Also Read: Decoding a Fixed Term Employment Contract

What Is Full and Final Settlement?

Full and Final Settlement refers to the process of clearing all financial obligations owed by an employer to an employee at the end of the employment relationship. It is the employer’s legal responsibility to calculate, verify, and release all monetary dues that have accumulated during the employment tenure.

In simple terms, F&F settlement ensures that the employee receives everything that is legally due for the period of employment—without any unjustified deduction or delay.

Also Read: Guide to Employee Provident Fund (EPF) – Registration and Compliance

When Is F&F Applicable?

1. Resignation (voluntary exit)

2. Termination (with or without cause)

3. Layoff or retrenchment

4. Retirement

5. End of a fixed-term contract

6. Mutual separation agreements

Across all categories, the employer is bound by law to release dues within a reasonable period.

Also Read: What Is A Non-Compete Clause In An Employment Contract?

Key Components of Full and Final Settlement

F&F settlement typically includes several financial components. Each component may be governed by specific statutory provisions:

1. Unpaid Salary

Includes:

1. Salary for days worked in the final month

2. Overtime (if applicable)

3. Any performance-linked or variable pay components accrued and due

Payment must be calculated proportionately based on the number of days worked.

2. Leave Encashment

Employees are entitled to encash unused earned or privilege leave as per:

1. Company policy

2. Factories Act, 1948 (for factories)

3. Shops & Establishments Act (for other establishments)

Casual and sick leaves typically do not qualify for encashment unless company policy allows.

3. Gratuity

Governed by the Payment of Gratuity Act, 1972
Eligibility: Minimum 5 years of continuous service
Time limit for payment: Within 30 days of exit
Delay beyond this attracts mandatory interest.

4. Bonus

Under the Payment of Bonus Act, 1965, eligible employees must receive any unpaid bonus for the completed financial year or for a proportionate period.

5. Provident Fund (PF)

Employers must:

1. Update PF records

2. Deposit pending contributions

3. Issue forms enabling withdrawal or transfer under EPF rules

6. Reimbursements

Pending reimbursements include:

1. Travel expenses

2. Business-related costs

3. Medical reimbursements

4. Any approved expenses backed by bills

7. Deductions

Employers may make legitimate deductions for:

1. Notice period recovery

2. Salary advances

3. Unreturned company assets

However, deductions must be legal, justified, and supported with documented proof. Unilateral or punitive deductions are prohibited.

Also Read: Now get your Unpaid Salary

Timeline for Full and Final Settlement (India – 2025)

While individual companies may follow internal timelines, labour laws provide clear guidance.

1. Statutory Timelines

1. Payment of Wages Act, 1936

   Section 5(3): Wages must be paid within two working days of termination.

2. Gratuity must be paid within 30 days.

3. Bonus must be settled within eight months from the end of the financial year.

4. Many Shops and Establishments Acts across states mandate payment within 30 days.

2. Industry Practice (Non-statutory)

Most companies follow a 30–45 day window for the complete F&F settlement, which includes:

1. Department clearances

2. Payroll verification

3. Managerial approvals

4. Final audit

3. Typical F&F Timeline Breakdown

Total duration: 7–17 days, usually within 30–45 days.

Also Read: What Is Moonlighting How Is It Influencing The Indian Corporate Culture

When Delay Becomes Illegal

A delay is considered legally unreasonable when:

1. It crosses 45 days without valid justification

2. Employer stops responding

3. Employer withholds payment due to disputes unrelated to wages

4. Deductions are unexplained or arbitrary

In such cases, the employee can take immediate legal action.

Also Read: Labour Laws And Startups

Common Issues in Full and Final Settlement

Employees frequently face the following challenges:

1. Delay in Payment

Often justified using:

1. Administrative bottlenecks

2. “Approval pending”

3. Payroll cycle delays

However, prolonged delays violate statutory obligations.

2. Unauthorised Deductions

Common examples:

1. Deductions for unserved notice period without considering leave balance

2. Deductions for training costs without agreement

3. Deductions for alleged performance issues

4. Deductions exceeding statutory limits

3. Withholding F&F for Non-return of Assets

F&F cannot be withheld entirely because of asset disputes; only proportional deduction is allowed.

4. Partial Payments

Employers may release a part of the dues but hold back the remaining amount, often without explanation.

5. Non-communication

Lack of clarity, no breakup of settlement, and no response to emails are common employee grievances.

6. Withholding Relieving Letter

Although relieving letters are not mandatory under law, withholding them to deny F&F payment is unethical and may be challenged.

Also Read: Knowing ESOPs and how it can help in retaining talent

Laws Governing Full and Final Settlement in India

Several important laws protect employees. Each is explained below:

1. Payment of Wages Act, 1936

1. Ensures timely payment of wages.

2. Section 5: Full dues must be paid within two working days of termination.

3. Unauthorised deductions are prohibited.

4. Employers may face fines or prosecution for willful non-payment.

2. Industrial Disputes Act, 1947

Applicable mainly to “workmen” such as:

1. Technical staff

2. Skilled workers

3. Support staff

Key protection:

Section 33C(2): Employee may approach the Labour Court to recover unpaid wages, bonuses, or any money due.

The Labour Court can:

1. Determine the payable amount

2. Order payment with interest

3. Enforce compliance

3. Payment of Gratuity Act, 1972

1. Gratuity must be paid within 30 days.

2. Delay attracts simple interest.

3. Non-payment or underpayment is punishable.

4. Payment of Bonus Act, 1965

1. Ensures statutory bonuses for eligible employees.

2. Bonus dues must be included in F&F.

5. EPF & MP Act, 1952

Employers must:

1. Deposit pending contributions

2. Update PF records

3. Facilitate PF withdrawal

Failure to deposit contributions is a serious offence.

6. Shops and Establishments Acts (State-specific)

Most states mandate:

1. Issuing service certificates

2. Timely settlement of wages

3. Prohibition of unfair labour practices

States like Karnataka, Maharashtra, Delhi, and Tamil Nadu regulate settlement timelines more strictly.

7. Indian Contract Act, 1872

For employees in managerial, administrative, or supervisory roles, contract law governs employment.

Delayed F&F settlement is considered:

1. Breach of contract

2. Failure of consideration

Employees can pursue civil remedies for recovery.

Legal Remedies Available to Employees

There are multiple authoritative legal paths depending on the employee category, nature of dispute, and amount.

1. File a Complaint with the Labour Commissioner

This is one of the most effective remedies.

Process:

1. Submit written complaint with supporting documentation.

2. Labour Officer initiates conciliation.

3. Employer receives a summons.

4. Matter is discussed for amicable resolution.

The Commissioner can:

1. Direct employer to clear dues

2. Recommend prosecution

3. Order compliance under relevant labour laws

This remedy is cost-effective and fast.

2. Approach the Labour Court or Industrial Tribunal

Applicable primarily to “workmen”.

Under Section 33C(2):

Employee can claim:

1. Unpaid salary

2. Bonus

3. Leave encashment

4. Any monetary dues

The Labour Court functions like an executing court, quantifying and ordering payment.

3. File a Civil Suit for Recovery

Applicable to:

1. Managers

2. Senior executives

3. Supervisors

4. White-collar professionals not covered under ID Act

Under the Civil Procedure Code and Contract Act, employees can recover:

1. Unpaid dues

2. Compensation

3. Interest for delay

4. Legal costs

4. File a Complaint Under the Payment of Wages Act

If the employee is eligible under this Act, they can file an application under Section 15 for:

1. Non-payment

2. Unauthorised deduction

The authority can impose penalties and order payment.

5. Alternative Dispute Resolution (ADR)

ADR includes:

1. Arbitration

2. Mediation

3. Conciliation

Many modern employment contracts include arbitration clauses.
ADR is faster than court proceedings and promotes amicable settlement.

6. Complaint Under Shops & Establishments Act

For employees in private offices, retail, IT companies, or commercial establishments, the state’s S&E Act applies.

Labour Inspectors or Deputy Commissioners have the authority to:

1. Issue show-cause notices

2. Penalise employers for violations

3. Order settlement of dues

Also Read: What To Do When Wrongfully Terminated From Employment?

Step-by-Step Procedure for Legal Action

A structured escalation process increases the success of settlement.

Step 1: Formal Written Request to Employer

1. Send an email or letter to HR.

2. Request settlement breakup and expected date.

3. Maintain a digital trail.

Step 2: Internal Grievance Escalation

If no response:

1. Escalate to senior HR

2. Escalate to operations/head of department

3. Refer to internal grievance committee (if available)

Step 3: Issue a Legal Notice

Through an advocate:

1. Demand payment within 7–15 days

2. Cite relevant laws

3. Mention legal consequences

Legal notices often prompt employers to comply.

Step 4: File Complaint with Labour Commissioner

Submit:

1. Appointment letter

2. Resignation letter

3. Payslips

4. Settlement statement (if provided)

5. Communication record

Conciliation hearings generally resolve the matter quickly.

Step 5: Approach Labour Court or Civil Court

If conciliation fails:

1. File claim for recovery

2. Include payment due with interest

3. Submit all evidence

Courts can direct immediate payment.

Step 6: Enforcement of Court Order

If employer still does not comply:

1. Attach company bank accounts

2. Attach movable and immovable property

3. Garnishee orders (direct bank to release payment)

Courts have extensive powers to enforce compliance.

Possible Penalties on Employers

Employers delaying F&F settlement may face:

1. Penalties Under Payment of Wages Act

1. Fine up to ₹7,500

2. In rare cases, imprisonment up to 6 months

2. Interest on Delayed Payment

Mandatory under the Gratuity Act.

3. Compensation

Courts may award compensation for:

1. Mental harassment

2. Financial hardships

3. Unfair labour practice

4. Labour Department Action

Includes:

1. Show cause notices

2. Inspections

3. Orders to release dues

5. Reputational Damage

Non-compliance affects employer credibility, especially in sectors relying on employee trust.

Precautions to Prevent Settlement Disputes

Employees can proactively avoid disputes through:

1. Maintain Documentation

Retain:

1. Offer letter

2. Appointment letter

3. Payslips

4. Increment letters

5. Email records

2. Serve Proper Notice Period

This avoids notice-period recovery disputes.

3. Complete Exit Formalities Promptly

Return assets, fill forms, and collect clearance receipts.

4. Request Written Confirmation

Seek written confirmation on:

1. Last working day

2. Notice period waiver

3. Settlement timeline

5. Keep Digital Evidence

Screenshots, emails, and HR acknowledgements are essential in legal proceedings.

Role of Labour Authorities and Courts

Labour authorities ensure strict compliance with wage laws.

1. Labour Department

1. Conciliation

2. Investigation

3. Enforcing orders

4. Penal action

2. Labour Courts

For workmen:

1. Fast-track adjudication

2. Recovery orders

3. Interest and compensation

3. Civil Courts

For non-workmen:

1. Contractual claims

2. Compensation

3. Execution proceedings

4. Appellate Authorities

If dissatisfied with lower orders, employees can appeal to higher authorities or High Courts.

Recent Trends and Observations (2024–2025)

1. Increasing F&F Disputes in Startups

High attrition rates and funding challenges have caused delays in many startups.

2. More Employees Using Online Grievance Portals

States like Maharashtra, Delhi, Karnataka, and Telangana allow online filing of wage-related complaints.

3. Automation of Payroll Systems

Companies are increasingly adopting automated payroll to eliminate manual errors.

4. Growing Awareness of Employee Rights

More employees are aware of statutory protections and legal remedies.

5. Labour Code Reforms

Though yet to be fully implemented nationwide, the upcoming Labour Codes aim to standardize wage timelines.

Conclusion

Full and Final Settlement is not merely a procedural formality—it is a statutory right of every employee.
Indian labour laws impose clear obligations on employers to release all dues promptly and transparently. When an employer fails to do so, employees have multiple legal remedies ranging from conciliation to court-directed recovery.

By understanding:

1. what F&F includes,

2. the legally accepted timelines, and

3. the full set of remedies available under Indian law,

employees can assert their rights confidently and protect themselves from financial and emotional hardship.

Timely settlements promote ethical employment practices and strengthen workplace trust. Awareness, documentation, and early action remain the most effective tools for ensuring a smooth and compliant exit process.