges the employee’s resignation by issuing an acceptance letter.
- The employee submits a “no dues” certificate or clearance from various departments (IT, Admin, Finance and HR). This also confirms that there is a return of company assets and resolution of any pending issues.
- The employee’s last working day is fixed, and a handover process is initiated.
- Dues Calculation and Verification:
- The HR collects all the data, like the last working day, attendance, leave balance and any loans or advances.
- The HR also calculates the final pay by using the payroll software or manually considering all the applicable dues, deductions and bonuses.
- The Finance Department helps in verifying the calculation and validates the payment.
- Final Settlement Statement and Payment:
- A detailed and final settlement statement is prepared, listing earnings, deductions and the net payable amount.
- Payment is processed via a bank transfer or cheque as per the company policy.
- The final settlement statement, payslip, relieving letter and experience certificate are provided to the employee.
- Documentation and Closure:
- All the relevant documents are related to the Full and Final Settlement (FNF) and are archived, along with being stored.
- The process concludes with the issuance of a clearance certificate to the employee.
- If there are any discrepancies or disputes, the employee should first raise the issue with HR, who will attempt to resolve it.
There are some Key Considerations:
- Timeframe: The FnF process is generally expected to be completed within 30-45 days from the employee’s last working day.
- Legal Compliance: The employers are expected to follow all the relevant labour laws and regulations regarding the timely payment of wages and benefits.
- Transparency: Providing a clear and detailed breakdown of the settlement calculation to the employee is crucial.
Automating FNF with HRMS: Why It Matters
Automating Full and Final Settlement (FNF) with an HR Management System (HRMS) is crucial for streamlining the offboarding process, ensuring accuracy, and maintaining compliance. It reduces manual errors, saves time, and minimises the risk of legal issues, ultimately enhancing both employee and employer experiences.
Here’s why automating F&F with HRMS matters:
- Efficiency and Speed:
- Reduces manual effort: HRMS automates the calculation of final settlements, including salary, unpaid leaves, and other dues, eliminating manual errors and saving significant time.
- Accelerates the offboarding process: Automation speeds up the entire process of clearing dues, generating necessary documents, and releasing the final payment, allowing for a smoother transition for the departing employee.
- Accuracy and Compliance:
- Minimises errors: Automated calculations ensure accuracy in determining final settlements, reducing the risk of overpayments or underpayments.
- Ensures compliance: HRMS helps organisations comply with labour laws regarding the timely settlement of dues to departing employees.
- Reduces legal risks: Accurate and timely settlements minimise the chance of legal disputes or claims arising from incorrect or delayed payments.
- Enhanced Employee Experience:
- Faster payouts: Automated processes mean employees receive their final settlements more quickly, improving their overall experience with the company.
- Clear communication: HRMS can generate clear and detailed settlement statements, providing transparency and clarity for the departing employee.
- Cost Savings:
- Reduced administrative burden: Automation reduces the time and resources required for manual calculations and processing, leading to cost savings.
- Fewer errors, fewer costs: Accurate settlements minimise the need for corrections and potential legal fees associated with errors.
- Improved Data Management:
- Centralised data: HRMS consolidates employee information, making it easily accessible for calculating final settlements and generating reports.
- Improved data accuracy: Automated processes minimise the risk of human error, resulting in more accurate and reliable data.
Automating the Full and Final Settlement (FNF) with the HRMS is a strategic move that makes sure that there is efficiency, compliance, improves employee satisfaction and minimises cost,s which ultimately contributes to a more streamlined and positive offboarding experience for both the organisation and the departing employee.
Conclusion: Why FNF Deserves More Attention in Your HRM
The FNF, which stands as a short form of Full and Final Settlement, needs more attention in the company’s HRM because of is a very important process in the offboarding of the company. FNF is the total calculation of the financial dues which are to be given to the employee who leaves the organisation. The Full and Final Settlement (FNF) is given to the employees who leave the company, irrespective of the reasons behind their leaving the company. The reason can be retirement, termination, resignation or switching to a new company for better career opportunities.
The Full and Final Settlement (FNF) should be legally settled within the first 10 days of the employee leaving the organisation. However, the private companies take more than these days to settle all the Financial transactions of the employees. The calculation of the Full and Final Settlement (FNF) is done considering various things, that as tax deductions, last month’s salary not credited, bonuses and incentives, reimbursements, etc. All of this is done within 45 days of the employee leaving the company, and also ensuring that the employee returns all the company’s records and assets, like laptops, documents, etc.
The company also has to make sure that there is a whole list of documents prepared with mention of the FNF settlements and calculations. To make the FNF settlement contract error-free, you will need software that will help you in efficiently making these contracts. To integrate with such software, contact DoInsights today. DoInsights is the best HRM software, which assists in making the HR executive’s life easy and stress-free.
