SERVICE INCENTIVE LEAVE COMPUTATION FOR RESIGNED EMPLOYEE AND TAX ISSUES

Service incentive leave (SIL) benefit grants five (5) days of absence with pay to qualified employees.

The basis of SIL is Article 95 of the Labor Code providing the right to service incentive leave to every employee who has rendered at least one year of service with five days with pay.

See re-numbered Labor Code 2018 Edition per R.A. 10151 and DOLE DA 01, Series of 2015

Such provision however, shall not apply to those who are already enjoying the benefit herein. 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.

The grant of benefit in excess cannot be made a subject of arbitration or any court or administrative action.

Under the Implementing Rules and Regulations, the SIL shall not apply to the following:

(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 the Labor 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” means 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.

An employee needs at least one year of service to avail of this benefit. This means that he needs to earn it. If the employee was hired January 1, 2017 by December 1, 2018 he is already entitled to the 5 days SIL. As he continues the service, he keeps on earning the succeeding periods.

For instance, by April 1, 2018 he would be earning credits by about 1.25 days. This is derived by dividing 5 by 12. Thus:

5 /12 = .42 days per month

.42 days per month x 3 months = 1.25 days

Does the SIL apply to vacation leave only or can it be used for sick leave?

See sample Leave Form

According to the DOLE Handbook 2017, the service incentive leave may be used for sick and vacation leave purposes. The unused service incentive leave is commutable to its money equivalent at the end of the year. In computing, the basis shall be the salary rate at the date of conversion.

Learn more about service incentive leave. Get a copy of the Guide to Employee Compensation and Benefits Volume 1

The service incentive leave is commutable to its money equivalent if not used or exhausted at the end of the year. The SIL should be converted to cash if unused at the end of the year.

For example, X was hired January 1, 2017 based in NCR. By January 1, 2018 he is already entitled to the earned SIL of 5 days.

He went on absence without leave January 15, 2018, February 14, 2018, and February 15, 2018 and did not use anymore leave till the end of the year, by December 31, 2018 he has an unused leave of 2 days. This should be converted to cash.

Minimum wage in NCR – P512.00

P512.00 x 2 days = P1,024.00

If X for instance did not use his 2017 earned leave credits and resigns effective April 1, 2018, both the earned in 2017 and the 2018 should be given to him in cash.

Thus:

SIL earned as of December 31, 2017                5 days

SIL earned as of April 1, 2018                              1.25 days

TOTAL                                                                       6.25 days

6.25 days x P512.00 = P3,200.00

Hence, X’s SIL upon resigning which shall form part his final pay is P3,200.00.

What is the tax implication of this benefit?

It bears noting that under the TRAIN Law service incentive leave benefit is not expressly mentioned as exempt from tax. Even Sec. 2 (i) of RR 8-2018 does not expressly exempt SIL since the exemption expressly covers only the holiday pay, overtime pay, night shift differential pay, and hazard pay earned by an MWE.

Yet, under the TRAIN Law this can be covered by the ceiling on non-taxable limit of P20,833.00 if he is a MWE considering that the total wage may not breach this amount. However, even if it does exceed, it can still be exempt under the de minimis benefits rule.

Under RR 5-2011, monetized unused vacation leave credits for private employees not exceeding ten (10) days during the year shall be considered as de minimis benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank-and-file employees.

It is clear that monetized vacation leave credits are not taxable. How about sick leave?

This cannot apply to sick leave credits since an employee must actually go on sick leave to be able to avail of said leave credits. (BIR Ruling No. 416-2012 dated June 25,2012; BIR Ruling No. 057-2014)