(Arjun Paleri & Harinie Seenivasan)
Full and Final (“F&F”) settlement is a crucial step in formalising the closure of an employer-employee relationship in India as this process includes a list of statutory obligations that an organisation must fulfil. Managing F&F settlements requires careful consideration of both central and state specific legislations. Several organisation have standard processes in place to handle F&F settlements, however, most of them do not meet the legal requirement leading to complicated employee transitions.
Through this article, we aim to highlight the importance of statutory requirements related to F&F settlements in India through a recent judicial precedent
Recent Judicial Precedent
The High Court of Calcutta in Dasrath Chaudhary & Another vs The State of West Bengal & Another3 recently held that non-payment of outstanding dues by employer does not amount to criminal breach of trust.
In this case, the Opposite Party, who was an ex-employee at a company initiated criminal actions against the Company and its directors for non-payment of full and final settlement amounting to INR 1,47,64,833. The Petitioners (ex-directors of the Company) against whom the criminal actions were initiated contended that if the settlements were pending, it would be a civil case and would not require a criminal action.
Considering the facts, the court observed that the allegations made by the Opposite Party did not establish any grounds required to establish criminal breach of trust under the Indian Penal Code, including intentions to cheat/deceive. Accordingly, the court disposed the petition.
Points to consider for streamlining the F&F process
While the court clarified that non-payment of F&F may not amount to criminal breach of trust, it is however important for establishments to make F&F payments in a certain manner to meet the statutory requirements. A few points to be considered while making F&F payments are summarised below:
Timeline for making F&F Payments – In our experience (and the prevalent market practice), we have seen establishments take up to a month to clear F&F payments due to logistics issue. However, the laws in India provide for the following timelines:
wage earned up to the date of termination must be paid within two (2) working days4 from the date of termination;
retrenchment compensation should be paid on or before the date5 of retrenchment; and
gratuity payments should be made to eligible employees within thirty (30) days6 from the date of termination.
Components to be considered for F&F Payments – Components such as (a) wages; (b) payment in lieu of notice period (if relevant); (c) provident fund contributions (to be deposited with the PF authorities); (d) gratuity payment (if relevant); (e) leave encashment; (f) statutory bonus (if any); and (g) retrenchment compensation (if relevant) need to be considered while making F&F calculations.
Ex-Gratia payments – In situations where the employer and employee sign a mutual separation agreement, the employer may choose to pay the employee a sum of money referred to as ex-gratia payment, which acts as a token for the employee’s service to the company. While there is no time limit within which such payments are to be made, it is best practice to make such payments as soon as possible.
Return of Company property and other assets – During termination, one of the key responsibilities of the employee is to ensure that company property is returned to the company in proper working conditions. The establishment must ensure that this is done in a timely manner, failing which, employees may deduct a sum of money in the full and final settlement.
Withholding of F&F dues – F&F payment can be withheld only in certain circumstances; hence, any such withholding must be given careful consideration and legal advice should be sought prior to withholding.
Conclusion
Streamlining the F&F process with the above-mentioned points will help organisations handle the transition process effectively as checking the points would mean that most statutory obligations are fulfilled. This will also help the organisation in avoiding any potential litigations thereby protecting its interests.