How to Manage Unused Annual Leave

Almost everybody knows about annual leave. After all, the Employment Act of 1955 (EA) specifies that all workers covered by it are entitled to a set number of days of paid leave each year. 

But did you know that the EA does not apply to all Malaysian workers? The EA only covers those listed in the First Schedule of the Employment Act.

Nonetheless, most employment contracts in this country include annual leave rights, ranging from 14 days per year to 20 or even 30 days.

As the calendar year comes to a close, many employees may be thinking, "What will happen to my unused annual leave?"

 

Can employees "bring forward" their unused annual leave?

According to the EA, all workers are entitled to at least eight days of annual leave, with the entitlement increasing based on years of service with the company. 

Section 60E of the EA says that the employees must use their unused annual leave during the next 12 months of employment, or they will forfeit the leave entitlement.

For instance, if an EA employee has ten days of annual leave after 12 months of continuous employment, they may utilise the ten days of annual leave within the next 12 months.

If an employee works in West Malaysia and fits into one of these categories, they are considered an employee under the EA:

• Monthly salary of RM2,000 or under,

• They perform manual labour regardless of their monthly compensation,

• They are domestic workers, and

• Their employment types are covered under the First Schedule of the EA.

 

Can non-EA employees "bring forward" their unused annual leave?

If an employee makes over RM2,000 per month or they do not fit into any of the categories above, they should review their employment contract's terms and conditions and the company policy.

Most employment contracts provide a set amount of annual leave, and employees must check the following details:

• The cap on the number of unused annual leave days that workers can carry forward in the next year.

• The deadline for unused annual leave to be utilised.

Some companies choose not to allow for any carry-forward in their company policy, so the employee must use up their annual leave allotment during the calendar year.

 

Can employees cash in their unused annual leave?

Encashing the unused leave essentially means exchanging the remaining days of the employee's annual leave entitlement for their regular daily pay. 

This is similar to "selling" the annual leave to the company and might benefit employees who do not need or want to spend their entire annual leave entitlement.

This is not, however, a legal obligation for employers. As a result, the employee will need to check their employment contract or employer handbook to see if their organisation offers this benefit. 

The management or Human Resources department can help to clarify the matter for these employees, as company policy varies from one to the other.

 

What happens if an employee quits and has unused leave days?

If and when an employee resigns, a similar concern may arise: what happens to their annual leave balance? 

If they still have unused annual leave days when they resign, they can use them during their notice period to "bring forward" their last day of service.

However, the employee is still technically employed by their employer until they finish their notice period. 

 

Can the employer reject a resigning employee's leave application?

Employers can refuse an employee's annual leave application even when they are serving their notice period. 

In this case, they are entitled to payment in place of the annual leave balance. In other words, the employer must pay the employee for unused annual leave days at the regular pay rate.

Here's how to calculate the ordinary rate of pay based on the daily wage:

monthly rate / 26 = ordinary rate of pay

 

What will happen if the employer rejects the employee's annual leave application?

If the employer tells the EA employee not to spend their annual leave, and because of it, the employee cannot use up their entitled annual leave, the employer should pay the EA employee in place of the annual leave.

As for non-EA employees, it will depend on their employment contract or company policy.

 

What happens if the employer refuses to pay the employee's unused annual leave after they leave the company?

Employers should be careful as the employee can take legal action against the employer for refusing to pay their unused annual leave after they leave the company. They can file a complaint with the Director General of Labour under Section 69 of the EA (if their salary is below RM5,000 per month) or claim for breach of contract in the civil courts.

Any employer who violates the annual leave provisions for EA employees commits an offence. If convicted, the employer will be ordered to pay the employee the ordinary pay rate for each day of annual leave not provided.

 

While employees are entitled to yearly leave, this does not imply that they can spend it whenever and however they like. The employer still has to approve the employee's annual leave. Employers and workers should be accommodating and cooperative when dealing with annual leave, mainly when it involves the notice period of a resigning employee.

Employers should also review their annual leave policy to discover any gaps, such as how to handle accumulated and unused annual leave. A detailed policy in writing will reduce the likelihood of disputes.

Furthermore, a proper structure will benefit the company financially since it will be able to properly plan, predict, and manage the costs associated with the encashment of accumulated but unused leave of leaving employees.