Cash Conversion of Unused Sick Leave (Philippines)

A complete legal guide for private- and public-sector workers

1) The big picture

In the Philippine private sector, “sick leave” (SL) is not a nationwide statutory benefit by itself. What the Labor Code does mandate for rank-and-file employees who have rendered at least one (1) year of service is the Service Incentive Leave (SIL) of 5 days with pay, which may be used for any purpose (sick or personal) and is commutable to cash if unused at year-end.

Separate, more generous company-granted sick leave (e.g., 10–15 SL days/year) exists only if provided by policy, employment contract, or CBA, or has ripened into a company practice. Whether unused SL converts to cash depends on those sources—there is no default legal requirement to encash unused SL beyond the 5-day SIL.

Bottom line: Unused SIL is cash-convertible by law; unused SL (beyond SIL) is cash-convertible only if your company rules, CBA, or a consistent practice says so.

2) Who is covered by SIL (and who may be excluded)

Covered: Rank-and-file private-sector employees who have completed at least one year of service, whether continuous or broken.
Common exclusions (per Labor Code IRR/jurisprudence):
- Employees already enjoying at least 5 days of vacation leave with pay each year (i.e., a benefit equal to or better than SIL).
- Certain field personnel and employees whose performance is unsupervised, and those paid by results (task, piece-rate, or purely commission), subject to the specific tests used in the IRR/case law.
- Employees covered by CBAs or company policies providing equivalent or superior leave benefits.

If you’re not sure whether an exclusion applies, check your contract/CBA, the IRR definitions of field personnel, and how you are actually supervised/paid in practice.

3) What the law says about cash conversion

A) SIL (5 days) — mandatory conversion

When: Typically at year-end (or upon separation).
How much: Basic daily wage × unused SIL days.
Carryover vs. commutation: The law mandates commutation if unused; the employer may allow carryover or accumulation by policy/CBA, but cannot deny commutation outright.

B) Company sick leave (beyond SIL) — policy/CBA/practice governs

If the policy/CBA says “convertible to cash”: Follow the stated rate, cap, and timing (e.g., encash up to 5 days per year; pay all upon separation).
If silent or says “non-convertible”: Generally no legal entitlement to cash conversion.
Company practice doctrine: If the employer has consistently encashed unused SL over a significant period in a uniform manner, that practice can become a demandable benefit—even if not written—until validly modified after proper notice/consultation.

4) Timing triggers for conversion

Annual year-end run
- SIL: Convert any unused portion automatically (unless carried over by rule—if carryover is allowed, ensure there’s still eventual commutation).
- Company SL: Convert only if policy/CBA/practice says so; some plans pay attendance incentives instead of pure SL encashment.
Employment separation (resignation, termination, retirement)
- SIL: Pay pro-rated SIL for the current year (where allowed) plus any unused carried balance, then encash.
- Company SL: Follow policy: some plans pay all unused SL upon separation; others forfeit.

5) How to compute

Inputs:

Employee’s basic daily wage (exclude allowances unless policy says otherwise)
Unused days eligible for conversion
Tax treatment (see §6)

Examples

SIL (unused 3 days): 3 days × ₱800/day = ₱2,400 (to payroll; typically taxable as compensation)
Company SL (policy: encash up to 5 days; unused SL = 7 days): 5 days × ₱800 = ₱4,000 paid; 2 days forfeited unless carryover applies
Separation mid-year (SIL pro-ration if company allows pro-rated accrual): Suppose SIL accrues 0.4167 day/month; after 8 months, earned ~3.33 days; if unused, encash 3.33 × ₱800 ≈ ₱2,664

Use the basic daily wage applicable at the time of commutation unless the policy fixes a different cut-off rate.

6) Tax treatment (private sector)

SIL encashment and company SL encashment are generally treated as taxable compensation income.
De minimis window: Under current BIR rules, monetized unused vacation leave of private-sector employees up to 10 days/year qualifies as de minimis (non-taxable). Sick leave encashment is not part of that de minimis list for private employees (different rules apply to government terminal leave).
Withholding: Employers should withhold the appropriate tax on encashments that do not qualify as de minimis.

Companies sometimes run “combined leave” banks; if a portion is expressly vacation leave, they may apply the 10-day de minimis to that portion.

7) Documentation you should check (or create)

Employee Handbook/Policy on leave accrual, carryover, and conversion
CBA provisions (if unionized)
Employment contract and addenda (especially for managerial/EC-level perks)
Payroll memos announcing year-end encashment schedules and cut-offs
Historical payslips showing prior encashments (to evidence company practice)
Separation clearance checklist listing leave conversion lines

8) Edge cases & special regimes

Government employees (Civil Service): The CSC grants 15 VL + 15 SL annually, cumulative, with monetization allowed subject to rules; upon separation/retirement, terminal leave benefits (cash value of accumulated VL/SL) are generally tax-exempt under special tax rules for government terminal leave.
Special sectors/laws: Some statutes or agency rules (e.g., for certain health workers or teachers) may recognize sector-specific leave beyond the Labor Code; conversion depends on the sector’s charter/regulations.
Attendance bonuses in lieu of SL encashment: Lawful if clearly disclosed, non-discriminatory, and not used to impair the mandatory SIL commutation.
Probationary/Project/Fixed-term employees: Still entitled to SIL after 1 year of service (continuous or broken). Company-granted SL rules apply as written.

9) How disputes typically arise—and how to win them

Common disputes

Employer did not pay unused SIL at year-end or on separation.
Employer refused to encash company-SL despite policy/CBA or years of uniform practice.
Confusion from combined leave banks (no clear split between VL and SL, or between SIL and company leaves).
Errors in rate used for conversion (e.g., excluding basic wage components that policy says to include).

Strategy

Write a formal demand to HR/Payroll citing the SIL rule and your unused balance (attach your computation and policy references).
If unresolved, file a SEnA request at the DOLE Regional/Field Office for conciliation.
If still unresolved, file a money claim with the NLRC (or invoke CBA grievance mechanisms first, if applicable).
To prove company practice, present payslips from prior years showing SL encashment for similarly situated employees, plus HR circulars.

10) Employer compliance checklist

Track SIL accrual and usage distinctly from company VL/SL.
Commute unused SIL at year-end (or permit carryover with eventual commutation).
Publish clear SL rules (accrual, proof of sickness, carryover caps, conversion, separation treatment).
Apply consistently; if revising benefits, give advance written notice and avoid diminution of vested or practiced benefits.
Withhold taxes correctly; treat de minimis vacation leave monetization separately.

11) Quick answers (FAQs)

Q: Is my employer required to pay my unused sick leave in cash? A: Only if the policy/CBA/practice says so. By law, what’s mandatory is the 5-day SIL commutation if unused.

Q: Can my employer forfeit unused SIL at year-end? A: No—unused SIL must be commuted to cash (unless a valid policy allows carryover with eventual commutation).

Q: I resigned in July. Do I get SIL pay? A: Yes, pay the unused (and where applicable, pro-rated) SIL; company SL conversion follows policy.

Q: Our handbook is silent, but we’ve been paid unused SL every December for years. A: That may be a demandable company practice; bring payslips/circulars to DOLE/NLRC if needed.

Q: Is SL encashment taxable? A: Yes, generally. Only monetized unused vacation leave up to 10 days (private sector) is de minimis and non-taxable.

12) Model clauses you’ll want to see (or negotiate)

SIL Clause (mandatory): “Employees who have rendered at least one (1) year of service are entitled to five (5) days Service Incentive Leave per year, commutable to cash if unused at year-end or upon separation.”
Company SL Clause (optional): “Employees receive 10 days sick leave annually. Unused sick leave up to 5 days is convertible to cash each December; any excess is carried over up to a maximum bank of 15 days. Unused sick leave is payable upon separation.”
Tax & computation: “Conversions shall use the employee’s basic daily wage at the time of commutation and shall be subject to applicable withholding taxes.”

13) Takeaways

SIL (5 days) is the only across-the-board legal minimum and is cash-convertible if unused.
Company SL beyond SIL is a contractual/CBA/practice matter; spell it out to avoid disputes.
Encashment timing (year-end vs. separation), carryover, and caps must be clear in writing.
Taxes matter: SL encashment is generally taxable; only limited vacation leave monetization enjoys de minimis relief.
Keep records—they decide both entitlement and amount.

If you share your handbook provision (or say it’s silent), your unused leave balance, and your daily rate, I can run the exact encashment computation and draft a one-page demand you can send to HR.