Final settlement (often called F&F, short for "Full and Final") is the payment due to an employee on resignation, termination or retirement. In Pakistan, this is where most exits go wrong: missed deductions, forgotten leave encashment, contested gratuity calculations, asset recovery overlooked. A clear process protects both sides. This is how we do it, step by step.

The 8 components of a clean final settlement

1. Unpaid salary (last partial month)

Pro-rated salary from the first of the month to the last working day. If the employee worked 12 days of a 26-day month, they get 12/26 × monthly salary. Include any unpaid prior arrears.

2. Leave encashment

Unused earned/annual leave (and sometimes casual leave, depending on company policy) is converted to cash at the per-day rate. Per-day rate = monthly basic / 26 (or 30, depending on policy). Sick leave is typically not encashable.

3. Gratuity (if applicable)

If the company has a gratuity scheme and the employee has completed the qualifying service period (often 1 year minimum, sometimes 5), gratuity is typically one month's basic salary per completed year of service, prorated for partial years above the threshold. Some companies offer this even where not legally required.

4. Provident Fund withdrawal

If the employee was a member of the company's Provident Fund, both their contribution and the employer's matched contribution (subject to vesting rules) become withdrawable. The PF withdrawal goes through the PF trust / scheme administrator.

5. EOBI status update

Notify EOBI of the employee's exit so their contribution record closes correctly. The employee can later claim EOBI pension at retirement age, independent of subsequent jobs.

6. Bonus / commission arrears

Any earned but unpaid annual bonus, performance bonus, or commission must be calculated and added.

7. Outstanding deductions

This is the part people get wrong. Subtract:

Outstanding loan or advance balances
Unrecovered reimbursement advances
Notice-period shortfall (if employee left without serving notice and policy applies)
Damage to company assets (only if documented and policy-supported)
Any other contractual recovery

8. Tax (WHT) on the settlement amount

The settlement total is taxable income. Calculate WHT for the year-to-date including the settlement amount, deduct any tax already paid, and withhold the remainder.

The 5 supporting workflows you also need

Multi-department clearance

Before releasing the cheque, get clearance from HR, IT (account revoked, devices returned), Admin (asset, ID card, parking pass returned), and Finance (no outstanding dues). Skipping this is how laptops disappear.

Document handover

Knowledge transfer document, project handover, client introductions and password vault transfer should all be confirmed before exit.

Asset recovery

Laptop, mobile, ID card, access cards, uniform, tools. Each asset returned and signed off. Zaffre HRM's asset management ties assets to the employee record and auto-flags pending returns on exit.

Reference letter / experience certificate

Issue formally on company letterhead. Includes joining date, exit date, last designation, and salary range (if requested).

Final settlement letter

Written acknowledgment of the settlement amount, signed by both sides, including breakdown of every component. Protects against later disputes.

How long should it take?

The usual practice is to pay the settlement within 30-45 days of the last working day. Paying sooner keeps the relationship good. Paying late invites labour-court action.

The most common F&F mistakes

Calculating leave encashment on gross instead of basic (over-pays)
Forgetting to deduct outstanding loan
Not adjusting WHT for year-to-date, so tax is over- or under-deducted
Releasing payment before asset recovery
No written settlement letter, which leads to disputes 6 months later
Missing EOBI/PF notification

How HR software helps

Zaffre HRM's final settlement module calculates every component for you (unpaid salary, leave encashment, gratuity, bonus, deductions, WHT), runs the multi-department clearance, tracks asset returns and prepares the final settlement letter. Book a demo to see a full settlement worked through.

Caveat

Settlement rules differ by employment contract, company policy and provincial labour law. This article is a general guide; consult your HR / labour-law advisor for specific cases.

How to Do Final Settlement of Employee in Pakistan: Step by Step