Annual Leave in Malaysia: Entitlement, Proration and Encashment Explained for Employers

Oct 12

2 min read

Every December, HR teams in Malaysia face the same questions: how much leave is left, can it be carried forward, and does unused leave have to be paid out? The answer depends on two things: the minimum set by the Employment Act 1955, and what the employment contract says. Here is how both work together.

Minimum annual leave under the Employment Act

Length of service	Minimum annual leave	Minimum paid sick leave
Less than 2 years	8 days	14 days
2 to 5 years	12 days	18 days
More than 5 years	16 days	22 days

These are minimums. Many employers, especially those hiring professionals and expatriates, offer more, such as 12 to 24 days from the first year. Where the contract is more generous, the contract applies.

How proration works

An employee who has not completed a full year of service gets leave in proportion to the months worked. The simplest method is monthly accrual: annual entitlement divided by 12, earned each completed month.

Example: an employee with 12 days a year joins on 20 August. By 31 December, they have completed 4 months of service, so they have earned 4 days of leave for that year.

Leave year: calendar year or anniversary?

Your contract or policy should state which leave year applies:

Calendar year (January to December): leave resets every 1 January. Common for local payroll, and simple for year-end planning.
Anniversary year: leave resets on the employee's join date. Common for fixed-term contracts.
Contract term: for fixed-term contracts, leave can accrue across the whole contract and be settled at the end.

Pick one and state it clearly. Unclear wording is one of the most common causes of leave disputes.

What happens to unused leave?

The Employment Act does not require employers to pay out unused leave each year, but your contract may. Common approaches:

Use it or lose it: unused leave lapses at the end of the leave year.
Carry forward: a limited number of days moves to the next year.
Encashment: unused leave is paid out, often in the December payroll.

When employment ends, unused leave the employee is entitled to must be settled. For monthly-paid staff, a common daily rate is the monthly salary divided by 26. Leave encashment is taxable income, so include it in PCB and in any tax clearance forms when an employee leaves.

Year-end checklist for employers

Confirm each employee's leave balance by early December.
Check each contract for carry-forward or encashment rules.
Agree a cut-off date for leave taken in late December.
Include encashment in December payroll and PCB where it applies.
Remind staff about public holidays, including any state holidays where they live.

How GPO Asia can help

GPO Asia manages leave tracking, year-end encashment and payroll for local and foreign employees under our Employer of Record service. We draft contracts with clear leave terms from day one, so year-end does not bring surprises.

Contact GPO Asia to review your leave policy before December payroll.

This article is general guidance. Check the Employment Act 1955 and your employment contracts, or speak to us, for your specific situation.