Leave Encashment Malaysia: How to Calculate Unused Annual Leave

If an employee leaves your company with unused annual leave, should you pay them for the remaining leave days?

This is known as leave encashment or payment in lieu of annual leave. Many employers are unsure when leave can be converted into cash, whether it is required by law, and how to calculate the payment correctly.

This guide explains how leave encashment works in Malaysia, what the Employment Act 1955 says, and the best practices employers should follow.

What Is Leave Encashment?

Leave encashment is the payment made to an employee for unused annual leave instead of allowing the employee to take the leave.

It most commonly happens when employment ends and the employee still has unused annual leave. Some employers may also allow employees to encash leave while they are still employed, but this depends on the company's leave policy or employment contract.

Is Leave Encashment Mandatory in Malaysia?

The answer depends on the situation.

When Employment Ends

Under the Employment Act 1955, employees who have accrued but unused annual leave when their employment ends may be entitled to payment for those leave days, subject to the Act and the terms of their employment.

This commonly applies when an employee:

Resigns
Retires
Is dismissed
Completes a fixed-term contract
Passes away (payment may be made to the employee's estate or legal representative, where applicable)

Employers should calculate any payment due and include it in the employee's final salary.

While the Employee Is Still Working

The Employment Act 1955 does not require employers to allow employees to exchange annual leave for cash during employment.

Whether leave encashment is allowed depends on:

The employment contract
Company policy
Collective agreement (if applicable)

Many employers encourage employees to take their annual leave to support employee well-being and reduce burnout.

Can Employees Take Annual Leave During the Notice Period?

This is one of the most common questions employers ask.

Whether an employee can take annual leave during the notice period depends on:

The employment contract
Company policy
The employer's approval

Some employers allow employees to use their remaining annual leave during the notice period. Others require employees to work until their last day and pay any unused annual leave through leave encashment.

Having a clear leave policy helps avoid disputes when an employee resigns.

Who Is Entitled to Annual Leave?

Under Section 60E of the Employment Act 1955, employees covered by the Act are entitled to minimum paid annual leave based on their length of service.

Length of Service	Minimum Annual Leave
Less than 2 years	8 days
2 to 5 years	12 days
More than 5 years	16 days

Many employers offer more annual leave than the statutory minimum as part of their employee benefits.

How to Calculate Leave Encashment

The basic formula is:

Leave Encashment = Daily Rate of Pay × Unused Annual Leave Days

Use this free Annual Leave Calculator to calculate annual leave entitlement quickly and accurately based on Malaysian employment rules.

Example 1

Monthly salary: RM3,000

Working days: 26

Unused annual leave: 5 days

Daily rate:

RM3,000 ÷ 26 = RM115.38

Leave encashment:

RM115.38 × 5 = RM576.90

Example 2

Monthly salary: RM4,500

Working days: 26

Unused annual leave: 3 days

Daily rate:

RM4,500 ÷ 26 = RM173.08

Leave encashment:

RM173.08 × 3 = RM519.24

Example of Prorated Leave Encashment

Suppose an employee:

Monthly salary: RM3,000
Annual leave entitlement: 8 days per year
Worked for 4 months
Resigned before taking any annual leave

Step 1: Calculate prorated annual leave

8 × (4 ÷ 12) = 2.67 days

Step 2: Calculate daily rate

RM3,000 ÷ 26 = RM115.38

Step 3: Calculate leave encashment

RM115.38 × 2.67 = RM308.06

The employee may receive approximately RM308.06 for the unused prorated leave, depending on the applicable calculation method and company policy.

Note: The daily rate of pay may differ depending on the employee's pay structure, employment contract, and applicable legal requirements. Employers should ensure their calculation method complies with the Employment Act 1955.

Leave Encashment vs Carry Forward

Leave Encashment	Carry Forward
Employee receives payment for unused leave.	Employee keeps unused leave for a future period.
Usually happens when employment ends.	Happens while employment continues.
Reduces the employee's leave balance.	Leave balance remains available until the carry forward deadline.
Depends on employment laws and company policy.	Depends on the company's leave policy.

When Is Leave Encashment Not Required?

Leave encashment may not apply in every situation.

For example:

The employee has already used all annual leave.
The employee has no accrued annual leave.
Unused leave has expired according to a valid company leave policy, where permitted.
The employee is requesting leave encashment during employment, but the company does not offer it.

Employers should always refer to their employment contract, leave policy, and applicable employment laws before making a decision.

Is Leave Encashment Subject to EPF, SOCSO, or EIS?

The payroll treatment of leave encashment depends on the nature of the payment and the applicable regulations.

Before processing leave encashment, employers should refer to the latest guidance issued by KWSP, PERKESO, and their payroll provider to determine whether EPF, SOCSO, or EIS contributions apply.

HR Best Practices

To manage annual leave and leave encashment effectively:

Create a written annual leave policy.
Explain whether leave encashment is allowed.
Clearly state carry forward rules and deadlines.
Review employees' leave balances regularly.
Encourage employees to take annual leave instead of accumulating large balances.
Process leave encashment together with the employee's final salary where applicable.
Keep accurate leave and payroll records for compliance purposes.

FAQs

What is leave encashment?

Leave encashment is the payment made to an employee for unused annual leave instead of allowing the employee to take the leave.

Is leave encashment mandatory in Malaysia?

When employment ends, employees may be entitled to payment for unused annual leave, subject to the Employment Act 1955, the employment contract, and the company's leave policy. Leave encashment during employment depends on the employer's policy.

How do you calculate leave encashment?

Leave encashment is generally calculated by multiplying the employee's daily rate of pay by the number of unused annual leave days.

Can employees take annual leave during the notice period?

It depends on the employment contract, company policy, and the employer's approval. If annual leave is not taken, any eligible unused leave may be paid through leave encashment.

Is leave encashment taxable in Malaysia?

Generally, yes. Leave encashment forms part of an employee's employment income and may be subject to income tax.

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