Published On: 15/01/2026By

Termination Benefits in Malaysia: Can Unpaid Leave Reduce Payouts? High Court Explains

High Court Clarifies How “True Day’s Wages” Should Be Calculated

Termination cases involving long-serving employees can be legally complex — especially when unpaid leave is involved.

A recent High Court decision has provided important clarification for Malaysian employers on how termination benefits must be calculated when an employee was on unpaid leave prior to termination. This ruling directly impacts HR, payroll teams, and employers handling retrenchment, medical termination, or long-term absence cases.

Below, we break down the case, the Court’s ruling, and the key compliance takeaways every employer should understand.

Background of the Case

In this case:

  • The employee had long service with the employer.

  • Due to prolonged illness, the employee was placed on extended unpaid leave, with the employer’s knowledge and consent.

  • Eventually, the employee’s employment was terminated.

  • The employer paid termination benefits based on actual wages earned during the final 12 months before termination.

The employee later filed a complaint with the Labour Office, disputing the calculation of his termination benefits.

The Core Legal Issue

The dispute centred on one key question:

How should “true day’s wages” be calculated when an employee was on unpaid leave during the 12 months before termination?

Under the Employment (Termination and Lay-Off Benefits) Regulations 1980, termination benefits are calculated based on the employee’s “true day’s wages” during the 12 months immediately preceding termination.

Labour Office’s Initial Decision

The Labour Office ruled in favour of the employee and held that:

  • The 12-month period does not have to be the immediate 12 months before termination

  • Periods of unpaid leave should not disadvantage the employee

  • Termination benefits should reflect the employee’s full contractual wages, even if those wages were not actually paid

Based on this approach, the Labour Office recalculated termination benefits using an earlier period when the employee was receiving full salary, and ordered the employer to pay additional benefits.

What the High Court Decided

The High Court overturned the Labour Office’s decision and ruled in favour of the employer.

The Court made several important clarifications:

1. The Law Is Clear and Cannot Be Rewritten

The High Court emphasised that Regulation 6(2) is clear and unambiguous:

“Twelve completed months’ service immediately preceding the relevant date”
means exactly that — the last 12 months counted backwards from the termination date.

The Labour Office had no authority to select an earlier period simply because it appeared more “beneficial” to the employee.

2. Unpaid Leave Means No Wages Earned

The Court confirmed that:

  • Wages not earned or paid during unpaid leave must be reflected as such

  • An employee on unpaid leave has waived the right to wages for that period

  • Unpaid leave cannot be treated the same as paid statutory leave such as:

    • Annual leave

    • Medical leave

    • Maternity leave

3. Termination Benefits Must Be Based on Actual Earnings

Termination benefits must be calculated using actual wages earned, not theoretical or contractual wages that were never paid.

The Court rejected any approach that attempts to “fill in” unpaid months with earlier full-pay periods.

Final Outcome

  • The employer’s original calculation was legally correct

  • No additional termination benefits were payable

  • The Labour Office’s interpretation was deemed incorrect and beyond its powers

Key Takeaways for Employers & HR Teams

This decision provides much-needed clarity for Malaysian employers:

✅ Unpaid leave affects termination benefits

If an employee was on unpaid leave, those months count as zero wages for calculation purposes.

✅ The final 12 months rule is strict

Employers must use the 12 months immediately before termination, not any earlier period.

✅ Paid and unpaid leave are treated differently

Unpaid leave is not protected in the same way as statutory paid leave.

✅ Documentation matters

Clear records of unpaid leave approvals, payroll data, and termination calculations are critical for compliance and dispute protection.

How Pandahrms Helps Employers Stay Compliant

Managing unpaid leave, payroll accuracy, and termination calculations can be challenging — especially when disputes arise.

With Pandahrms, employers can:

  • Track unpaid leave records accurately

  • Maintain clean payroll histories

  • Ensure termination benefits are calculated correctly

  • Support HR decisions with clear documentation and audit trails

All in one centralised HR system — reducing compliance risk and HR disputes.

Final Thoughts

This High Court ruling reinforces an important principle for Malaysian employers:

Termination benefits are based on what was actually earned — not what could have been earned.

Understanding the legal treatment of unpaid leave is essential for lawful termination processes and protecting your organisation from unnecessary disputes.