What are the rules on service incentive leaves?

A Supreme Court decision has described service incentive leave as a “curious animal” due to its unique features. The following provides for the laws and rules governing service incentive leaves.

Leave benefit and conditions

The service incentive leave of 5 days with pay is a legally mandated benefit provided to covered employees who have rendered at least one year of service. 

The legal basis for the service incentive leave is found in the Philippine Labor Code, viz:

ART. 95. Right to Service Incentive Leave. – (a) Every employee who has rendered at least one year of service shall be entitled to a yearly service incentive leave of five days with pay

(b) 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.

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

As indicated above, the provisions on service incentive leave does not apply to the following employees:

1. Those that are already enjoying the benefit herein provided – If the company is already providing a service incentive leave, then Article 95 shall not apply anymore. Meaning, if there is already an existing 5-day service incentive leave, then the company is not obligated to provide additional 5-day service incentive leave. Otherwise stated, the company shall only have 5-day service incentive leave.

2. Those enjoying vacation leave with pay of at least 5 days – If instead of a service incentive leave the company has a vacation leave of at least 5 days, then such vacation leave shall be treated as the service incentive leave equivalent stated in Article 95. Similar to No. 1, if the company has an existing 15-day vacation leave, it is not obligated to provide additional 5-day service incentive leave as Article 95 will no longer apply.

3. Those employed in establishments regularly employing less than ten employees – If there are no more than 9 employees in a company, then such establishment is exempted from providing a 5-day service incentive leave.

4. Those in establishments exempted from granting this benefit by the Secretary of Labor and Employment after considering the viability or financial condition of such establishment – If the company is exempted from granting such benefit by the DOEL Secretary, then the establishment is also not obligated from granting the 5-day service incentive leave.

While those exceptions are provided in the Labor Code, there are additional exceptions in terms of those who are exempted from the coverage.

Coverage

In addition to the foregoing, the SIL does not apply to all kinds of employees. Certain employees are exempt from the coverage. Those not exempted are referred to as covered employees.

The 2016 Handbook on Statutory Monetary Benefits by DOLE-BWC provides for the additional list of employees who are exempted from the benefit:

1. Government employees, whether employed by the National Government or any of its political subdivisions, including those employed in government-owned and/or controlled corporations with original charters or created under special laws;

2. Persons in the personal service of another;

3. Managerial employees, if they meet all of the following conditions:

3.1. Their primary duty is to manage the establishment in which they are employed or of a department or subdivision thereof;

3.2. They customarily and regularly direct the work of two or more employees therein; and

3.3. They have the authority to hire or fire other employees of lower rank; or their suggestions and recommendations as to hiring, firing, and promotion, or any other change of status of other employees are given particular weight.

4. Officers or members of a managerial staff, if they perform the following duties and responsibilities:

4.1. Primarily perform work directly related to management policies of their employer;

4.2. Customarily and regularly exercise discretion and   independent judgment;

4.3. (a) Regularly and directly assist a proprietor or managerial employee in the management of the establishment or subdivision thereof in which he or she is employed; or (b) execute, under general supervision, work along specialized or technical lines requiring special training, experience, or knowledge; or (c) execute, under general supervision, special assignments and tasks; and

4.4. Do not devote more than twenty percent (20%) of their hours worked in a workweek to activities which are not directly and closely related to the performance of the work described in paragraphs 4.1, 4.2, and 4.3 above;

5. Field personnel and those whose time and performance is unsupervised by the employer;

6. Those already enjoying this benefit;

7. Those enjoying vacation leave with pay of at least five (5) days; and

8. Those employed in establishments regularly employing less than ten (10) employees.

For No. 7 on “those whose time and performance is unsupervised by the employer”, this includes piece-rate employees (Mark Roche International v. Roche Workers Union, G.R. No. 123825, 31 August 1999).

One year of service – how interpreted

Regarding the one year of service for service incentive leave, Section 1, Rule V, of the Implementing Rules of Book III of the Labor Code explains it thus:

… service within 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 one year.

Meanwhile, the 2016 Handbook provides for the following explanation:

The phrase “one year of service” of the employee means service within twelve (12) months, whether continuous or broken, reckoned from the date the employee started working. The period includes authorized absences, unworked weekly rest days, and paid regular holidays. If through individual or collective agreement, company practice or policy, the period of the working days is less than twelve (12) months, said period shall be considered as one year for the purpose of determining the entitlement to the service incentive leave.

Jurisprudence via JPL Marketing Promotions v. Gonzales (G.R. No. 151966, 08 July 2005) has defined the one year service as follows:

… The term at least one year of service shall mean service within twelve (12) months, whether continuous or broken reckoned from the date the employee started working.

Common to all, the reckoning point is thus when the employee started working for purposes of counting the 1 year period.

Convertible to cash

Due to its unique features, the service incentive has been described as a “curious animal” by a Supreme Court decision (Auto Bus Transport Systems case).

If not used within the year, the service incentive leave may be converted to its cash equivalent. For purposes of computation, the salary rate at the date of conversion shall be the basis (2016 Handbook). Cited in Sentinel Security Agency, Inc. v. Cabano (G.R. No. 122468, 122716, 03 September1998), the Implementing Rules and Regulation of the Labor Code provides:

Sec. 5. Treatment of Benefit. – The service incentive leave shall be commutable to its money equivalent if not used or exhausted at the end of the year.

Based on DOLE Legal Service Opinion cited in the 2016 Handbook, the use and conversion may be on a pro rata basis:

Illustration: An employee was hired on 1 January 2000 and resigned on 1 March 2001. Assuming that he/she has not used or commuted any of his/her accrued SIL, he/she is entitled to the conversion of his/her accrued SIL, upon his/her resignation, as follows:

SIL earned as of 31 December 2000: 5 days

Proportionate SIL for January and February 2001 (2/12) x 5 days: 0.833 day

Total accrued SIL as of 1 March 2001: 5.833 days

If it is a matter of days, following the same approach above, the computation may be pro rata down to the days where 1 month is considered to be 30 days (Article 13, Civil Code).

Commutative for following year

However, the employee may choose to commute it. That is to say, the employee can carry forward the unused/non-converted 5-day service incentive leave to the next year. As a result, the employee will have 10-day service incentive leave the following year, and so on.

No forfeiture

If not used, the 5-day service incentive leave cannot be forfeited by the employer. If unused/non-converted, they are commuted and shall be payable once the employee exits the company. This is explained in the Auto Bus Transport Systems case below.

3-year Prescription

In Auto Bus Transport Systems, Inc. v. Bautista (G.R. No. 156367, 16 May 2005), the issue on the service incentive leave was whether the entitlement only extends to the last 3 years following the 3-year prescription for monetary claim in the Labor Code. The answer was in the negative. Otherwise stated, the service incentive leave shall be accrued from date “the employer fails to pay such amount at the time of his resignation or separation from employment.”

The case provided for the following rules:

1. If the employee entitled to service incentive leave does not use or commute the same, he is entitled upon his resignation or separation from work to the commutation of his accrued service incentive leave.

2. SIL is also commutable to its money equivalent if not used or exhausted at the end of the year. In other words, an employee who has served for one year is entitled to it. He may use it as leave days or he may collect its monetary value.

3. If the employee wishes to accumulate his leave credits and opts for its commutation upon his resignation or separation from employment, his cause of action to claim the whole amount of his accumulated service incentive leave shall arise when the employer fails to pay such amount at the time of his resignation or separation from employment.

4. Thus, the three (3)-year prescriptive period commences, not at the end of the year when the employee becomes entitled to the commutation of his service incentive leave, but from the time when the employer refuses to pay its monetary equivalent after demand of commutation or upon termination of the employee’s services, as the case may be.

The same decision was also arrived at in Far East Agricultural Supply, Inc. v. Lebatique, thus: “[The employee] timely filed his claim for service incentive leave pay, considering that in this situation, the prescriptive period commences at the time he was terminated.”

When operationalized, this means that an employee who has rendered 10 years of service can claim all accrued service incentive leave (9 years x 5 SIL = 45 SIL) if at the time of his exit of the company this is not paid. The 3-year prescription shall only run from the date of failure to pay by the employer, and not on the years when they could have been used/converted.

Proof of use with employer

If the application or use of the service incentive leave becomes an issue, the burden of proof is with the employer, as held in Mansion Printing Center v. Bitara, Jr. (G.R. No. 168120, 25 January 2012):

…. [the employers] failed to establish by evidence that [the employee] had already used the service incentive leave when he incurred numerous absences notwithstanding that employers have complete control over the records of the company so much so that they could easily show payment of monetary claims against them by merely presenting vouchers or payrolls, or any document showing the off-setting of the payment of service incentive leave with the absences, as acknowledged by the absentee, if such is the company policy. [The employers] presented none.

We [the Supreme Court] thus quote with approval the findings of the Court of Appeals on the following:

[The employers] bear the burden to prove that employees have received these benefits in accordance with law. It is incumbent upon the employer to present the necessary documents to prove such claim. Although private [the employers] labored to show that they paid [the employee] his holiday pay, no similar effort was shown with regard to his service incentive leave pay. We [the Court of Appeals] do not agree with the Labor Arbiter’s conclusion that [the employee’s] service incentive leave pay has been used up by his numerous absences, there being no proof to that effect.

Part of award in illegal dismissal

In Fernandez v. Lhuillier (G.R. No. 105892, 28 January 1998), it was held that service incentive leave is part of the award to the employee in an illegal dismissal case, viz:

Since a service incentive leave is clearly demandable after one year of service — whether continuous or broken — or its equivalent period, and it is one of the benefits which would have accrued if an employee was not otherwise illegally dismissed, it is fair and legal that its computation should be up to the date of reinstatement as provided under Section 279 of the Labor Code, as amended, which reads:

ART. 279. Security of Tenure. — An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation is withheld from him up to the time of his actual reinstatement. (underscoring supplied).

Less than 10 employees

It is the employer’s responsibility to prove that the establishment has less than 10 employees to be exempted from the coverage of the service incentive leave.

… the clear policy of the Labor Code is to include all establishments, except a few classes, under the coverage of the provision granting service incentive leave to workers. Private respondents’ claim is that they fell within the exception. Hence, it was incumbent upon them to prove that they belonged to a class excepted by law from the general rule. Specifically, it was the duty of respondents, not of petitioners, to prove that there were less than ten (10) employees in the company. Having failed to discharge its task, private respondents must be deemed to be covered by the general rule, notwithstanding the failure of petitioners to allege the exact number of employees of the corporation. In other words, petitioners must be deemed entitled to service incentive leave… (Murillo v. Sun Valley Realty, Inc., G.R. No. L-67272, 30 June 1988)

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