Legality of “Use-It-or-Lose-It” Leave Policies in the Philippines – A 2025 Update

1. Snapshot

Statutory annual leave in the private sector is the Service Incentive Leave (SIL) of five (5) paid days per year after one year of service (Art. 95, Labor Code). Because the Labor Code and its implementing rules expressly require conversion of any unused SIL to its cash equivalent at the end of the year or upon separation, employers may not impose a “use-it-or-lose-it” rule on those five mandatory days. (Wikipedia, OHNAP)
For any leave credits that a company gives over and above the statutory SIL—for example, a 10- or 15-day vacation leave—employers may validly introduce a use-it-or-lose-it provision, provided four conditions are met (see § 4.2 below). This has long been the stance of the Department of Labor and Employment (DOLE) and is supported by recent practitioner commentary. (Respicio & Co., RESPICIO & CO.)
Public-sector rules differ. The Civil Service Commission (CSC) requires all officials and employees who have at least 10 vacation-leave (VL) credits to go on a five-day forced leave each year; those five days are forfeited if not used, save for narrow exceptions when the agency itself cancels the leave. (Civil Service Commission, Civil Service Commission)
The Supreme Court’s landmark decision in Auto Bus Transport v. Bautista (G.R. No. 156367, 16 May 2005) underpins the rule that SIL is a statutory monetary benefit that “ripens into a demandable right” and, when unused, must be paid in cash. (LawPhil)

2. Sources of Law and Policy

Layer	Key Instruments	Core Principles
Primary legislation	Labor Code of the Philippines (Pres. Decree 442), Art. 95	Gives every employee who has rendered ≥1 year of service 5 days SIL “with pay.”
Implementing rules	Book III, Rule V, §§ 1-4 (DOLE)	SIL may be used for either sick- or vacation-leave purposes; unused balance is commutable to cash at year-end.
Administrative issuances	DOLE Handbook on Workers’ Statutory Monetary Benefits, 2024 ed.	Reiterates mandatory conversion of unused SIL and provides computation examples.
Case law	Auto Bus Transport v. Bautista (2005); later cited in Rodriguez v. Sinotrade (2020) and others	SIL is a statutory benefit that cannot be waived or forfeited; entitlement extends even to commission-based workers unless truly “field personnel.”
Public-sector rules	CSC Omnibus Rules on Leave, Rule XVI, § 25	5-day “forced leave” is forfeited if not taken in the same year, unless cancellation is agency-initiated.

3. What Is a “Use-It-or-Lose-It” Policy?

In HR practice, a use-it-or-lose-it rule simply means that leave credits expire if not availed of by a fixed cut-off date—most commonly 31 December—or after reaching a permitted carry-over limit. The question, therefore, is whether Philippine law allows an employer to set such an expiry.

4. Private-Sector Analysis

4.1 Statutory SIL (the first 5 days)

Absolute prohibition on forfeiture. The Labor Code, implementing rules, and DOLE handbook all provide that unused SIL “is commutable to its money equivalent” at the end of every year. Any company policy, contract, or waiver that causes forfeiture of these five days is void for being contrary to labor standards. (OHNAP)
Supreme Court confirmation. In Auto Bus, the Court held that an employee’s SIL credits “accrue and are demandable after one year of service”; non-payment constitutes an illegal deduction from wages. (LawPhil)
Tax treatment. Cash conversion of unused SIL is treated as additional compensation subject to withholding tax unless the total 13th-month and other benefits remain within the annual P90,000 tax-exempt ceiling under the NIRC.

4.2 Company-Granted Leave over the 5-Day Minimum

The Labor Code is silent on vacation, wellness, birthday, or similar leaves that an employer voluntarily grants. Under general principles of contract and management prerogative—tempered by the non-diminution of benefits rule—the following applies:

Condition	Explanation	Authority
(1) Express, written policy	The forfeiture rule must be clearly stated in the employee handbook, CBA, or individual contract circulated before the leave year begins.	DOLE commentary on valid company policy (Respicio & Co.)
(2) Reasonable opportunity to take leave	Employees must be able to schedule their days off without undue restrictions (e.g., blackout periods should be justified by genuine business necessity).	Fair-standards principle; DOLE advice (RESPICIO & CO.)
(3) Non-interference with the 5-day SIL	A policy must explicitly reserve the statutory SIL conversion. Mixing SIL with company leaves then forfeiting the combined balance is unlawful.	Art. 95, Labor Code
(4) Consistency / non-discrimination	Implementation must be uniform; selective waiver or arbitrary application can amount to unfair labor practice.	Art. 109, Labor Code (equal work equal pay)

Practical tip: Many Philippine employers adopt a hybrid: allow carry-over of 5-10 days into the next year but cap the total bank (e.g., 30 days); anything beyond the cap cashes out automatically to avoid ballooning liabilities.

4.3 Separation from Employment

Unused statutory SIL must always be paid upon resignation, retirement, or termination. Whether unused extra leave is payable depends on the same company rules; a clear forfeiture-on-separation clause is generally upheld, as recent practitioner analyses note. (Respicio & Co.)

5. Public-Sector Nuances

Five-Day Forced Leave. Under § 25, Rule XVI of the CSC Omnibus Rules on Leave, officials and employees with ≥10 VL credits must go on a minimum of five working days of VL each year. If not taken, those five days are forfeited (they cannot be converted to cash or carried over) unless the agency itself cancels the scheduled leave “in the exigency of service.” (Civil Service Commission, Civil Service Commission)
Other leave credits (e.g., the remaining VL/Sick Leave balance) continue to accumulate and are convertible to cash upon retirement or separation, subject to CSC monetization rules.

6. Interaction with Other Mandatory Leaves

Leave Type	Governing Law	Forfeiture Allowed?	Notes
Maternity Leave (105 days)	R.A. 11210	✗	Benefits are a social-security entitlement; unused balance is not an issue.
Paternity Leave (7 days)	R.A. 8187	✗	Must be used within 60 days of childbirth; otherwise lapses without pay-out.
Solo-Parent Leave (7 days)	R.A. 8972	✗	Non-cumulative and non-convertible if unused within the year.
Violence-Against-Women & Children (VAWC) Leave (10 days)	R.A. 9262	✗	Non-cumulative.
Expanded Parental Leave for Persons with Disabilities (Up to 15 days)	R.A. 10754	✗	Non-convertible.

Thus, the use-it-or-lose-it concept is inapplicable to these special-purpose leaves because the statutes themselves already set a limited window for use and expressly forbid conversion or accumulation.

7. Compliance Checklist for Employers (Private Sector)

Map your leave matrix: segregate statutory SIL, special statutory leaves, and discretionary company leaves.
Draft or update the leave policy: spell out (a) accrual, (b) scheduling procedure, (c) carry-over limits, (d) forfeiture mechanics, and (e) conversion rules.
Communicate and train: disseminate via handbook, onboarding, and annual reminders.
Track balances in real time: use HRIS or spreadsheet trackers; flag employees approaching forfeiture to satisfy the “reasonable opportunity” test.
Year-end reconciliation: convert unused SIL automatically; implement forfeiture or carry-over for discretionary leave per policy.
Document consent: secure signatures or digital acknowledgments for policy receipt.
Audit for non-diminution issues when changing an existing policy—grandfather earlier accruals or pay them out.

8. Remedies for Employees

Conciliation at DOLE-NCMB for unpaid SIL or illegal forfeiture.
Money claim before the NLRC within three (3) years from the cause of action (Art. 306, Labor Code), following Auto Bus on accrual.
Small-claim action (if ≤ P200,000) in the regional DOLE office under the Single-Entry Approach (SEnA) Rules.

Penalties for violators include payment of the monetary equivalent of lost benefits plus legal interest (currently 6 % per annum) and, in serious cases, criminal sanctions under Art. 303-305 of the Labor Code.

9. Frequently Asked Questions

Question	Short Answer
Can we require employees to finish all leave by 30 November to avoid year-end crunch?	Yes—for anything beyond the 5-day SIL—so long as staff were informed early, had reasonable scheduling latitude, and the policy is applied even-handedly.
May unused SIL be offset against absences without pay earlier in the year?	Yes; the regulations allow SIL to be “used for sick or vacation purposes,” and offsetting is equivalent to using it.
What if we convert unused vacation leave to cash instead of forfeiting—does that breach the use-it-or-lose-it clause?	No. Conversion is more favorable to labor and therefore valid; the non-diminution rule works only one way.
Does the 5-year prescriptive period under Article 306 apply to SIL?	No. In Auto Bus, the Court said the three-year wage-claim prescriptive period governs SIL because it is “in the nature of wages.”

10. Conclusion

In Philippine labor law, use-it-or-lose-it is fundamentally incompatible with the mandatory 5-day Service Incentive Leave, whose monetary value cannot be forfeited. Beyond that statutory floor, however, employers remain free to design competitive leave programs, including reasonable expiration rules, so long as they are clear, consistently applied, and respectful of workers’ statutory minima and contractual rights. Public-sector employees, conversely, face a hard use-it-or-lose-it rule for their 5-day forced leave under CSC regulations.

For HR and legal teams, the dual tasks are policy hygiene (drafting and disclosure) and process discipline (accurate tracking and year-end reconciliation). When done right, a well-crafted use-it-or-lose-it scheme can promote work-life balance without exposing the organization to costly wage claims.

Last updated: 27 May 2025