1) Start With the Key Distinction: “Vacation Leave” vs the Statutory Minimum

In the private sector, Philippine law does not generally mandate “vacation leave” by name. What the Labor Code mandates (for most employees) is Service Incentive Leave (SIL): 5 days with pay per year after meeting eligibility.

Most company “Vacation Leave (VL)” programs are therefore either:

the company’s way of complying with the 5-day SIL requirement (by granting at least 5 paid leave days), plus possibly additional days as a benefit; or
an extra benefit on top of the 5-day minimum.

This distinction determines whether a “use-it-or-lose-it” rule (forfeiture) is lawful.

2) The Baseline Rule: The Statutory 5-Day SIL Is Cash-Convertible If Unused

A. SIL entitlement (private sector)

As a general rule, an employee who has rendered at least one year of service becomes entitled to 5 days SIL with pay each year (subject to coverage/exemptions below).

B. Cash conversion is part of the SIL concept

If SIL is unused, it is commutable to its cash equivalent. In practice, this means that the statutory portion of leave should not simply “expire into nothing” if the employee did not use it—there is a right to a money equivalent for the unused statutory minimum, either at year-end (common practice) and/or upon separation (final pay), depending on how the employer administers it.

Core takeaway: A policy that says “unused leave is forfeited and will not be paid” is legally problematic to the extent it eliminates the cash conversion of the statutory 5-day SIL (or the portion of company leave that stands in place of SIL).

3) Who Is Covered (and Common Exemptions)

SIL generally applies to rank-and-file employees in the private sector, but traditional implementing rules/exclusions commonly include:

Government employees (covered by civil service rules, not SIL)
Managerial employees (and certain officers with managerial prerogatives)
Field personnel whose actual hours of work cannot be determined with reasonable certainty (context-specific)
Persons paid purely by results (piece-rate/task-based) in some settings, depending on control and time determinability
Employees who already receive at least 5 days leave with pay (the employer is treated as having met the SIL minimum through that existing benefit)

The details can be technical and fact-driven, especially for “field personnel” and “paid by results” classifications.

4) So Is “Forfeiture of Unused Vacation Leave” Legal?

Short answer:

For the statutory minimum (SIL or its equivalent): Pure forfeiture is not legal if it deprives the employee of the cash equivalent of unused statutory leave.
For leave days beyond the statutory minimum: Forfeiture can be legal if the extra leave is a company-granted benefit and the forfeiture/expiry rule is clearly stated, reasonable, and not prohibited by a CBA/contract/practice.

A. If your company grants 5+ days “Vacation Leave,” those first 5 days often function as SIL

Many employers grant 10–15 VL days and treat that as compliance with SIL. In that common setup, the statutory component (the “SIL-equivalent” portion) should still carry the cash-conversion protection if unused.

A “zero encashment, full expiry” rule risks violating SIL—unless the employer ensures that the statutory minimum is satisfied in a compliant way (e.g., by paying the cash equivalent for the SIL-equivalent portion or requiring employees to actually take the leave with pay instead of letting it lapse).

B. The “extra” VL days are generally policy-driven

For VL days above the statutory minimum, the employer generally has more freedom to design rules such as:

expiry at year-end (“use-it-or-lose-it”),
carry-over allowed but capped (e.g., carry up to 5 days),
carry-over allowed but with an expiration date (e.g., use carried days by March 31),
no cash conversion (VL must be used as time off, not monetized),
cash conversion only at separation (final pay), not annually.

These can be lawful if clearly communicated and consistently applied—but they must still respect (1) the statutory minimum, (2) the contract/CBA, and (3) the non-diminution rule.

5) Limits on Employer Rules: Reasonableness, Due Process, and Non-Diminution

Even for company-granted VL beyond SIL, “forfeiture” rules can become vulnerable when they are unfairly implemented.

A. Reasonable scheduling rules are allowed

Employers may impose reasonable controls, such as:

advance notice requirements,
blackout dates for peak operations,
approval workflows,
minimum staffing constraints,
forced leave schedules.

B. But employers should not weaponize rules to prevent usage and then forfeit

A leave program looks abusive (and more challengeable) when:

leave requests are routinely denied without valid operational reasons,
employees are effectively prevented from using leave,
management delays approval until the leave “expires,”
leave is forfeited despite the employee’s documented attempts to use it.

If the employer’s conduct makes the benefit illusory, employees have a stronger argument for payment or restoration—especially for the statutory portion.

C. Non-diminution of benefits (Article 100 concept)

If an employer has an established practice of:

allowing carry-over,
paying cash conversion annually,
paying unused VL at resignation,
or otherwise treating unused leave as monetizable,

then a later unilateral change that reduces the benefit can be attacked as diminution of benefits, unless properly justified and lawfully implemented. Company practice and consistency matter.

D. CBA and contract trump policy memos

If a collective bargaining agreement or individual contract specifies that unused leave is convertible, cumulative, or not forfeitable, the employer cannot override it via handbook changes.

6) What Happens When You Resign or Are Terminated?

A. Unused SIL should be included in final pay (if not already paid)

Upon separation, employees commonly claim the cash equivalent of unused SIL (up to what accrued and remains unused), unless the employer already paid it out at year-end or the employee already used it.

B. Unused VL beyond SIL depends on the employer’s rules

Whether unused VL is paid out in the final pay depends on:

the company policy/handbook,
employment contract,
CBA provisions,
established company practice.

Some companies pay all earned-but-unused VL at separation; others pay none (except the SIL-equivalent portion), and require VL to be used as time-off only.

7) How to Compute the Cash Equivalent (General Approach)

A. SIL conversion

A common approach is:

Cash equivalent = Daily rate × Number of unused SIL days

“Daily rate” usually refers to the employee’s basic daily wage rate used for payroll (excluding discretionary bonuses; treatment of allowances varies depending on whether they are integrated into the wage).

B. Divisors (why this can vary)

Monthly-paid employees’ daily rate is often derived using a payroll divisor (commonly 26 for many 6-day work arrangements, though practices vary by workweek structure and company payroll method). Because payroll practices differ, disputes sometimes arise on the correct divisor.

8) Tax Notes (Often Overlooked)

Monetized/converted leave is generally treated as compensation for tax purposes, subject to withholding rules and possible exclusions under de minimis/benefits regulations (which depend on the type of leave, employer sector, and limits). Company payroll policies typically implement the applicable tax treatment.

9) Special Case: Government Employees (Civil Service Rules, Not SIL)

For government personnel, leave benefits are governed by Civil Service Commission rules and agency regulations, not the Labor Code SIL framework. Government vacation leave credits are typically cumulative and may be monetized subject to CSC policies and limits. “Forfeiture” is not usually the default concept the same way it appears in private handbooks; instead, accrual, monetization, and maximum accumulation rules (if any) are controlled by CSC issuances and agency-specific guidelines.

10) Practical Scenarios and Legal Answers

Scenario 1: “Our handbook says unused VL expires at year-end and is not convertible to cash.”

Legal risk: If that VL is the company’s compliance vehicle for the statutory 5-day SIL, a total no-cash, full expiry scheme can violate SIL principles.
Likely compliant structure: Expiry can apply to the excess over the statutory minimum, while the statutory portion is either (a) monetized if unused, or (b) managed through mandatory usage with pay.

Scenario 2: “We get 15 VL days; the company allows carry-over of 5 and forfeits the rest.”

Generally lawful for the excess VL, assuming clear policy and consistent application, while still protecting the statutory portion.

Scenario 3: “My manager never approves leave, then HR says my leave expired.”

This strengthens claims that the rule is being applied unfairly. Documented requests and denials matter. At minimum, the statutory component should not be lost without its cash equivalent.

Scenario 4: “I resigned; HR refuses to pay my unused leave.”

Unused SIL (or SIL-equivalent portion) is the strongest claim.
Additional VL depends on policy/contract/CBA/practice.

11) How Employees Enforce Rights (Typical Philippine Route)

Gather documents: handbook/leave policy, contract, payslips, leave ledger, approvals/denials, email trails, resignation/termination papers.
Make a written demand: specify the number of unused days, the basis (SIL-equivalent + policy/CBA), and computation.
Labor dispute processes: Many wage/benefit disputes pass through conciliation-mediation mechanisms before adjudication; money claims and labor standards disputes may proceed through DOLE/NLRC pathways depending on the issue and employment relationship status.

12) Compliance Checklist for Employers (What “Legal” Usually Looks Like)

A leave program is typically safer when it:

explicitly identifies what portion satisfies the 5-day SIL requirement,
ensures the SIL-equivalent portion is used with pay or paid in cash if unused,
states clear, reasonable rules for excess VL (carry-over limits, expiry dates, approval standards),
applies rules consistently (no selective denials to trigger forfeiture),
respects CBA/contract commitments and avoids unilateral changes that trigger diminution issues.

Bottom Line

Forfeiture of unused vacation leave can be legal in the Philippines only to the extent it applies to leave days that are purely employer-granted beyond the statutory minimum and subject to valid policy/contract terms. What is generally not legal is a policy or practice that effectively forfeits the employee’s statutory 5-day SIL (or its equivalent) without providing the required cash equivalent when unused.