Often, people who leave their jobs, complain about not getting their final settlement in time. While the common practice is to get the final settlement around a month after leaving a job, sometimes the delay is even more. But this could soon change. According to the Code on Wages, 2019, employers will have to pay the full settlement within just 2 days from the employee’s last working day.

According to the Code, wage is defined as any remuneration, whether by way of salary, allowances or otherwise. Hence, it includes basic pay, dearness allowance, and also retaining allowance if any.

But it excludes certain compensation items like value of housing accommodation, leave travel allowance, conveyance allowance etc. 

Again, according to the Code, if the specified exclusions other than retrenchment compensation, gratuity payable, other retirement benefits, ex-gratia paid on termination exceeds 50% of the total remuneration, then the same will be added to wages.

Value of remuneration in kind, ESOP (Employees Stock Option Plan) payable to employee for instance, will be included up to 15% of total wages. On payment of the full and final payment after an employee leaves his job, the Code on Wages, 2019 states, “Where an employee has been – (i) removed or dismissed from service; or (ii) retrenched or has resigned from service, or became unemployed due to closure of establishment, the wages payable to him shall be paid within two working days of his removal, dismissal, retrenchment or, as the case may be, his resignation.”

Current Rules

According to Puneet Gupta, Director, People Advisory Services, EY India, “Wages under the Payment of Wages Act, 1936 means total remuneration paid except for the specified exclusions under the Act. These exclusions are bonus paid which is not the part of the terms of employment, value of any-house accommodation or supply of light, water, medical attendance, or any service excluded from computation of wages, any contribution paid by the employer to provident fund or pension fund, any travelling allowance or value of travelling concession, gratuity payable on termination of employment.”

Since currently there is no clear guideline on the timeline for the full and final settlement once an employee leaves his or her job, each firm has its own policy regarding it. “Under the current Payment of Wages Act, 1936 there is no specific time limit for making full and final settlement payment on resignation of an employee,” Gupta explained. 

The deadline to make a full and final settlement is covered under the Payment of Wages Act, 1936, only in specified cases such as retrenchments or dismissals. “The current Act covers only the specified nature of termination of employees whose earning wages does not exceed Rs 24,000 per month. This wage amount is revised by the government on the basis of Consumer Expenditure Survey published by the National Sample Survey Organisation”, Gupta said.

“Under the Payment of Wages Act, 1936, the settlement of wages will be made within two working days only if the services are terminated by the employer or are terminated due to closure of establishment. It is silent on timeline for making payment in case of resignation by the employee,” said Saraswathi Kasturirangan, Partner, Deloitte India. 

Under the Payment of Wages Act, 1936, the timeline to pay the full and final settlement is as follows:

• Termination of employment by employer – Before expiry of 2nd working day from the date of termination of employment
• Termination due to establishment’s closure – Before expiry of 2nd working day from the date of termination of employment
• Any railway, factory and industrial or other establishment having less than 1000 employees – Before expiry of  7th day from the last day of wage period
• Any railway, factory and industrial or other establishment having 1000 or more employees – Before expiry of 10th day from the last day of wage period

Currently, the Payment of Wages Act, 1936 is in force, and is silent on issues like full and final settlement in case an employee resigns on his or her own accord. Better clarity on this specific matter is expected once the Code of Wages, 2019 is implemented. 

What Code on Wages, 2019 says..

“Code on Wages, 2019 seeks to universalise the laws related to payment of minimum wages and timely payment of wages to the employees. The previous labour laws were silent on various issues such as time limit on making final payment in case of resignation, removal and so on,” Gupta said.

Again, Saraswathi Kasturirangan said,”Code on Wages, 2019 has widened the applicability to a wider class of employees. With stringent provisions on penalties, compliance on labour matters by employers is expected to be high. In short, the provision of early settlement of dues (within two days on resignation), increased coverage by extending the provisions to the unorganised sector, disclosure requirement for specified cases of domestic workers and increase in penalties for non-compliance by employers will all go a long way in providing a conducive labor regime.”

However, one must remember that though the Code has been passed in Parliament, the date from which it is effective is yet to be notified by the government. “Do keep in mind that though the Code on Wages, 2019 has been passed by the parliament, various procedural rules, forms, necessary for its implementation have not been notified yet. The preliminary draft rules have been uploaded on the website of Ministry of Labour and Employment on November 1, 2019 for inputs of various stakeholders and public. The date of actual implementation of code is likely to be notified once the rules for the code and other details such as floor wages are finalized and notified to ensure smooth implementation of the Code,” Ms. Kasturirangan said.

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