Cash Conversion of Unused Vacation Leave & Non-Working Holidays (Philippines) — Complete Legal Guide

Philippine private-sector focus. This explains when unused vacation leave (VL) must or may be converted to cash, how non-working holidays affect accrual, availment, and conversion, and how to compute payouts for monthly-paid vs daily-paid employees. Includes the mandatory Service Incentive Leave (SIL) rule, tax, separation, sample computations, and model policy language. This is general guidance, not legal advice for specific facts.

1) What’s mandatory vs. company-policy

1.1 Mandatory benefit: Service Incentive Leave (SIL)

At least 5 days paid leave per year after one (1) year of service for employees not exempt (common exemptions: field personnel whose time is unsupervised, managerial staff, those already enjoying equivalent or better leave by CBA/company policy, and certain specific sectors).
Any unused SIL at year-end is commutable to its cash equivalent.
SIL may be availed as vacation or sick leave (unless your policy distinguishes them).
If an employee separates mid-year, the earned but unused SIL fraction must be paid out.

1.2 Beyond the minimum: Company-granted VL

Many employers grant VL in excess of SIL (e.g., 10–15 days/year).
Cash conversion of the excess is policy-driven (CBA, handbook, practice). Policies typically specify:
- When conversion happens (e.g., year-end, anniversary month, or upon separation only);
- How much is convertible (all, a cap, or none);
- Forfeiture rules (e.g., unused VL expires if not used by year-end except SIL, which is always commutable).

Non-diminution: If you consistently cashed out VL historically, you may be barred from unilaterally withdrawing that practice.

2) Do non-working holidays affect VL accrual, charge, and conversion?

2.1 When you take VL that spans holidays

Regular holidays falling inside an approved VL should not be charged against the VL balance (since they are paid rest days by law).
Special non-working days: charging depends on policy. Many employers do not charge them either, but they can, because “no work, no pay” applies by default on special days unless the company grants pay.

Practical rule of thumb for charging:

Count only actual working days you would have worked but for the vacation. Exclude weekly rest days, regular holidays, and any special days your policy exempts.

2.2 Do holidays increase the cash value of unused VL?

No. Conversion uses your basic daily rate (BDR) or monthly equivalent at the time of conversion. You don’t add holiday premium rates unless your CBA/policy explicitly says so.
For monthly-paid employees, regular holidays are already paid in the monthly salary; they don’t increase the cash value of a leave day.

3) Who gets paid for holidays (context you’ll need)

Regular holiday (e.g., New Year’s Day, Independence Day): No work, still paid (subject to usual present/paid on working day before/after rules in some policies). Work on a regular holiday earns premium pay per law/policy.
Special non-working day (e.g., EDSA People Power Anniversary, All Saints’ Day): No work, no pay by default, unless your CBA/policy/practice grants pay. Work may earn premium per law/policy.

This matters because regular holidays inside a VL aren’t chargeable and don’t affect cash conversion; special days follow company policy.

4) When cash conversion is due

Mandatory:
- Unused SIL (5 days) at year-end;
- All earned, unused, and convertible leave upon separation (resignation, redundancy, termination) including the pro-rated SIL.
Policy-based:
- Year-end cashout of excess VL (e.g., “cash out up to 10 days, carryover up to 5”);
- Anniversary cashout;
- “Convert-on-demand” (less common).

Prescription: Money claims generally prescribe after 3 years from when the benefit should have been paid (e.g., year-end or separation date).

5) Computation rules

5.1 Define “One day of leave”

Use the Basic Daily Rate (BDR)—basic wage only, excluding allowances not integrated into wage, overtime, night differential, holiday premiums, and discretionary bonuses, unless your CBA/policy states otherwise.

5.2 Monthly-paid employees

BDR (for leave conversion) = Monthly basic ÷ Monthly divisor used consistently in payroll (common: 26, 22, or 30 depending on pay scheme).
Use the same divisor you use for salary deductions/leave credits to avoid disputes.

Example A (monthly-paid):

Monthly basic: ₱30,000; divisor 26 → BDR = ₱30,000 ÷ 26 = ₱1,153.85
Unused VL to convert: 8 days → ₱1,153.85 × 8 = ₱9,230.80

Regular holidays inside that period don’t change the conversion figure.

5.3 Daily-paid employees

BDR = the current daily rate on the conversion date (or the governing rate per policy/CBA).
If your shop pays special days even if unworked (by policy), that does not increase the cash value per leave day unless policy says otherwise.

Example B (daily-paid):

Daily rate: ₱700
Unused SIL: 3 days → ₱2,100
Unused company VL: 4 days (policy allows conversion) → ₱2,800
Total cashout = ₱4,900

5.4 Proration on separation

Earn accruals pro rata up to the last day worked (or effectivity).
All earned, unused, and convertible leave is paid with final pay (commonly within 30 days absent disputes, or sooner if your policy commits to a shorter timeline).

6) Tax treatment (quick, practical)

For rank-and-file employees, monetized unused VL of up to 10 days per year is typically treated as a de minimis benefit (non-taxable) if it meets BIR rules; any excess is taxable as compensation.
For managerial/supervisory employees, monetized VL is generally taxable, but may fall under the “13th month and other benefits” ceiling (amounts within the annual exemption cap are non-taxable; excess is taxable).
SIL cash conversion follows the same tax logic as VL (it is monetized leave).

Always align with your payroll’s documented tax treatment and keep a memo from Finance/Tax to support how you applied the rules.

7) Edge cases & how to handle them

Holiday falls during approved VL:
- Regular holiday → do not charge against VL.
- Special day → follow policy (charge or not).
- Conversion later uses the same BDR regardless.
Forced/Block leave at year-end:
- Allowed if reasonable and policy-based, but cannot defeat the SIL commutation right.
Carryover vs cashout caps:
- You can cap carryover and cashout for excess VL, but not for SIL (always commutable if unused).
Different divisors in the company:
- Publish and apply one divisor per pay scheme (e.g., 26 for semi-monthly 6-day operations; 22 for 5-day workweeks; 30 for administrative computations). Be consistent.
Allowances regularly paid:
- If an allowance is wage-integrated by practice/CBA (fixed, regular, tied to time worked), you may need to include it when computing BDR for conversion. Discretionary/non-integrated allowances are excluded.
Attendance rules before/after holidays:
- Some policies condition holiday pay on being present/paid on the working day immediately before and after a holiday. These do not apply to leave conversion (but they affect whether a holiday is paid if the employee is absent without VL).
Probationary employees:
- They earn SIL after one year of service. Company-granted VL can start earlier if policy allows; conversion is still policy-based for the excess.

8) Year-end & separation checklists

For HR/Payroll

Identify SIL-eligible employees and compute earned SIL.
Apply forfeiture/carryover rules only to excess VL, never to SIL.
Use documented divisors and BDR; include wage-integrated allowances if applicable.
Confirm tax handling (de minimis / other-benefits cap).
Pay with year-end or final pay; issue a breakdown sheet.

For Employees

Check your handbook/CBA for conversion caps and carryover.
Verify SIL entitlement after 1 year of service.
If separating, request the leave ledger and conversion worksheet with divisors shown.

9) Sample policy language (plug-and-play)

9.1 Charging rule across holidays

“Approved vacation leave is charged only against working days. Regular holidays within a vacation period are not charged. Special non-working days are not charged unless otherwise announced; the Company may, by notice, designate certain special days as chargeable. Weekly rest days are never chargeable.”

9.2 Conversion & carryover

“Unused SIL at year-end shall be commuted to cash at the employee’s basic daily rate. For Company VL in excess of SIL, employees may carry over up to [X] days to the next year and convert up to [Y] days to cash; any remainder is forfeited. Upon separation, all earned, unused, and convertible leave (including pro-rated SIL) is paid out with final pay.”

9.3 Computation

“Cash conversion uses the Basic Daily Rate (monthly basic ÷ divisor of [26/22/30] for monthly-paid; current daily rate for daily-paid). Overtime, night differential, holiday premiums, and non-integrated allowances are excluded unless a CBA/policy states otherwise.”

9.4 Tax

“Monetized leave follows applicable tax rules (e.g., de minimis for rank-and-file up to 10 days; amounts beyond caps are taxable). Finance shall issue implementing tax guidance annually.”

10) Worked scenarios (holiday overlaps)

Scenario A — Monthly-paid, 5-day workweek, year-end cashout

Monthly basic ₱40,000; divisor 22 → BDR ₱1,818.18
Unused VL: 7 days (incl. 1 day that would have been a regular holiday inside a planned VL week)
Policy: Regular holidays not chargeable; special days not chargeable
Chargeable unused remains 7 (you didn’t actually take VL), so Cashout = ₱12,727.26

Scenario B — Daily-paid, separation

Daily rate ₱800; Unused: SIL 2 + Company VL 5 (convertible) → 7 days
Final pay leave conversion = ₱800 × 7 = ₱5,600 (no holiday premium applied)

Scenario C — Allowance integration

Monthly basic ₱30,000 + fixed transport allowance ₱2,000 (policy says wage-integrated)
Divisor 26 → BDR = (₱32,000 ÷ 26) = ₱1,230.77
Convert 10 days → ₱12,307.70

11) FAQs (fast answers)

Is conversion of unused VL required by law? Only the 5-day SIL has a statutory cashout at year-end. Extra VL conversion is policy/CBA-based.
Do regular holidays increase my leave cash value? No. Conversion uses BDR, not holiday premiums.
If a regular holiday falls during my vacation, is it charged against my VL? No. Regular holidays within VL are not chargeable.
Are special non-working days charged? Depends on policy. Many employers don’t charge; some do.
How soon must conversion be paid on separation? Good practice (and common DOLE guidance) is within 30 days absent disputes; follow your CBA/policy if it’s stricter.
Is monetized VL taxable? For rank-and-file, up to 10 days may be de minimis; excess is taxable. Managers typically taxable, subject to the other-benefits annual cap.

Key takeaways

SIL (5 days): always commutable if unused.
Extra VL: conversion depends on policy/CBA—but non-diminution protects established cashout practices.
Regular holidays: don’t charge them against VL; they don’t add to cash value.
Use consistent divisors/BDR, document allowance integration, and apply one rulebook across payroll and HR.

If you’d like, I can tailor a 1-page leave-conversion policy and a payroll calculator (with divisors and holiday logic) to match your company’s scheme.