Definition of Full and Final Settlement
The process of an employee leaving a company is an important process for the human resource department. Usually, the process involves multiple stages: first is the initiation of the employee- company separation process wherein the employee notifies the management about his intent to leave the company. This may be followed by talk of counseling or negotiations between the employee and the company. Thereafter the company approves the resignation of the employee. Following this, any dues that are to be given to the employees are paid off. There may even be an exit interview with the employee wherein the company may seek feedback about the employee’s work experience from him/ her. The final stage of the separation process is that of full and final settlement wherein all the remaining dues to the employee are paid and which officially brings a close to the employee/ employer relationship.
When someone in the capacity of an employee leaves a company, the person is entitled to the last month’s pay of his work with the employer. ‘Final Settlement’ is the process of paying off the leaving employee. Final settlement is conducted either in the last working month of the employee on which he or she is on the payroll or is performed after the employee has stopped working. This means that the employee’s payment can either be first settled before the employee officially resigns or it the employee can resign first and then his payment can be settled at a later point in time.
A full and final settlement is usually done in the form of a settlement contract which signifies the end of employer and employee relationship between the parties. However, a full and final settlement does not always mean that the employer is no longer liable to provide the leaving employee of his or her benefits. That is to say, even after the termination of the contract of employment, the employer is still required to pay gratuity to the leaving employee since by law the employer cannot contract with the employee to not pay gratuity.
How is the Final Settlement amount calculated?
There are a number of factors which have to be considered when determining the final and full settlement of an employee. These factors include:
- Any unpaid salary or any arrears in salary. This amount includes any annual benefits that are due to the employee like travel allowances. This unpaid salary is calculated by multiplying the employee’s gross salary with the number of days for which the employee has to be paid and diving the sum amount by 26, which are the number of paid days in a month.
- Any unpaid bonus is also calculated into this amount.
- Any unavailed leaves are also calculated into this amount. This number is calculated by multiplying the number of days of non-availed leaves by the basic salary of the employees. And then this sum amount is divided by 26, which is the total number of working days in a month. The Factories Act, 1948 provisions for unpaid leave dues under section 79(11). As per this provision, any unpaid leave dues are required to be paid off by the employer before the 7th and 10th of the month following the resignation of the employee. The Shops and Establishment Acts of various states also provision for payment of unsettled amounts. For example, the Karnataka Shops and Commercial Establishments Act, 196, under section 15(3), provides that all unpaid leave dues should be paid before the 7th and 10th of the next month.
- Any employment gratuity is also calculated into the final and full settlement amount. The Payment of Gratuity of Act, 1972 provides under section 7(3) that gratuity should be paid within 30 days of the employee’s resignation. If gratuity is not paid within the stipulated time period, then interest will be added to the gratuity amount provided that the employee has complete four years and 240 days with the employer.
- Pension is also a part of the full and final amount. However, pensions will only form part of the full and final amount if the leaving employee has been in service of the employer for at least six months and also has also completed ten years of pensionable service at the time of providing the Scheme Certificate post the retirement age of the employee, which is set at 58 years of age.
- Deductions include income tax, provident fund, any application profession tax and also any compensation for which the employer did not serve any notice to the leaving employee. The money earned on a paid leave as well as gratuity is exempt from TDS (tax deducted at source). All other forms of payments to the leaving employee will attract TDS according to the tax laws of India as per Section 192 of the Income Tax Act, 1961. Moreover, under section 72(5) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, all employers need to forward the Employees Provident Fund claim forms within a time period of five days from the date of the employee submits his or her claim.
How long does the full and final settlement process take?
A full and final settlement, usually, is done on the employee’s last working day with his or her employer. However, the process of clearing the final settlement is not immediate and usually takes about 30 to 45 days to process the amount. This means that the final full and final settlement is paid only after the employee has left the company. If the employee has to be paid gratuity as well, then it is paid 30 days after the employee leaves the company. On the other hand, if the bonuses are due to the employee then they should be paid within that accounting year.
Helpful pointers to facilitate smooth full and final settlement process
- Ensure that any advance that was taken from the employers is settled. And if not, then ensure that it gets adjusted in the final settlement amount.
- Ensure that you obtain copies of the different clearances that are needed from the various departments of the company.
- It is prudent on part of the resigning employee to ensure that the final settlement process is carried out as per procedure. To do this, it is good practice to become familiar with the employer company’s policies. Hence, the employee should go through the company’s human resources policies, the employee rule book as well as any standing orders or notices passed by the company. These documents and policies are by rule available to the employees of a company. In case they are not made available, then they can be asked for by the employer company.
- Make all communications with the employer in written instead of verbal and ensure that the Human Resource department is informed of such communications.
On the event that there is some issue with the payment of the Full and Final Settlement amount and the resigning employee feels the need to take legal recourse, the following laws are applicable to the matter of full and final settlement:
- Industrial Employment Standing Orders Act, 1946.
- Shops and Establishment Act.
- Industrial Disputes Act, 1947.
- Payment of Wages Act, 1936
Usually, problems with full and final settlement arise with respect to the notice period. Numerous court cases have stated that whichever party, either the employee or the employer that does not honour their contractual commitments will be the one who will have to compensate the other party. If an employer is terminating employees’ en mass, then the employer will first have to seek permission for the same from the relevant government body also the concerned authority that has been specified by the Industrial Disputes Act, 1947 and inform them that the employer intends to mass terminate the contract of its employees. The legislation has provisions that require the employers to give employees the termination notice with an adequate amount of notice period. If adequate notice is not given, then the employer should give the employees adequate compensation as per that particular industry standard.
In the case of Bennett Coleman & Co. (P) Ltd v. PunyaPriya Das Gupta (AIR 1970 SC 426) is an important case relevant to full and final settlement. In this case, the employee had resigned from his company and had claimed the dues for the period of his leave. In the process of receiving his full and final settlement from his employer, the employee signed a receipt which did not contain the payment of dues for his period of leave. The Supreme Court, in this case, held that the employee was entitled to claim such dues for the period of leave as he had not waived off his rights to claim the said dues as part of his full and final settlement.
In the case of Automotive and Allied Industries v. Regional Provident Fund [(1990) 95 BOMLR 740], the Bombay High Court held that when the full and final settlement process has been completed, the employee later cannot claim any other amount from the employer. In doing so, the High Court allowed that any statutory benefit could be waived off. However, section 14 of the Payment of Gratuity Act, 1972 states gratuity has to be paid by the employer and its payment cannot be waived off by any contract or statutory provision. This case can be used to argue the point that a statutory benefit that enables a rise to a claim on part of the employee can be waived through a contract. But it must also be noted that gratuity is an amount of money that is paid when an employee dies, retires or is superannuated. The significance and importance of gratuity cannot be negated or overpowered by a contractual clause or consent on part of the employee. Gratuity is a legislative and statutory provision that has serves a welfare purpose and backed by a moral reasoning and courts should be mindful of this the significance of gratuity when deciding matters related to full and final payment with respect to gratuity.
In the case of Burroughs Wellcome (I) Ltd. v. Jagannath Namdeo Patel and Ors. [2006 (1) Bom CR 812], the Bombay High Court, the issue was regarding the employee’s complaint of non-payment of wages and whether the inclusion of Voluntary Retirement Scheme (VRS) negated the employees’ claim. The Court held that once the employees have availed of the Voluntary Retirement Scheme, they cannot file a complaint against the employer since they have waived off their claims under the Voluntary Retirement Scheme. This is because Voluntary Retirement Scheme was a contractual term between the employee and the employer and the court does not have the power to rewrite the terms of a contract.
In the case of L. Ravi v. The Presiding Officer [(W. P. No.2442 of 2008)], the employee had resigned from his company and had also received all of his dues through the full and final settlement process. However, the employee had alleged that he had been threatened to resign from the position by the General Manager of the company. Here, the Madras High Court had rejected the employee’s claim on the grounds that the employee had received all of his dues on the same date as his resignation through full and final settlement. The completion of full and final settlement indicated that all relationships between the employee and the employer had come to an end and if the employee had actually been coerced into resigning, then the company would not have given his full and final settlement on the same day as his resignation.
Format for a letter of Full and Final Settlement
Given below is a general format for a letter of Full and Final Settlement that can be relied upon:
_____(Enter the name of the employer/ company)
Re: Issue of Full and Final Settlement
Dear Sir or Madam,
This is to inform you that it has been ___ days since my resignation from your company and I have not yet received my fill and final settlement and the same is a concern to me. My resignation from the company is dated ____.
I request you to process my full and final settlement and send me any due amount with regard to the same at the earliest. I request you to also send the original statement of the same as well.
_____ (Enter your name)
_____ (Enter your present address)