Full and Final Settlement: Process, Components, & Sample Guide
Concluding a professional journey with an organization is as important as beginning it for the employees. As an employer, you must ensure a smooth process for the employees ending their employment. This blog will discuss an essential part of this process: full and final settlement, the steps in the process, the components, and the settlement letter template to provide you with the comprehensive knowledge you require.
What is a Full and Final Settlement Policy?
The settlement policy includes the process of the employee getting paid for the last working month by the employer. It comes into effect when an employee resigns. The FnF meaning is a settlement that includes the salary for the last working month and any extra earnings. But if there are some deductions to be made, they are done, and a final amount is paid.
Your organization’s policy decides if the employee will be relieved from their duty first and then the settlement process will follow or vice versa. Do note that the employer has to clear the FnF within 30 to 45 days after the last working day of the employee. Gratuity is paid within 30 days from the last working day and the bonus must be paid within a specified accounting year. Learn more about compensation management with an online HR course.
Process of Settlement
From job posting to ending employment, the employer has to ensure the journey of the employee with their organization adds value to their career. Let us discuss the process flow of the final settlement through the following steps:
HR Receives the Termination or Resignation Letter
Employee submits their resignation letter to their manager, or they receive an intimation about their termination leading to the HR receiving the termination or resignation letter for approval.
HR Accepts the Resignation
Next in the full and final settlement process flow, HR decides whether to accept the resignation. If accepted, they send a letter or email conveying the same to the employee.
HR Department Conducts a Verification
After the confirmation that the employee is leaving, a verification process ensues where the employee has to get various clearances such as admin clearance (for returning devices such as a laptop), finance clearance (that there are no unpaid dues), and HR clearance (that noticed period is served). These are sent to the HR for verification.
The Final Settlement Amount Is Calculated
The HR calculates the final amount after considering the leftover leaves, gratuity, unpaid leave, etc.
A Settlement Agreement Is Prepared
A settlement agreement mentioning all the details of the settlement is prepared by HR.
Cheque Is Issued
The HR sends the agreement to the accounts department and prepares a cheque. This cheque and the FnF settlement statement are sent to the employee.
Also Read: Recruitment Strategies
Essential Components of Settlement
Let us now discuss the various components of the settlement.
Unpaid Salary
It will include any salary that was held due to certain reasons and annual benefits.
Leave Encashment
This includes the paid leaves that are not utilized. The payment for this is calculated based on the company’s policy. It can either be calculated as per day basic, or as a fixed amount decided by the company.
Gratuity
It is the amount paid by the employer to the employee for rendering their services for a certain period. Payment of Gratuity Act specifies that the gratuity amount is equal to the wage of 15 days for each completed year of service. The maximum amount an employee can receive as gratuity is ₹10 lakh.
Deductions
The deductions applicable in the FnF process include provident fund, employee state fund, compensation for not serving the notice period, and tax deductions. While there is a TDS (Tax Deducted at Source) exemption for gratuity and encashed earned leave, the rest of the payments are not.
Settlement Letter to Employee
A full and final settlement letter to an employee is a letter given to the employee who is leaving the organization. It mentions that the settlement is complete, and no unpaid dues remain. It also contains details such as the breakup of the final amount and the cheque number by which the final settlement amount was paid.
Final Settlement Letter Template
You can better understand the composition of a letter about the full and final settlement of an employee with the following template.
[Your Company’s Leatterhead]Date:[Letter Issue Date]
To
Name: [Employee Name]
Address: [Employee’s Address]
Subject: Full and Final Settlement Letter
Respected Mr./Ms. [Employee Name]
This is to confirm that your full and final settlement has been prepared according to the terms and conditions of the appointment letter you received during the confirmation of your employment.
Kindly find enclosed a cheque bearing no. [Cheque Number] dated [Date] for [Amount] drawn on [Bank Name] Bank towards your full and final settlement. Please find a statement of the settlement attached to this letter.
We, hereby, declare that your account is settled with our company, and nothing remains due.
Thank you
Signature
Name of the Signatory
Designation
Name of the Company
Conclusion
Financial aspects can be intricate, but understanding them in detail can help you ensure the professional and smooth functioning of your organization. Full and final settlement is received by the employee leaving the company, but the financial responsibility lands on the employer. Therefore, you should get familiar with the laws and even the latest changes to avoid any settlement-related issues. You can learn more about the HR responsibilities through an HR Specialization course.
