This study investigated the effect of Leadership Ostracism Behavior (LOB) on Counterproductive Work Behavior (CWB), emphasizing the mediating role of Moral Disengagement (MD) among public sector employees in the East Gojjam Zone, Amhara Region, Ethiopia. Using a quantitative, explanatory, cross-sectional design, data were collected from 397 public employees through validated Likert-scale questionnaires and analyzed using Structural Equation Modeling (SEM) in AMOS. Results revealed a negative direct effect of LOB on CWB, indicating that employees exposed to ostracizing leaders were initially less likely to engage in overt deviance, likely due to cultural norms emphasizing hierarchy and respect for authority. However, LOB exhibited a strong positive effect on Moral Disengagement (β = 0.53, p < .001), and MD, in turn, significantly increased CWB (β = 0.40, p < .001). Mediation analysis confirmed that MD fully mediates the relationship between LOB and CWB (indirect effect β = 0.21, p < .001), transforming leadership exclusion into delayed counterproductive behavior through moral rationalization. These findings highlight that while ostracism may suppress immediate retaliation, it erodes employees’ moral self-regulation, fostering cognitive justification for unethical acts. The study contributes to leadership and organizational behavior literature by demonstrating that the consequences of destructive leadership unfold through moral-cognitive mechanisms rather than direct behavioral responses. Practically, the results underscore the need for ethical leadership training, moral engagement programs, and inclusive communication structures within Ethiopia’s public institutions to mitigate the hidden costs of ostracizing leadership and promote ethical, high-performing workplaces.