Employee separation in Octal HR covers the complete off-boarding workflow — from recording the last working day, managing the notice period, and completing the clearance checklist, through to calculating and disbursing the Full & Final (F&F) settlement including gratuity, leave encashment, and any outstanding recoveries.
Separation Types
| Type | Initiated By | Notice Period | Gratuity |
|---|---|---|---|
| Resignation | Employee | As per contract; recovery if not served | Payable if service ≥ eligibility threshold (configurable; commonly 5 years) |
| Termination | Employer | Notice or payment in lieu | Payable in most cases; consult counsel for misconduct dismissals |
| Retirement | System / HR | Typically waived | Always payable; may include additional retirement gratuity |
| Contract End | System alert | Defined in contract | Payable if contract renewed multiple times (courts may deem permanent) |
| Death in Service | HR | Not applicable | Payable to legal heirs; EOBI survivor benefit also triggered |
Initiating the Separation Process
Once separation is initiated, the employee is locked from being included in future payroll runs beyond their Last Working Day. Their current month payroll is prorated automatically.
Notice Period Management
| Scenario | How Octal HR Handles It | Payroll Impact |
|---|---|---|
| Serving full notice | Employee works through to Last Working Day; normal attendance tracked | Salary paid as normal; prorated if LWD is mid-month |
| Notice buyout (employer waives) | Mark as "Notice Waived"; enter actual leave date | Salary paid to actual date; notice pay added to F&F as one-time addition |
| Notice recovery (employee leaves early) | Mark as "Notice Not Served"; enter actual leave date | Unserved notice days deducted from F&F settlement (Basic ÷ 26 × days) |
Notice Period Settings
Default notice period (e.g., 30 days for permanent, 15 days for probationary) is configured under Settings → Employment → Notice Period Policy. This can be overridden per employee on their Employment tab (useful for senior roles with 90-day clauses).
Clearance Checklist
The clearance checklist ensures all company assets are returned and internal hand-offs are completed before the F&F is processed. HR can configure the list under Settings → Separation → Clearance Checklist.
Sample Clearance Checklist
Each checklist item is assigned to a department (IT, Admin, Finance, HR). The responsible department head marks items complete via their dashboard. F&F processing can be configured to require all items to be ticked before the settlement can be approved.
Full & Final Settlement Calculation
Octal HR calculates the F&F settlement automatically based on the employee's salary structure, leave balance, service duration, and any outstanding recoveries. A typical settlement for a PKR 60,000/month (Basic PKR 30,000) employee with 6 years of service leaving on the 18th looks like:
Full & Final Settlement — Sample (PKR)
Settlement Components
| Component | Formula | Direction |
|---|---|---|
| Partial month salary | Gross Salary ÷ Working Days × Days Worked | Addition |
| Leave encashment | Basic ÷ 26 × Encashable Leave Days | Addition |
| Gratuity | Basic Salary × Completed Years (see below) | Addition |
| Provident Fund (employee) | Accumulated employee contributions + interest | Addition |
| Notice pay (employer waives) | Basic ÷ 26 × Unserved Notice Days | Addition |
| Notice recovery (employee leaves early) | Basic ÷ 26 × Unserved Notice Days | Deduction |
| Loan / advance balance | Outstanding balance at date of separation | Deduction |
| Withholding Tax | Per FBR income tax on taxable F&F components | Deduction |
Gratuity Rules (Pakistan)
Under the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, workers completing qualifying service are entitled to gratuity on separation. The standard formula is one month's basic salary per completed year of service.
| Service Years | Gratuity Entitlement | Notes |
|---|---|---|
| Less than 1 year | None (statutory) | Company policy may still pay a discretionary amount |
| 1–4 years | Configurable (commonly 1 month per year) | Statutory requirement kicks in at 5 years for industrial workers |
| 5+ years | 1 month basic × completed years | Mandatory for industrial establishments; best practice for all |
| Partial year (6+ months) | Round up to full year (common policy) | Configure rounding rule under Settings → Separation → Gratuity |
The minimum gratuity threshold (years before payment) and rounding rules are configurable under Settings → Separation → Gratuity Policy. Many Pakistan companies pay from year 1 as a retention benefit even where not legally required.
Withholding Tax on F&F (Pakistan)
Under Section 12(2)(b) of the Income Tax Ordinance, 2001, gratuity received on retirement or termination is exempt from WHT up to the lower of:
- PKR 75,000 × completed years of service, or
- 50% of the total gratuity amount, or
- The total gratuity amount if paid from an approved gratuity fund
Gratuity above the exempt limit is included in the employee's taxable income for the year and taxed at the applicable slab rate. Octal HR automatically calculates the exempt and taxable portions and applies WHT, generating a final tax certificate (Form-16 equivalent) for the employee.
Approved Gratuity Funds
If your company has an FBR-approved gratuity fund, the entire gratuity payment is exempt from WHT. Mark this under Settings → Payroll → Gratuity Fund Type → Approved Fund to apply the correct tax treatment.
EOBI Final Benefit
On separation, the employee's EOBI registration is closed. EOBI provides the following benefits depending on the type of separation:
- Retirement (age 60M / 55F): Monthly pension based on contributions and salary history
- Invalidity pension: If the employee becomes permanently disabled
- Survivor's pension: Paid to legal heirs on death in service
- Emigrant's grant: Lump-sum for employees emigrating permanently
Octal HR generates the EOBI Form 1-A (Closing Certificate) from the separation screen, pre-filled with the employee's contribution history. Download and submit it to the EOBI branch within 30 days of the last working day.
Generating the F&F Settlement Report
Payment Timeline
Under the Payment of Wages Act, wages (including F&F) must be paid within 7 days of the last working day for establishments with fewer than 1,000 employees, and within 10 days for larger establishments. Delays attract penalties under the Act.