The question of whether an employee can "encash" or convert their remaining sick leave credits into cash upon resignation is a frequent point of contention in Philippine labor relations. While many employees view these credits as earned benefits, the legal reality under the Labor Code of the Philippines is more nuanced.
1. The General Rule: No Mandatory Encashment
Under Philippine law, there is no statutory requirement for an employer to pay the cash equivalent of unused sick leaves upon an employee's resignation or separation from service.
The Labor Code only mandates the grant of Service Incentive Leave (SIL)—five days of paid leave for every year of service. By law, only these five days of SIL are required to be converted to cash if unused at the end of the year or upon resignation. Sick leaves, specifically, are not mandated by the Labor Code; they are generally considered voluntary benefits granted by the employer.
2. Exceptions: When Encashment Becomes Mandatory
While the law doesn't require it, an employee may still be entitled to sick leave encashment if it is provided for in any of the following:
- Employment Contract: If the specific contract signed by the employee explicitly states that unused sick leaves are convertible to cash upon resignation.
- Company Policy or Employee Handbook: If the employer has an established written policy granting such encashment.
- Collective Bargaining Agreement (CBA): In unionized settings, the CBA often contains provisions for the conversion of leave credits into cash.
- Established Company Practice: Under the principle of Non-Diminution of Benefits, if an employer has consistently and voluntarily practiced the encashment of sick leaves for a long period, it may be deemed an "established practice." Once it reaches this status, the employer cannot unilaterally withdraw or stop the benefit.
3. Service Incentive Leave (SIL) vs. Sick Leave
It is crucial to distinguish between the two. If an employer does not provide sick leave but provides the mandatory 5-day SIL, that SIL must be converted to cash upon resignation.
However, if the employer provides "Sick Leave" and "Vacation Leave" that are superior to the 5-day SIL (e.g., 10 days of SL and 10 days of VL), the employer is deemed to have complied with the SIL requirement. In this case, the rules for encashment will depend entirely on company policy, not the Labor Code.
4. Taxation of Leave Encashments
For tax purposes in the Philippines, the rules for encashment vary:
- Vacation Leave: Encashment of up to 10 days of unused vacation leave is generally considered "de minimis" and is exempt from income tax and withholding tax.
- Sick Leave: Unlike vacation leave, the Bureau of Internal Revenue (BIR) generally treats the encashment of sick leaves as part of "other benefits." These are exempt from tax only if the total amount of "other benefits" (including the 13th-month pay and other bonuses) does not exceed the PHP 90,000 threshold. Any amount exceeding this threshold is subject to income tax.
5. Jurisprudence and Supreme Court Rulings
The Supreme Court has consistently held that leave credits are not "salary" but are "privileges" granted to employees for rest or recovery. In cases such as Auto Bus Transport Systems, Inc. v. Bautista, the court emphasized that while the SIL is a mandatory statutory benefit, any leave benefits beyond what is required by law are governed by the "four corners" of the agreement between the employer and the employee.
"In the absence of a specific provision in the contract or CBA, the employee has no vested right to the money value of their unused sick leaves."
Summary Table
| Feature | Service Incentive Leave (SIL) | Sick Leave (SL) |
|---|---|---|
| Legal Basis | Labor Code (Art. 95) | Company Policy / Contract / CBA |
| Mandatory Grant | Yes (5 days after 1 year of service) | No (Voluntary) |
| Mandatory Encashment | Yes, upon resignation/separation | No, unless agreed upon |
| Tax Treatment | Exempt (if within limits) | Exempt if total benefits < PHP 90,000 |