When someone leaves, payroll has one more statement to produce, and it is the one most likely to be argued over. A full and final settlement closes the account between the employer and the leaver: everything still owed to them, everything they still owe, and the single figure that settles it. Done badly it delays the leaver’s money, sours the exit, and leaves finance answering the same question three times. Done well it is a short, checkable list.
This guide sets out that list in the order payroll should work through it, with a worked example. The arithmetic is simple; the work is in getting each input right. If you want to follow along with your own figures, the final settlement calculator takes the same inputs and shows each line.
Gather the inputs before you calculate anything
Most settlement disputes come from a wrong input, not a wrong sum. Before any calculation, collect these and confirm each one with whoever owns it:
- Last working day, agreed in writing — it fixes how many days of the final month are owed.
- Monthly salary on the last day, after any increment that took effect before it.
- The day-rate basis the contract or pay policy uses: salary ÷ 30, ÷ working days, or ÷ the calendar days in that month.
- Leave balance: days earned to the last working day, less days taken. Check pending leave requests are decided first.
- Notice served against notice required, from the resignation or termination letter.
- Gratuity or provident fund entitlement, if any, worked out under the law and contract that apply.
- Loans, salary advances and other recoveries: outstanding balances, and any equipment not returned.
- Tax to withhold on the settlement.
Step 1: work out a day’s pay
Divide the monthly salary by the basis the contract names. For a salary of 120,000 on a 30-day basis, a day’s pay is 4,000. On a 26-working-day basis it would be about 4,615 — a difference of more than 15% on every day-based line, which is why step zero above matters.
Step 2: add what is still owed to the leaver
Salary for days worked
Count the days worked since the last payroll run up to the last working day, and multiply by the day rate. If the last run paid the full month in advance, this line may be zero — or negative, if the leaver was paid for days after their last working day.
Unused leave
Whether unused leave is paid out depends on the leave policy, the contract and the law where the person works. Where it is paid, multiply the remaining days by the day rate. Where leave was taken in excess of what had been earned by the last day, the same arithmetic becomes a recovery instead of a payment.
Gratuity, provident fund and bonuses
Gratuity rules are set by the law that applies to the employer and the employee — in Pakistan, by provincial standing-orders law, which is why our payroll guide for Pakistan treats it as an input rather than one national formula. Work the figure out separately, have it checked, and add it as a single line. Add any bonus or other amount already earned the same way.
Step 3: subtract what the leaver owes
Notice not served
If the contract requires notice and the leaver served less, the shortfall in days multiplied by the day rate is usually recovered. Some employers waive it; record the decision either way, because a waived recovery that is not written down tends to reappear as a question.
Loans, advances and other recoveries
Recover outstanding loan and advance balances in full, and any other agreed recovery — equipment not returned, an insurance premium the employer paid in advance. Each should be a separate line with its own amount, so the leaver can see exactly what was taken and why.
Tax
Withhold tax on the settlement under the rules that apply. A final month changes the tax-year projection that monthly withholding is based on — the reason is set out in how annualised salary tax withholding works — so take the tax figure from payroll’s year-to-date view, not from a monthly payslip.
A worked example
A leaver earns 120,000 a month on a 30-day basis, so a day is worth 4,000. They worked 15 days of the final month, have 6 days of leave the policy pays out, served 2 days less notice than required, are owed 50,000 in gratuity, and have a salary advance of 20,000 outstanding. Tax on the settlement is 1,000.
| Line | How | Amount |
|---|---|---|
| Salary for days worked | 15 days × 4,000 | 60,000 |
| Unused leave | 6 days × 4,000 | 24,000 |
| Gratuity | Worked out separately | 50,000 |
| Notice not served | 2 days × 4,000 | −8,000 |
| Salary advance | Balance outstanding | −20,000 |
| Income tax | From the year-to-date view | −1,000 |
| Net payable | Payments less deductions | 105,000 |
Payments total 134,000, deductions 29,000, and the net payable is 105,000. Present it exactly like this: one line per item, the working beside each, and the net at the foot. A leaver who can follow every line rarely disputes the total.
Mistakes that cause disputes
- Mixed day-rate bases across lines, as above.
- Leave balances taken from a spreadsheet that missed the last few requests — reconcile against approved leave first.
- Recoveries netted silently into another line, so the leaver cannot see them.
- Gratuity assumed rather than worked out under the rule that actually applies.
- Access left open: settlement is finance’s last step, but the leaver’s systems, devices and shared passwords should be closed before it, not after.
That last point is why the settlement belongs at the end of an offboarding checklist rather than on its own. In Orbiz, deactivating a member raises offboarding checklists for HR and the manager — see HRMS workflows — and the settlement is prepared in Ledgr from the same record.
Running settlements in one system
A settlement is slow when its inputs live in different places: attendance in one tool, leave in another, loans in a spreadsheet, salary in a payroll file. Ledgr, the payroll tool in Orbiz, prepares the final settlement from the leave balance, claims, loans and last period already on the member’s record, shows how each line was computed, and has it approved like a salary sheet. HRMS holds the exit date and runs the offboarding. The point is not speed for its own sake; it is that every input comes from a record someone already checked. For the wider argument, see moving payroll off spreadsheets.
Built for your industry
