How to Compute Cash Conversion of Service Incentive Leave or Vacation Leave of Above Minimum Employees

How to Compute Cash Conversion of Service Incentive Leave or Vacation Leave of Above Minimum Employees

Under Article 95 of the Labor Code, as amended, every employee who has rendered at least one year of service shall be entitled to a yearly service incentive leave (SIL) of five days with pay.

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This provision shall not apply to those who are already enjoying the benefit herein provided, those enjoying vacation leave with pay of at least five days and those employed in establishments regularly employing less than ten employees or in establishments exempted from granting this benefit by the Secretary of Labor and Employment after considering the viability or financial condition of such establishment.

The grant of benefit in excess of that provided herein shall not be made a subject of arbitration or any court or administrative action.

The rule on SIL shall apply to all employees except:

(a) Those of the government and any of its political subdivisions, including government-owned and controlled corporations;

(b) Domestic helpers and persons in the personal service of another;

(c) Managerial employees as defined in Book Three of this Code;

(d) Field personnel and other employees whose performance is unsupervised by the employer including those who are engaged on task or contract basis, purely commission basis, or those who are paid a fixed amount for performing work irrespective of the time consumed in the performance thereof;

(e) Those who are already enjoying the benefit herein provided;

(f) Those enjoying vacation leave with pay of at least five days; and

(g) Those employed in establishments regularly employing less than ten employees.

The term “at least one-year service” shall mean service for not less than 12 months, whether continuous or broken reckoned from the date the employee started working, including authorized absences and paid regular holidays unless the working days in the establishment as a matter of practice or policy, or that provided in the employment contract is less than 12 months, in which case said period shall be considered as one year. (Section 3, Rule VI, Rules to Implement the Labor Code).

The service incentive leave shall be commutable to its money equivalent if not used or exhausted at the end of the year. Nothing in the Rule shall justify an employer from withdrawing or reducing any benefits, supplements or payments as provided in existing individual or collective agreements or employer’s practices or policies. (Section 6, Rule VI, Rules to Implement the Labor Code).

The purpose of a vacation leave is to afford the laborer a chance to get much needed rest to replenish his worn out energies and to acquire a new vitality to enable him to effectively perform his duties, not merely to give him additional salary or bounty. (See page 236, Guide on Employee Compensation and Benefits Volume 1, 2nd Edition citing Cuajao vs. Chua Lo Tan, L-16298, Sept. 29, 1962, 6 SCRA 136, 138 citing Sun Ripe Coconut Products, Inc. vs. National Labor Union, L-7964, 51 O.G., 5133-5137; Philippine Air Lines, Inc. vs. Balanguit, et al., 53 O.G., 8549; Tanguiling, et al. vs. Theo H. Davies & Co., L-9144, May 30, 1959, 105 Phil. 1342, 1343.)

Vacation leave is not a benefit mandated by the Labor Code. Thus, the employer and the employee may agree to the grant of such benefit including the policies to implement its availment. Thus, the employer has the discretion as to the treatment of leave above five days.

For instance, the employer may grant ten VLs and convert to cash five (5) days thereof or any remainder of the unused of the five (5) days. The policy may state:

“Employees who have rendered at least one (1) year of service shall be entitled to ten (10) days Vacation Leave (VL) credits.

A maximum of five (5) days shall be convertible to cash at the end of the calendar year unless actually availed of. In which case, only the balance of five (5) days shall be converted. The remaining days of the ten-day VL shall be forfeited if unused at the end of the calendar year.

At the time the employee qualifies he is automatically entitled to the full VL credits. The VL benefit shall be earned at the rate of .83 days per month of service. The employee shall use only the VL that accrued the previous year and may exhaust the current subject to approval of the management in meritorious cases.

However, if the employee resigns he shall be entitled to all VL credits that accrued and are due her, subject to the company policy.”

For instance, Alice Ng Alisto is a monthly paid employee with a salary of PhP20,000.00 per month. She was hired January 1, 2017. On January 1, 2018 she was already entitled to VL of ten (10) days. As of December 31, 2018 she consumed only three (3) VLs.

Thus, only two (2) days shall be converted to cash and the five (5) days shall be forfeited. To compute for the conversion:

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Cash Conversion = Daily Pay Equivalent x No. of Days

The daily equivalent of her monthly salary of PhP20,000.00 should first be obtained. Considering that she is monthly-paid, the factor is 365 days (considered paid for all days of the year).

The formula is as follows:

Daily Pay Equivalent =        (Monthly Salary x 12) / 365

(PhP20,000.00 x 12) / 365

PhP240,000.00 / 365

PhP657.534247

Going back to the cash conversion due to Alice:

Cash Conversion = Daily Pay Equivalent x No. of Days

PhP657.534247 x 2 days

PhP1315.07

Bear in mind that the cash conversion pertains to leave credits that became due after year 2017. At that time of conversion in December 2018 Alice had already accrued VL credits for the year 2018 of another ten (10) days. But the use thereof should be applied only in year 2019.

However, if Alice resigns on July 31, 2019 she shall be entitled to the following:

  • Remaining unused VL credits maximum of 5 days for the year 2018
  • Prorated or accrued VL credits for the year 2019

For instance:

Unused VL credits as of December 31, 2018: 7 days

– Convertible to cash: 2 days (assuming she availed of the 3 days)

VL earned as of July 31, 2019: 5.83 days [.83 days x 7 months]

– Convertible to cash: 5 days (this is the maximum)

Thus, as part of her final pay:

Unused VL for 2018            : 2 days x PhP657.534247 = PhP1,315.06849

Convertible VL earned as of July 31, 2019:

5 days x PhP657.534247 = PhP3,287.67

VL Conversion

Convertible VL for 2018      (2 days)         PhP1,315.06849

Convertible VL for 2019      (5 days)         PhP3,287.67124

Total VL Conversion                                   PhP4,602.74

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