Under the Code on Wages, 2019, employers are required to settle an employee’s wages within two working days of termination, dismissal, retrenchment, or resignation. This marks a significant shift from earlier practices where settlements often aligned with the next payroll cycle.
To help HR and Finance teams stay compliant and minimize the risk of penalties, here is a practical, legally aligned checklist.
Phase 1: Pre-Exit Documentation (Day 0)
- [ ] Clearance Tracking: Initiate the internal “No Dues Certificate” (NDC) process across relevant departments (IT, Admin, Finance, Library) on the employee’s last working day. (Note: This is an organizational best practice, not a statutory requirement.)
- [ ] Exit Interview & Resignation Acceptance: Issue a formal acceptance letter confirming the Last Working Day (LWD).
- [ ] Attendance & Leave Records: Freeze attendance and leave data for the final month to calculate earned leave encashment.
Phase 2: Wage Calculation & Adjustments (Day 1)
- [ ] Wage Computation: Ensure wage components comply with the statutory definition under Section 2(y) of the Code on Wages, 2019, where Basic + DA must form at least 50% of total remuneration.
- [ ] Notice Pay Adjustment: Verify whether notice pay is recoverable or payable, based on the employment contract and actual service.
- [ ] Bonus & Incentives: Calculate pro-rata statutory bonus (as per the Payment of Bonus Act, 1965, until subsumed under the Code on Wages) and any earned commissions.
- [ ] Deductions Audit: Confirm that total deductions (including damages or asset recovery) do not exceed 50% of wages, as mandated under Section 18 of the Code on Wages, 2019.
Phase 3: Disbursement & Statutory Filings (Day 2 – The Deadline)
- [ ] Payment Execution: Transfer the net payable amount via bank transfer or cheque. Reminder: The two working day timeline starts from the employee’s exit date.
- [ ] Payslip Issuance: Provide a detailed F&F statement/payslip showing all additions and deductions.
- [ ] EPF/ESI Updates: Record the employee’s exit date in the EPFO Unified Portal and ESIC portal within statutory timelines.
- [ ] Gratuity (If Applicable): If the employee has completed 5 years of continuous service (as per the Payment of Gratuity Act, 1972), calculate and include gratuity. (Note: The Code on Social Security, 2020 provisions are pending enforcement.)
Practical Compliance Tip
Facilitator’s View: Even if assets such as laptops are not returned promptly, employers must still comply with the two-day wage settlement rule. Document all follow-ups and communications to demonstrate due diligence. Asset recovery can be pursued separately, but wage timelines cannot be extended.
Legal Disclaimer
This checklist is for educational purposes only and does not constitute legal advice. Compliance requirements may vary based on state rules, sector-specific laws, and employment contracts. Please consult a qualified labour law expert before implementation.