Full and Final Settlement Under the Labour Codes: The 2 Day Rule Small Employers Miss

Last Updated on November 3, 2026 by Abhijit Divekar

When someone leaves your company, the last salary used to be something you settled "next payroll" or "within 30 to 45 days". Under the Labour Codes, that habit can now put you in breach of the law.

The Code on Wages, 2019 sets a much shorter deadline for paying wages to an employee who leaves. Here is what changed, what goes into a full and final settlement, and a simple checklist so your next exit is clean.

What the 2 day rule says

Under Section 17(2) of the Code on Wages, wages due to an employee must be paid within 2 working days when the employee:

• resigns
• is removed or dismissed
• is retrenched
• becomes unemployed because the business or unit closes

The 2 days are counted from the employee's last working day, not from the date you run your next payroll. The Labour Codes came into force on 21 November 2025, so this applies to exits happening now.

Key takeaway: if an employee’s last day is a Friday, the wages you owe them are due by the following Tuesday, even if your monthly payroll runs on the 30th.

What goes into a full and final settlement

A full and final settlement (often called F and F) is everything you owe the employee, minus anything they owe you. For most small businesses it includes:

• Salary for the days worked in the final month
• Payment for unused earned leave, as per your leave policy and state rules
• Statutory bonus for the year, on a pro rata basis, if the employee is covered
• Gratuity, if the employee is eligible
• Pending reimbursements, incentives or arrears
• Notice pay, if you asked the employee to leave without serving notice

Deductions usually include notice pay recovery (if the employee did not serve notice and the contract allows recovery), unadjusted advances or loans, and TDS. Any deduction must follow the Code on Wages rules and the employee's contract.

Use our leave encashment calculator to work out the leave part quickly.

Gratuity has its own timeline

Gratuity is paid under the Code on Social Security, 2020, not the Code on Wages, and it follows its own rules:

• Permanent employees usually become eligible after 5 years of continuous service.
• Fixed term employees become eligible after 1 year of service.
• The 5 year condition does not apply on death or disablement.
• Gratuity is generally due within 30 days of becoming payable, and interest applies if you pay late.

The basic formula is 15 days of last drawn wages for every completed year of service, using 26 working days in a month. Under the Labour Codes, "wages" means basic pay plus dearness allowance, and if allowances are more than half of total pay, the extra is added back. That can raise gratuity for employees with a low basic salary.

Why small employers get this wrong

• Payroll runs once a month, so exits get paid with everyone else.
• Nobody owns the exit checklist, so the leave balance or bonus gets missed.
• Salary structures with a low basic make the 50% wage rule easy to overlook.
• Recoveries are made without a clear clause in the appointment letter.

A late or short settlement is one of the most common reasons for labour complaints from ex employees. It also spreads quickly on review sites and LinkedIn, which hurts hiring. If you are still updating policies for the new rules, see our Labour Codes checklist for SMEs.

A simple full and final settlement checklist

1. Confirm the last working day in writing on the day the resignation is accepted.
2. Collect attendance and leave balance for the final month.
3. Calculate salary, leave payment, bonus and any gratuity.
4. List recoveries and check each one against the contract.
5. Get the settlement approved and paid within 2 working days of the last day.
6. Update the date of exit on the EPFO and ESIC portals.
7. Share the settlement statement, relieving letter and experience letter.
8. Issue Form 16 for the year when it is due.

Frequently asked questions

Do I have to pay full and final settlement within 2 days?

Wages due to the employee must be paid within 2 working days of the last working day under the Code on Wages. Gratuity follows a separate timeline under the Code on Social Security.

Does the 2 day rule apply when an employee resigns?

Yes. The rule covers resignation as well as removal, dismissal, retrenchment and closure.

Can I deduct notice pay from the settlement?

Only if the employee did not serve the required notice and the appointment letter or policy allows the recovery. Keep the calculation in the settlement statement.

When is gratuity payable for fixed term employees?

Fixed term employees become eligible for gratuity after 1 year of service, on a pro rata basis.

Is leave encashment part of full and final settlement?

Usually yes. Unused earned leave is paid on exit as per your leave policy and the state rules that apply to your business.

Want exits handled for you?

HRTailor runs payroll and compliance for small and growing businesses across India, including full and final settlements, EPFO and ESIC exits and relieving documents. Tell us your team size and we will share a simple payroll quote.

Get my payroll quote