The procedure for 'full and final settlement' is often fairly simple and as per the appointment contract. Usually, the following components are used to decide the final settlement sum:
>> Unpaid Salary (including annual benefits such as leave travel allowance) and arrears, which is calculated as the number of days for which salary is to be paid multiplied by the gross salary divided by 26 (paid days in a month)
>> Unpaid bonus
>> Payment for non-availed leaves (earned or privilege leave), which is calculated as the number of days of non-availed leave multiplied by basic salary divided by 26
Apart from the usual components the following might be applicable:
>> Gratuity, if four years and 240 days have been completed
>> Pension, as long as the employee has completed at least 6 months of service with the existing employer and 10 years of 'pensionable service' on providing a Scheme Certificate after retirement (58 years) age
Deductions include profession tax (if applicable), provident fund, income tax and compensation for notice period not served. Gratuity and cashed earned leave are exempt from tax deducted at source (TDS). All other payments attract TDS under Section 192 of the Income Tax Act.
As far as the period for settlement is concerned, going strictly by the rules, the final settlement needs to happen on an employee's last working day at the organisation. However, as clearances take time, it is prevalent policy to do so within 30-45 days after the employee has left. For gratuity, the stipulation is 30 days after leaving the company, while bonuses must be paid within the specified accounting year.
A common point of contention is the notice period. Even so, it is clear according to the law. Whichever party does not live up to the commitments in the contract will have to compensate the other.
In case of a mass termination, permission has to be sought from the government or the appropriate authority (as specified in the Industrial Disputes Act) specifying the reason for termination. There are also clauses that require employees be given sufficient notice or compensation as per designation and nature of industry.
There are also a few things that an employee must do to ensure there are no complications in the process or later on. Make sure to settle any advances taken or get it adjusted in the final settlement.
Further, get a copy of all the various clearances required from the different departments of the organisation that the employee was attached to by virtue of his responsibilities. This will also ensure that there will be no complications when you join another organisation.
Co-founder and Senior Vice-president, TeamLease Services