In the Philippine labor landscape, the Service Incentive Leave (SIL) is a mandatory benefit that often serves as the baseline for employee time-off. Governed primarily by Article 95 of the Labor Code of the Philippines and its Implementing Rules and Regulations (IRR), SIL is unique because of its "commutable" nature—meaning it must be converted to cash if left unused.
1. The Legal Basis and Entitlement
Under Article 95, every employee who has rendered at least one year of service is entitled to a yearly service incentive leave of five (5) days with pay.
The phrase "one year of service" is defined as service within twelve months, whether continuous or broken, reckoned from the date the employee started working. This includes authorized absences and paid regular holidays.
Coverage
The law applies to all employees except:
- Those already enjoying at least five days of paid vacation leave.
- Government employees (governed by Civil Service laws).
- Domestic helpers (now covered by the Batas Kasambahay, which has its own leave provisions).
- Persons in the personal service of another.
- Managerial employees.
- Field personnel and those whose performance is unsupervised by the employer.
- Those engaged on task or contract basis, purely commission basis, or those paid a fixed amount for performing work irrespective of the time consumed.
2. The Rule on Cash Conversion (Commutability)
The most critical feature of SIL, distinguishing it from other types of leaves (unless specified by company policy), is its mandatory conversion to cash.
The General Rule: If the five days of SIL are not used by the employee by the end of the year, the employer is legally required to convert the unused balance into its cash equivalent.
Timing of Payment
The conversion typically occurs at the end of the calendar year. However, if the employee is terminated or resigns before the end of the year, the earned SIL must be included in the final "back pay" or terminal pay, proportionate to the time served.
3. Exempted Establishments
Not every private employer is required to provide SIL. The law provides exemptions for:
- Retail and service establishments regularly employing fewer than ten (10) workers.
- Establishments already providing equivalent or superior benefits (e.g., a company providing 10 days of Vacation Leave is generally exempt from adding another 5 days of SIL, as the SIL is considered integrated into the higher benefit).
4. Calculation of SIL Conversion
The cash equivalent is calculated based on the employee's salary rate at the time of conversion.
| Component | Calculation Basis |
|---|---|
| Daily Rate | Current daily wage (including COLA, if applicable/integrated). |
| Formula | Unused SIL Days × Current Daily Rate = Cash Conversion |
If an employee has worked for at least one year but leaves the company mid-year, the SIL is often computed proportionately (pro-rata), though jurisprudence generally supports the full 5-day credit once the one-year threshold is crossed and maintained.
5. SIL vs. Vacation Leave (VL) and Sick Leave (SL)
It is a common misconception that all VLs and SLs must be converted to cash. Under Philippine law:
- SIL is the only leave mandated by the Labor Code to be convertible to cash.
- VL/SL are typically voluntary benefits granted by the employer or through a Collective Bargaining Agreement (CBA). Their convertibility depends entirely on the Company Policy or the Employment Contract.
If a company policy states that employees get 15 days of VL but they are "non-convertible and non-cumulative," this is legal, provided that the first 5 days (representing the statutory SIL) are treated according to the law's conversion requirements.
6. Jurisprudence on "Prescriptive Periods"
A vital point for HR departments and employees alike is the "three-year prescriptive period." According to the Supreme Court (e.g., Auto Bus Transport Systems, Inc. v. Bautista), the cause of action for the cash conversion of SIL only accrues at the time the employer ignores the employee's demand for it, or upon the employee's separation from service. This means an employee can often claim unused SIL for the entire duration of their employment upon resignation, rather than just the last three years.
Summary of Employer Obligations
- Grant: 5 days of paid leave after 1 year of service.
- Usage: Employees may use it for vacation or sick leave purposes.
- Conversion: Unused days must be paid out in cash at the end of the year or upon separation.
- Documentation: Employers should maintain a record of leave usage to accurately compute the year-end conversion.