Prorating Service Incentive Leave in Philippine Labor Law

Executive summary

Under the Labor Code, rank-and-file employees who have rendered at least one (1) year of service are entitled to five (5) days of service incentive leave (SIL) with pay per year. “One year of service” means 12 months of employment, continuous or broken. As a rule, no SIL is due before the first 12 months, so there is nothing to prorate for that initial period unless a more generous company policy or CBA says otherwise. After an employee becomes entitled, employers commonly prorate SIL when the employee separates mid-year or starts mid-year in a subsequent year, even though the statute is silent on the exact proration formula; this practice aligns with the purpose of SIL and long-standing DOLE guidance and case law principles on commutation and employer record-keeping.

Below is a practical, everything-you-need treatment of the topic.

Legal foundation and coverage

Core rule

Entitlement: Five (5) days SIL with pay per year for an employee who has served at least one year.
Purpose: A minimum benefit for rest or personal time—not limited to sickness.
Commutation: Unused SIL is commutable to its cash equivalent at the end of the year or upon separation, based on the employee’s latest regular wage.

Who is covered

SIL generally applies to rank-and-file employees in the private sector.

Statutory/IRR exemptions (no SIL required)

Employees already enjoying vacation leave with pay of at least 5 days per year (whether by policy or CBA).
Employees of establishments that regularly employ less than 10 workers.
Employees of establishments exempted by the Secretary of Labor due to financial condition or business nature.
Field personnel and other employees whose performance is unsupervised, and those paid by results (e.g., piece-rate, task or contract basis, or purely commission-based), and others similarly situated.
Managerial employees are generally outside the scope because SIL is a rank-and-file minimum benefit.

Note: If any exemption no longer applies (e.g., workforce grows to 10+), SIL coverage follows prospectively.

Accrual mechanics

Vesting point: SIL vests after the first 12 months of employment. Before that, no legal entitlement accrues—hence no mandatory proration for months 1–12.
Annual grant thereafter: After vesting, the employee is entitled to 5 days SIL each year of continued employment.
Counting “one year of service”: The law looks at months actually served in any 12-month window, whether continuous or broken (e.g., seasonal or project workers who return can meet the “one year” threshold over time unless exempt by nature of pay/work).

Prorating: When it is (and isn’t) legally required

Not required before the first year

If an employee resigns or is terminated at, say, month 8, there is no SIL to prorate—the employee has not yet reached the one-year vesting requirement.
Employers may voluntarily grant pro-rated leave via policy/CBA, but that is contractual, not statutory.

Commonly applied after vesting (post-year-1)

Although the Code doesn’t spell out a formula, two routine, DOLE-consistent practices have emerged:

Pro-rata on separation mid-year. If an employee who has already vested leaves in the middle of a year, pay:
- Unused carry-over (if your policy allows carryover) plus
- Pro-rated current-year SIL earned up to the separation month, minus any SIL already used that year.
Pro-rata on first year’s anniversary in a subsequent year. Once the employee passes the first-year mark (e.g., anniversary falls in April), employers may:
- Grant the full 5 days at the start of each calendar year (and claw back or offset if separation occurs early), or
- Accrue monthly and allow pro-rated use (administratively cleaner for separations and payroll).

Either approach is acceptable if clearly and consistently applied and no less generous than the statutory minimum.

Practical proration formulas

Pick and state one method in your policy; apply it consistently.

A. Monthly accrual method (most transparent)

Accrual rate: 5 days ÷ 12 months = 0.4167 day per month
Prorated SIL earned for the year to date: 0.4167 × months served in the current calendar year
Separation pay-out for SIL: Prorated SIL earned – SIL used = Unused SIL to be paid, valued at latest daily rate.

Example: Employee vested last year. Separates on August 15 having used 1 day in March. Months served Jan–Aug = 8 → Earned 3.3336 days ≈ 3.33 days. Unused = 3.33 – 1.00 = 2.33 days → Pay 2.33 × latest daily wage.

B. Half-month rounding method (simpler to administer)

Credit 0.5 day for each completed month, and 0.25 day for a half month or more.
Sum credits through separation month, less days used.

C. Anniversary-based full grant with claw-back (grant 5, offset if needed)

Grant 5 days at the start of the year to all vested employees.
If the employee separates before completing the year, compute the prorated earned (Method A or B) and offset excess from final pay.

Make sure this is expressly authorized in the employment contract/policy and remains compliant with no-offset rules for statutory benefits.

Special scenarios

1) New hire mid-year; completes first year next year

Year 1 (months 1–12): No legal SIL yet; optional company-provided prorated leave is allowed.
On the 12th month anniversary: Employee becomes entitled; some employers grant a full 5 days for the remainder of that calendar year; others prorate from the anniversary month. Either is fine if the policy is clear and consistent.

2) Carryover versus “use-it-or-cash-it”

The law requires commutation of unused SIL at year-end or at separation, not carryover.
You may allow carryover (e.g., allow unused SIL to roll into vacation leave banks) in addition to or instead of year-end cash-out, provided the employee can still monetize the statutory minimum if unused.

3) Partial absences / tardiness

SIL is leave with pay, not a time-bank for offsets of undertime or tardiness unless your policy permits conversion of partial hours to SIL in fractions (e.g., 0.5 day).

4) Suspensions, no-work-no-pay days, and breaks in service

These do not erase prior service already credited toward the first 12-month vesting.
For proration after vesting, decide in policy whether unpaid months count toward the monthly accrual (most employers still count calendar months in active status, regardless of actual paid days).

5) Change in employment status

Promotion to managerial: You may prospectively cease SIL entitlement (managerial roles are outside SIL), but previously earned/unused SIL must be paid or honored.
Transfer to a “paid by results” role: If the role now falls under an exemption, entitlement stops prospectively; previously earned/unused SIL remains payable.

Computation notes

Daily rate to use: Employee’s latest regular wage (basic daily rate), exclusive of allowances not integrated into basic pay, unless your policy or CBA is more favorable.
Tax treatment (general guidance): Monetized leave is generally taxable compensation, but de minimis rules may exclude part of monetized unused vacation leave (private sector) up to a cap. Coordinate with payroll/tax advisors to apply the current BIR rules correctly.
Rounding: State your rounding rule (e.g., to the nearest 0.25 day) and apply consistently.

Documentation, proof, and disputes

Employer’s burden: In disputes, employers must produce payroll records, leave ledgers, and policies proving either payment of SIL or a valid exemption.
Policy clarity: A written SIL & leave policy should specify:
- Eligibility and exemptions adopted by law;
- Accrual method (monthly/anniversary/full-grant);
- Proration rules on separation and mid-year scenarios;
- Rounding and fractional day handling;
- Carryover vs year-end commutation;
- Offsetting rules (only where lawful and consented);
- Treatment for status changes (managerial, field personnel, paid-by-results).

Model policy language (you can adapt)

Service Incentive Leave (SIL). Employees who have rendered at least twelve (12) months of service are entitled to five (5) working days of service incentive leave with pay per calendar year, subject to statutory exemptions. Accrual: After vesting, SIL accrues at 0.4167 day per month. Use: SIL may be used in whole or half-day increments for any personal purpose, subject to scheduling rules. Proration on separation: On separation, vested employees are paid for unused accrued SIL at their latest regular daily rate. Accrued SIL is computed pro rata through the separation month, less SIL used. Year-end: Unused SIL at year-end is commutable to cash; the Company may allow carryover by separate rule without prejudice to commutation of the statutory minimum. Exemptions: The Company applies statutory exemptions (e.g., establishments with fewer than 10 employees; field personnel; paid-by-results; managerial employees; or where employees already receive at least 5 days of paid vacation). Administration: The Company keeps official leave and payroll records. This policy is construed to ensure the most favorable treatment consistent with law.

Frequently asked questions

1) Can we prorate SIL before an employee completes one year? Not by law. There is no SIL to prorate before the first 12 months. You may voluntarily grant prorated paid leave by policy/CBA.

2) Must we always prorate after vesting? While the Code does not mandate a formula, proration on separation is a sound, employee-friendly and regulator-consistent practice. Pick a method and state it in policy.

3) Are part-timers entitled? Yes, if not exempt and they have completed one year of service (counting calendar months employed), they are entitled to SIL; proration thereafter follows policy.

4) How does SIL interact with company vacation leave? If your vacation leave with pay is at least 5 days, you may treat it as satisfying SIL (but ensure commutation or carryover rules still meet the minimum SIL protection).

5) What records should we keep? Maintain employment dates, exemptions basis, accruals, usage, balances, payroll proofs, and final pay computations for at least the statutory retention period.

Key takeaways

No vesting, no proration in the first 12 months (unless voluntarily granted).
After vesting, state and apply a clear proration method (monthly accrual is simplest).
Always commute unused SIL at year-end or separation at the latest regular wage.
Document exemptions and keep records—the burden of proof is on the employer.
Align SIL with your broader leave program for a clean, compliant, and employee-friendly system.

This article is for general information in the Philippine context and is not a substitute for tailored legal advice on specific facts or CBAs.