The law guarantees five paid leave days a year and requires the unused ones to be paid out. Most companies give more than five. The payroll question is the same either way: how many days are unused, what is one day worth, and what happens to the balance when the year rolls over.
Service Incentive Leave (Article 95)
Article 95 of the Labor Code entitles every employee who has rendered at least one year of service to a yearly Service Incentive Leave (SIL) of five days with pay. "One year of service" means twelve months of service, continuous or broken, counted from the date the employee started working, and includes authorized absences and paid regular holidays.
The SIL is a floor. It can be used as vacation leave, sick leave, or both, at the employee's option, subject to reasonable company scheduling rules. The main exemptions under the implementing rules are:
- employees already enjoying at least five days of paid vacation leave under company policy or CBA;
- managerial employees;
- field personnel and others whose actual hours of work cannot be determined with reasonable certainty;
- establishments regularly employing fewer than ten employees;
- establishments exempted by the DOLE Secretary after due consideration of their viability.
Check the current DOLE rules for the complete list and its interpretation.
Commutation to cash
SIL that is not used by the end of the year is commutable to its money equivalent. This is what payroll teams call leave conversion. The employee cannot be made to forfeit it, and the employer cannot substitute carry-over for the cash unless that arrangement is more favorable to the employee. On separation, unused SIL is likewise paid out in the final pay.
Company leave beyond the SIL
Most employers give more than the legal minimum, typically separate vacation leave (VL) and sick leave (SL) credits of 10 to 15 days each, sometimes growing with tenure. Where a company grants at least five days of paid leave, the SIL is deemed included in it. Everything above the five days is governed by company policy or the CBA, not Article 95, so the employer decides:
- whether unused VL and SL are converted to cash, carried over, or forfeited;
- how many days can be converted or carried over, and any caps;
- whether conversion happens at year end, on an anniversary date, or only on separation;
- whether conversion is at the basic daily rate or includes allowances.
Whatever the policy says, it must not leave the employee with less than five convertible days.
How conversion is computed
Cash value = daily rate × unused leave days
For a monthly-paid employee the daily rate is monthly basic salary × 12 ÷ working-days factor. The factor depends on which days the company pays for: 261 (Monday to Friday), 313 (Monday to Saturday), or 365 (rest days paid), among others. For daily-paid employees the daily rate is simply their rate.
The factor matters. The same ₱24,000 salary gives a daily rate of ₱1,103.45 at 261, ₱920.13 at 313, or ₱789.04 at 365. Use the factor your payroll already uses for absences so both directions agree.
Worked example
Employee with ₱24,000 monthly basic salary, 5 unused SIL days, 261-day factor
| Annual basic salary (₱24,000 × 12) | ₱288,000.00 |
| Daily rate (₱288,000 ÷ 261) | ₱1,103.45 |
| Unused leave days | 5 |
| Leave conversion (₱1,103.45 × 5) | ₱5,517.24 |
If the company policy grants 15 VL days, all convertible, and the employee used 6, the conversion is 9 × ₱1,103.45 = ₱9,931.03. Paid at year end, or in the final pay for a separated employee. The cash value of unused leave is not part of basic salary for 13th month purposes.
Annual refresh and carry-over
At the start of each leave year the balances are reset. Companies handle the rollover in one of a few ways:
- Convert and reset. Unused days are paid out and the new year starts with the full fresh credit. Simplest, and the only option that is always compliant for the SIL portion.
- Carry over up to a cap. Unused days beyond the SIL roll into the new year up to a maximum (for example 5 or 10 days); anything above the cap is converted or forfeited per policy.
- Accrue monthly. Credits are earned at a rate per month of service rather than granted in full on January 1, which changes how much is "unused" at any point.
The leave year itself varies: calendar year, fiscal year, or the employee's anniversary date. Whichever it is, the refresh should produce a report of what was converted, what was carried over, and what was forfeited, per employee, so finance can book the payout and HR can answer questions.
Common payroll mistakes
- Forfeiting unused SIL. The five statutory days must be converted to cash, whatever the policy says about the rest.
- Converting at a different daily rate than absences are deducted at. If absences use 261 and conversion uses 313, the same day is worth two different amounts.
- Losing the balance history. Once balances are reset, disputes are impossible to settle unless the pre-refresh figures were snapshotted.
- Missing the SIL start date. Entitlement starts after one year of service from the hire date, not from regularization or January 1.
- Including the conversion in 13th month basic salary. It is excluded.
- Ignoring the tax treatment. Monetized unused vacation leave is de minimis only up to the BIR's limit; check the current issuance for the days cap and for sick leave conversion.
How AppDeep Payroll handles this
- Leave balances live on each employee's 201 file and are drawn down by approved leave applications filed through the self-service portal, so "unused days" is always a live figure, not a spreadsheet reconciliation.
- The annual leave balance refresh snapshots every employee's pre-refresh balances first, then applies your carry-over and conversion rules to produce the new year's credits. Nothing is overwritten without a record.
- The leave conversion report for each refresh lists, per employee, the unused days, the daily rate, and the cash value, ready for finance to book and for payroll to pay.
- For separated employees, unused leave conversion is computed inside the final pay together with pro-rated 13th month and the BIR 2316.
- Employees can ask the built-in chatbot for their current balances, which removes most of the January questions to HR.
Frequently asked questions
What is Service Incentive Leave?
Under Article 95 of the Labor Code, every employee who has rendered at least one year of service is entitled to a yearly Service Incentive Leave of five days with pay. It can be used for vacation or sickness, and if unused at the end of the year it is convertible to cash.
What is leave conversion?
Leave conversion, or commutation, is paying the employee the cash equivalent of leave credits they did not use. For SIL it is required by law; for company vacation and sick leave beyond the SIL it depends on company policy or the CBA.
How is the cash value of unused leave computed?
Daily rate multiplied by the number of unused leave days. The daily rate for a monthly-paid employee is monthly salary times 12 divided by the company's working-days factor (commonly 261, 313, or 365 depending on which days are paid).
Is leave conversion taxable?
The monetized value of unused vacation leave of private-sector employees is treated as a de minimis benefit up to a limit set by the BIR, currently expressed in days per year; amounts beyond that are taxable compensation. Check the current BIR issuance for the exact limit and the treatment of sick leave conversion.
Who is exempt from Service Incentive Leave?
The main exemptions are employees already enjoying at least five days of paid leave under company policy, managerial employees, field personnel whose hours cannot be determined, and employees of establishments regularly employing fewer than ten workers. Check the current DOLE rules for the complete list.
Can unused leave be carried over instead of converted?
For SIL, unused days must be converted to cash at year end; carry-over is not a substitute unless the policy is more favorable to the employee. For company leave beyond the SIL, employers commonly allow carry-over up to a cap, forfeiture, or conversion, as their policy or CBA provides.
Not tax or legal advice. This guide is general information based on the rules currently in effect as we understand them. Verify against the current DOLE and BIR issuances and consult your accountant or counsel for your situation.