As the year draws to a close, many HR departments in Malaysia are preparing for one of the most common year-end challenges — unused annual leave.
Can employees carry it forward? Must employers encash it? Or does it simply expire when the year ends?

Understanding how unused leave is treated is crucial for both employers and employees, especially during the final payroll cycles of the year.

1. What Does Malaysian Law Say About Annual Leave?

Under Section 60E of the Employment Act 1955, every employee covered under the Act is entitled to a minimum number of paid annual leave days based on years of service:

However, the Act does not specify what happens to unused leave at the end of the year — leaving it up to company policy to decide whether to allow carry forward, encashment, or forfeiture.

2. Can Employees Carry Forward Unused Leave?

Most companies in Malaysia allow employees to carry forward a certain number of unused leave days into the following year — often between 5 to 10 days — but this must be clearly stated in the company’s HR policy.

Employers typically set a deadline (e.g., March 31) for employees to utilize their carried-forward leave, after which any remaining balance may be forfeited.

Best practice:
✅ Clearly state carry-forward limits in your company handbook.
✅ Remind employees early (before December) to plan their remaining leave days.

3. Can Employers Forfeit Unused Leave?

Yes — if your company policy explicitly states that unused leave expires at the end of the year, then forfeiture is legally valid.
However, it is strongly recommended that HR departments communicate this early to employees to avoid misunderstandings or disputes.

For employees under contract terms that mention forfeiture, HR should ensure the clause is transparent and acknowledged in writing.

4. What About Leave Encashment (Pay in Lieu of Leave)?

Some companies may offer leave encashment, allowing employees to convert their unused leave into cash — either as a year-end benefit or upon resignation.

While not required by law, it’s a common practice for companies aiming to boost employee morale or when operational needs prevent employees from taking leave.

For payroll processing, this encashment amount should be treated as part of gross income and subject to statutory deductions such as EPF, SOCSO, and PCB.

5. Why Managing Unused Leave Matters for Employers

Ignoring unused leave balances can create significant HR and payroll issues — especially during year-end closing:

• ❌ Financial liability: Accumulated leave represents potential payout obligations.

• ❌ Productivity risk: Employees delaying leave may experience burnout.

• ✅ Compliance and clarity: Proper tracking ensures transparent, fair management.

That’s why many employers are turning to automated leave management systems like Pandahrms to stay ahead.

6. How Pandahrms Simplifies Year-End Leave Management

With Pandahrms, HR teams can easily:

• Auto-track leave balances — real-time visibility of who still has unused leave.

• Set policy rules — such as carry-forward limits or expiry dates.

• Automate encashment calculations — syncs directly with the payroll module.

• Generate reports — for management and audit purposes before year-end closing.

This ensures every leave request, approval, and balance is managed accurately — helping your HR team close the year smoothly and stay compliant with Malaysian labor laws.

Final Thoughts

Unused leave may seem like a small issue, but for HR teams, it reflects how well a company balances compliance, fairness, and employee well-being.
By setting clear policies and automating your process with Pandahrms, you can eliminate confusion, avoid disputes, and maintain a healthy workplace culture — even during the busiest time of the year.