Are vacation leaves totally convertible and commutable?

In the war for talent, human resource designs their job offers to attract and entice qualified applicants. One of the primarily selling point is giving longer vacation leaves. What follows thereafter is the question whether such vacation leaves are convertible to cash or commutable?

The following revisits and explores the laws and rules surrounding vacation leaves, particularly on when they are convertible to cash and commutable the following year. 

Vacation leave in the Labor Code

The Labor Code does not require the employer to give vacation leaves. What is required is the 5-day service incentive leave – which may be replaced by a vacation leave with pay of at least 5 days. Hence, the vacation leave if equal to or more than the required service incentive leave effectively replaces the latter, 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.

Reading the above provision, one crucial question comes to mind: If there is an equal or more beneficial vacation leave, does that do away with the service incentive leave provision including the conversion and commutation?

Take note of clause (b): This provision [on service incentive leave] shall not apply to… those enjoying leave with pay of at least five days. A plain reading suggests that no service incentive leave will be required if there is an equal or more beneficial vacation leave.

There lies the rub.

Treatment of vacation leave

Thus, there are differences in treatment of vacation leave in practice:

1. The vacation leave effectively substitutes service incentive leave, including all related consequences such as conversion and commutation;

2. The vacation leave effectively replaces and does away with the requirement of service incentive leave, without the related consequences such as conversion and commutation;

3. The vacation leave partially substitutes the service incentive leave insofar as the 5 days are concerned including related consequences of conversion and commutation, but those days exceeding 5 days are not covered by the related consequences.

These shall be further discussed herein.

Vacation leave as a substitute of service incentive leave

Drawing from Article 95, some interpret the provision in conjunction with other law and legal reasoning to treat vacation leave as a substitute of service incentive leave.

One of these laws refer to the provision in the Civil Code (not Labor Code):

Article 1702. In case of doubt, all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the laborer.

Why is this provision cited when Article 95 appears to be clear?

That’s where legal reasoning comes in.

If the vacation leave is 20 days with pay, and the employee is not able to use them, there will be no conversion or commutation. To be clear, the employee gets nothing. Article 95 states that it “shall not apply” “to those enjoying vacation leave with pay of at least five days.”

Considering that the employer is the one who approves the use of the vacation leave, and can effectively deny it the entire year, then this is the best way to deny an employee of the service incentive leave benefit by giving 100-day vacation leave – but never approve it all.

In short, the result of plainly reading Article 95 is ridiculous and absurd.

Decisional law dictates that Article 95 should be read to come up with a logical construction rather than result in an absurdity. People v. Temporada (En Banc, G.R. No. 173473, 17 December 2008) provides:

It is a general rule of statutory construction that a law should not be so construed as to produce an absurd result. The law does not intend an absurdity or that an absurd consequence shall flow from its enactment. If the words of the statute are susceptible of more than one meaning, the one that has a logical construction should be adopted over the one that will produce an absurdity. Statutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion.

Consequently, this interpretation of the vacation leave acting as a substitute of service incentive leave, including all related consequences of conversion and commutation, arose to avoid the absurdity that results of a straight reading of Article 95.

Further, this is also in line with Article 1702 of the Civil Code. Due to the doubts in the application of Article 95 of the Labor Code, it is interpreted in favor of the employee. Evidently, the vacation leave substituting the service incentive leave is in their favor.

Vacation leave as a replacement of service incentive leave

The other approach is to consider vacation leave as a replacement of service incentive leave. The basis is likewise Article 95 of the Labor Code which gives us a plain and direct provision on the non-applicability of service incentive leave if there is an equal or more favorable vacation leave:

(b) This provision shall not apply to… those enjoying vacation leave with pay of at least five days…

Following this reading, if an employer has a 10-day vacation leave, and the same is not used by the employee or allowed to be used by the employer who did not approve them, the employee gets nothing.

Of course, this is without prejudice to the employment contract, company policy, collective bargaining agreement, or any employment agreement. These may provide for the rules on conversion and commutation. However, what if there is none? The employee gets nothing.

Again, and for emphasis, this is the best way for the employer to avoid the service incentive leave. Give the employees 100-day vacation leave – but never approve a single one.

While some employers take this approach, this is very risky due to the absurd consequences. In the event that a labor case is filed against such employers, it is very likely that they might end up paying for the cash conversion of the vacation leave. The question is how much? That’s the reason why there is a third interpretation.

Vacation leave as a partial substitution of service incentive leave

Partial is the operative word for this third interpretation. The vacation leave partially substitutes the service incentive leave insofar as the 5 days is concerned, including the related consequences of conversion and commutation. In excess of the 5 days, the leaves are forfeited – unless the employer has a different rule.

To be clear, if a 20-day vacation leave is not used by the employee or not approved by the employer for use, it is only the 5 days thereof which shall be converted to cash or commuted the following year. The 15 days are effectively forfeited. This is without prejudice to any provision that might provide for rules covering the 15 or unused vacation leaves in the employment contract, company policy, collective bargaining agreement, or any employment agreement.

If a labor case arises, it is possible that the liability will be limited to the 5 days only applying clause (c) of Article 95. It expressly provides that any excess cannot be the subject of arbitration (before the Labor Arbitrator and NLRC) or any court/administrative action (Court of Appeals, Supreme Court, DOLE Administrative Case), viz:

(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.

In all, this third interpretation makes for a rational and sensible interpretation of Article 95. This ensures that the 5-day service incentive leave benefit is given to the employee, while the employer’s liability for conversion is limited to the same 5 days.

However, the major charge against this third interpretation is that it is not the most favorable construction to the employee as espoused in Article 1702 of the Civil Code. Instead of the entire 20-day conversion, the employee gets only a 5-day cash conversion. To avoid such charge, the workaround is to require the employees to take their vacation – i.e. forced vacation. This way issues on cash conversion or commutation are avoided.

Summary

To be clear, and for avoidance of doubt, these three interpretations and practice came about due to exactly not having any express – black and white – legal provision or rule on the application and use of vacation leaves. From the foregoing, it is the employer’s management prerogative how to go about it based on the discussions.