How to Calculate Prorated Annual Leave in Malaysia

Annual leave is a key benefit for employees, allowing them to take time off while still receiving their salary.

However, not all employees work a full year. Some join mid-year, others resign early, and some take unpaid leave.

In such cases, prorated annual leave comes into play.

Businesses must calculate leave fairly based on the employee’s actual service period to avoid disputes and stay compliant with Malaysian labor laws.

This time, we will share further about prorated annual leave, how to calculate it, and when employers need to do prorate annual leave for employees.

What is Prorated Annual Leave?

Prorated annual leave refers to the adjusted number of leave days granted to employees who do not work a full year.

The Employment Act 1955 sets the basic entitlement for annual leave, but prorated calculations apply when employees work for only part of the year.

The calculation depends on company policies, employment contracts, and the legal requirements for employees earning RM2,000 and below per month.

When Does Prorated Annual Leave Apply?

Prorated annual leave applies when an employee does not complete a full calendar year of service but is still entitled to a portion of their leave.

This happens when an employee joins or leaves a company mid-year, or when specific contract terms impact their leave entitlement.

For example, if an employee starts working in July, they will not be entitled to the full year's leave but will receive a prorated amount based on the number of months they have worked.

Similarly, if an employee resigns in October, they will only be eligible for leave based on the months worked up to that point.

Companies use prorated leave calculations to ensure fair distribution of annual leave and reflect the actual duration of employment within the leave entitlement period.

When Do Employers Need to Prorate Annual Leave?

Employers need to calculate prorated annual leave in several situations, including:

New employees joining mid-year
Employees resigning before completing a full year
Employees on unpaid leave
Changes in employment contracts (part-time to full-time or vice versa)

How to Calculate Prorated Annual Leave (Based on Scenarios)

Calculating prorated leave follows a simple formula:

(Total Annual Leave Entitlement ÷ 12 months) × Number of Months Worked

Here are some examples of how this calculation works:

Scenario 1: New Employee Joining in June

An employee is entitled to 12 days of annual leave per year. They start work on June 1st and complete 7 months of service by year-end.

Calculation:

(12 ÷ 12) × 7 = 7 days of leave

Scenario 2: Employee Resigning in September

An employee with a 14-day annual leave entitlement resigns on September 15th, having worked for 9.5 months.

Calculation:

(14 ÷ 12) × 9.5 = 11 days (rounded based on company policy)

Scenario 3: Employee Taking 2 Months of Unpaid Leave

An employee entitled to 10 days of annual leave takes 2 months of unpaid leave. The company reduces their entitlement accordingly.

Calculation:

(10 ÷ 12) × (12 - 2) = 8.3 days (rounded to 8 days)

Scenario 4: Prorating Annual Leave for New Employees on Probation

A company offers 14 days of annual leave to confirmed employees. However, employees on probation (first 3 months) are not entitled to take annual leave during this period.

An employee joins the company on April 1st and completes probation on June 30th. From July 1st onward, they are eligible for annual leave.

Calculation:

Employee works from July to December (6 months)
Leave entitlement: 14 days annually

(14 ÷ 12) × 6 = 7 days

The employee is entitled to 7 days of annual leave for the remainder of the year.

Scenario 5: Prorating Annual Leave for Employees with a Contract Ending Mid-Year

New employee has a 1-year contract with 12 days of annual leave entitlement. However, the contract ends on September 30th instead of completing a full year.

Calculation:

The employee works from January to September (9 months).
Leave entitlement: 12 days annually.

(12 ÷ 12) × 9 = 9 days

What Employees Can Do with Unused Leave

Employees may not always use up their leave balance before leaving the company. Employers typically handle unused leave in one of three ways:

Carry forward leave

Some companies allow employees to transfer unused leave to the next year, but there may be limits on how many days can be carried forward.

Encashment of leave

Employees may convert unused leave into cash payments. This is usually based on their daily wage rate and based on company rules.

Forfeiture policy

If employees do not use their leave within a specified period, it may be forfeited. Companies must clearly communicate their leave policies to prevent misunderstandings.

FAQ

Is prorated leave mandatory in Malaysia?

Yes, under the Employment Act 1955, prorated leave is necessary for employees earning RM2,000 and below. For employees outside this category, leave entitlement follows company policy and contractual agreements.

How should employers round off leave calculations?

Employers typically round leave entitlements to the nearest full or half-day. Company policies should state whether rounding is up or down to maintain consistency and avoid misunderstanding.

What happens if an employee has taken more leave than their prorated entitlement?

If an employee resigns after taking more leave than they were entitled to, the excess leave may be deducted from their final salary. This should be outlined in the employment contract.

Can employers apply different prorated leave policies?

Yes, as long as they comply with the minimum requirements of the Employment Act 1955. Employers may offer better leave benefits but must communicate policies clearly in employment agreements

Keep Your Business Running This Raya

Giving bonuses and leave, like prorate annual leave, shows you care for your employees. But if you need extra help during this busy time, hiring new staff can keep your business smooth.

Post a job now and find the right people for your team!