Payment of Accrued Unused Leaves Upon Company Closure under a Collective Bargaining Agreement (CBA) in the Philippines
1. Overview
When a Philippine employer permanently closes its business, two bodies of law converge on employees’ “final pay”:
- Statutory labor standards under the Labor Code (P.D. 442, as amended) and related issuances; and
- Contractual/voluntary benefits embedded in the Collective Bargaining Agreement (CBA) or long‑standing company practice.
Accrued unused leave credits can arise from both regimes, and each follows distinct rules on convertibility to cash and enforceability.
2. Statutory Leaves vs. CBA/Voluntary Leaves
| Category | Source | Number of days | Automatic cash conversion? | Notes |
|---|---|---|---|---|
| Service Incentive Leave (SIL) | Art. 95, Labor Code | 5 days per year | Yes. Employer must pay cash equivalent for unused SIL upon termination for any reason, including closure. | Applies only if employee worked ≥ 1 year and is not exempt (field personnel, etc.). |
| Maternity / Paternity / Solo‑parent / Special Leaves (e.g., VAWC leave) | Special laws (RA 11210, RA 8187, etc.) | Fixed per statute | No cash conversion. These are avail‑or‑lose. | |
| Leaves granted by CBA, policy, or practice (vacation, sick, emergency, birthday leave, etc.) | Contractual | Varies | Depends on the CBA or practice. If the CBA expressly states “convertible to cash upon separation,” it becomes a demandable obligation; if silent, conversion hinges on proven company practice. | Company cannot withdraw a benefit already crystalized into practice (Art. 100, non‑diminution). |
3. Closure/Cessation of Business and Final Pay
Art. 298 [283] Labor Code permits termination due to closure or cessation of business with at least 30 days’ notice to DOLE and the workers. Employees are entitled to:
Separation pay – ½ month pay per year of service unless closure is due to serious business losses (to be proven).
Final pay – which, under DOLE Labor Advisory 06‑20 (Final Pay Advisory), must include:
- Unpaid salaries/wages;
- Cash value of unused SIL;
- Cash value of other convertible leaves (if any, per CBA/policy);
- Pro‑rated 13th‑month pay;
- Other monetary benefits due (e.g., retirement pay, bonuses already earned).
DOLE expects release within 30 calendar days from effectivity of separation, unless a more favorable CBA/company rule exists.
4. Role of the CBA in Monetizing Leaves
Express provisions rule. Typical clauses:
“All unused vacation and sick leave credits shall be converted to cash upon separation for any cause, including closure.”
Such language is binding under Art. 1700 (management‑labor contracts are imbued with public interest) and Art. 1159 Civil Code (obligations arising from contracts have the force of law). Non‑payment constitutes illegal deduction and unfair labor practice.
Silence of the CBA.
- The union must prove a consistent, deliberate practice of monetizing the leaves at separation to invoke non‑diminution of benefits (Art. 100).
- In absence of practice, employer may validly decline payment for unused CBA leaves, though it must still pay unused SIL.
Renegotiation / closure settlement. Unions sometimes negotiate a “closure package” that lumps separation pay, monetized leaves, and other gratuities into a quitclaim. DOLE and NLRC generally honor such quits if:
- Payment is free and voluntary;
- Consideration is reasonable (≥ statutory minima);
- Employee signs with full understanding (see Periquet v. NLRC, G.R. L‑97790, 1992).
5. Key Jurisprudence
| Case | G.R. No. / Date | Principle Relevant to Unused Leave Pay |
|---|---|---|
| Auto Bus Transport Systems, Inc. v. Bautista | 156367, May 16 2005 | A benefit becomes part of wage if consistently and deliberately given. |
| Manila Hotel Corp. v. NLRC | 12292‑93, April 16 1988 | Employer liable for accrued vacation leave because long practice ripened into obligation. |
| Insular Life Assurance Co. v. NLRC | 84484‑85, November 15 1989 | Conversion of sick leaves required where policy and past practice established it. |
| Equitable Banking Corp. v. Sadac | 164772, June 8 2006 | Non‑diminution applies even when company incurs losses; practice cannot be withdrawn unilaterally. |
| Mabeza v. NLRC (Hotel Supreme) | 118506, April 18 1997 | Quitclaim does not bar claims for benefits not specifically waived or of which employee was unaware. |
6. Taxation
- Separation pay due to closure and monetized leave credits are both tax‑exempt under Sec. 32(B)(6)(b) of the National Internal Revenue Code, because termination is beyond employee’s control.
- Employer must still withhold taxes on other regular earnings included in final pay (e.g., unpaid salary), and issue BIR Form 2316.
7. Procedural Checklist for Compliance
| Step | Responsible | Timing |
|---|---|---|
| Serve 30‑day written notice of closure to DOLE Regional Office and to each worker (Art. 298). | Employer | ≥ 30 days before effectivity |
| Compute: (a) separation pay; (b) unused SIL; (c) unused CBA leaves if convertible; (d) pro‑rated 13th‑month; (e) other earned pay. | HR/Finance | Before last working day |
| Release full final pay and issue Certificate of Employment & BIR 2316. | Employer | Within 30 days or shorter period agreed in CBA/company rule |
| Secure clearances; require employees to sign quitclaim only after actual payment. | Employer | On release date |
| Report Termination (RKS Form 5) to DOLE for each affected employee. | Employer | Within 30 days after separation |
8. Union and Employee Strategies
Audit the CBA early for explicit monetization clauses; propose insertion during renegotiation if absent.
Document the practice—pay slips, HR memos, A/R forms—to establish a consistent history of conversion.
Negotiate a closure package that locks in:
- Higher separation pay (e.g., 1 month per year of service);
- Guaranteed cash conversion of all leave credits;
- Pro‑rated allowances, Christmas bonus, profit‑sharing;
- Outplacement or training assistance.
File complaints with the DOLE Regional Office or NLRC within four (4) years from accrual if employer fails to pay.
9. Employer Best Practices
- Integrate leave‑conversion language into CBA to avoid ambiguity.
- Maintain leave ledgers and automate accrual tracking.
- Communicate the closure plan and detailed pay computations in writing to each employee.
- Set aside reserves for leave monetization in financial statements to pre‑empt disputes over “serious losses.”
10. Conclusion
Upon business closure in the Philippines, payment of accrued unused leaves hinges on (a) statutory rights (principally the 5‑day SIL) and (b) the binding force of the CBA or company practice. Employers must honor clear contractual clauses and long‑established benefits; unions should preserve or negotiate monetization provisions. Proper planning, transparent computation, and adherence to DOLE guidelines safeguard both sides from costly labor claims and ensure a dignified termination process.