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Employee Payroll: Understanding Full and Final Settlement

Employee Payroll: Understanding Full and Final Settlement

Maintaining an excellent employee experience throughout an employee lifecycle is a crucial responsibility of organisations.

And when done right, businesses reap the rewards in the form of increased customer satisfaction which improves customer retention, and ultimately, revenue. 

This article focuses on helping you understand a crucial aspect of payroll that ensures quality employee experience when a member of staff is exiting your organisation – The full and final settlement.

What Is Full and Final Settlement?

Also known as FnF Settlement, Full and Final Settlement in payroll happens when an employee resigns from an organisation or is terminated by the employer.

In this case, the employee has to be paid for the last working month and any additional earnings, including bonuses or incentives.

The goal of this settlement policy is to pay all the balance payments to the employees, including retirement benefits, bonuses, gratuity, incentives, etc.

This full and final settlement process needs to take place latest by an employee’s last working day. This procedure is fairly straightforward and should follow any guidelines set out in the employment contract.   

Major Components Included in Full and Final Settlement

During the FnF settlement, there are usually a series of activities that take place, but the trigger is the “Resignation Letter,” which should be in writing. Most companies follow these basic steps below: 

  • The employer receives a resignation letter in writing from the employee.   
  • After an overview, the company’s management team accepts the employee’s resignation letter.   
  • The employee also has to receive a clearance letter from concerned departments to show that all company assets are no longer in their possession and submit that letter to the company’s HR.   
  • Calculations are made to determine the final amount to be paid out to the employee.   
  • The FnF statement is prepared. The company’s accounts department will then review this statement and clear/reject it. Once the accounting department clears the statement, payments can then be made to the employee resigning.   

Some of the major components of the FnF settlement include:   

  1. Unpaid Salary   
  2. Unavailed Leaves and Bonus   
  3. Gratuity   
  4. Deductions   

Let’s look at all these components in detail and some formulas for calculations.

some formulas for calculations

1. Unpaid Salary   

Unpaid salary is the total number of days that an employee has worked after submitting the resignation later. It is typically the time duration between an employee’s resignation date and the last workday at the organisation.

In some cases, unpaid salary may also include payments from the previous months (for example, if an employee’s salary is paid quarterly). Unpaid salary may also include any other arrears and Leave/Travel Allowance. 

Calculation of Unpaid Salary: 

The number of days an employee worked × gross monthly salary/26 (the number of paid days in a month) 

2. Unavailed Leaves and Bonus   

An employee’s Unavailed leaves are subject to encashment. Any bonuses or other cash benefits offered are also added to the full and final settlement sum.

Regulation has mandated that all dues from an employee’s unpaid leaves must be paid by the employee’s last workday when an employee resigns.   

The company policy should mention how the payment for unavailed leaves has to be made. There are two different methods that are usually adopted:   

  • Earned per day based on the basic salary    
  • Fixed amount defined by the company 

Calculation of Unavailed Leaves:   

Number of days of Unavailed leaves × Basic salary ⁄ 26 days (avg paid days in a month)   

If the payment of Unavailed leaves is a Fixed amount defined by the company, it will be added to the final payouts along with any bonuses as stated by the company’s policies. 

3. Gratuity

Gratuity is a cash benefit (made in a single payment) that employers provide to their employees as a reward for a commendable and extensive service over the years for the organisation or establishment at the time of their resignation or retirement.

In Nigeria, employers are not mandated by the law to pay their workers gratuity benefits. Still, they can, however, depending on their internal policies, decide to set up a gratuity scheme for the employees and the obligatory pension contribution scheme.   

The gratuity amount and time which the employee can access the amount is dependent on various factors, including the length of service and is usually subjected to terms and conditions of employment.    

Gratuity Calculation:

An example of how this can be calculated is:    

Gratuity Amount = (Basic salary + Dearness Allowance) × number of years used in service.

Based on the use of this formula, if an employee works for six months or more, it is considered to be approximately a year.

This means that if an employee has worked in a company for about ten years and six months, the total number of years that would be taken into consideration while calculating the gratuity benefits amount is eleven years.  

4. Deductions   

Deductions include an employee’s Income tax and any other compensation for the notice period, including Bonuses and other incentives.

Earned leaves that have been cashed and gratuity is exempted from tax. All other payments will be taxed. Exact Income Tax deductions will depend upon the employee’s income bracket.

Conclusion

Full and final settlement is a detailed and organised process. When executed properly, it helps a company systematically offboard its employees. The FnF settlement requires expertise in the HR and Payroll domain with precise calculations.  

In recent times, customised software has been used. This software is easy to use and aids organisations in accelerating their full and final settlement process. This helps avoid and prevent any mistakes in calculations or minor details.  

When an organisation follows the rules, policies, and procedures according to the law, the FnF settlement will become an easy process.

All complaints and grievances that arise due to the full and final settlement process should be addressed formally in a timely manner. Organisations with a strong FnF settlement framework generally set deadlines internally to be met for the whole process.  

In a perfect full & final settlement process, the HR section would seamlessly facilitate all transactions necessary between the shareholders and resolve the unsettled issues before the employee’s last working day.    

With Workforce Africa, you erase your worries about staff management and conduct FnF settlements with ease. Schedule a consultation today and let’s help you succeed