diff --git a/crates/oxc_linter/src/rules/eslint/no_unused_labels.rs b/crates/oxc_linter/src/rules/eslint/no_unused_labels.rs
index a015c35e6a454..80dca2aa3d9ed 100644
--- a/crates/oxc_linter/src/rules/eslint/no_unused_labels.rs
+++ b/crates/oxc_linter/src/rules/eslint/no_unused_labels.rs
@@ -84,6 +84,12 @@ fn test() {
             None,
         ),
         ("A: { var A = 0; console.log(A); break A; console.log(A); }", None),
+        (
+            "label: while (true) { f = function() { label: while (true) { break label; } }; break label; }",
+            None,
+        ),
+        ("outer: { function f() { inner: { break inner; } } break outer; }", None),
+        ("A: { const f = () => { B: { break B; } }; break A; }", None),
     ];
 
     let fail = vec![
@@ -96,6 +102,9 @@ fn test() {
         ("A: { var A = 0; console.log(A); }", None),
         ("A: /* comment */ foo", None),
         ("A /* comment */: foo", None),
+        // Ensure inner label in function is still marked as unused when not used
+        ("A: { function f() { B: { } } break A; }", None),
+        ("label: while (true) { (() => { label: while (false) {} })(); }", None),
     ];
     let fix = vec![
         ("A: var foo = 0;", "var foo = 0;", None),
diff --git a/crates/oxc_linter/src/snapshots/eslint_no_unused_labels.snap b/crates/oxc_linter/src/snapshots/eslint_no_unused_labels.snap
index 4d6e748f2846e..c8da03d4c9263 100644
--- a/crates/oxc_linter/src/snapshots/eslint_no_unused_labels.snap
+++ b/crates/oxc_linter/src/snapshots/eslint_no_unused_labels.snap
@@ -63,3 +63,24 @@ source: crates/oxc_linter/src/tester.rs
    · ─
    ╰────
   help: Replace `A /* comment */: foo` with `foo`.
+
+  ⚠ eslint(no-unused-labels): 'B:' is defined but never used.
+   ╭─[no_unused_labels.tsx:1:21]
+ 1 │ A: { function f() { B: { } } break A; }
+   ·                     ─
+   ╰────
+  help: Replace `B: { }` with `{ }`.
+
+  ⚠ eslint(no-unused-labels): 'label:' is defined but never used.
+   ╭─[no_unused_labels.tsx:1:32]
+ 1 │ label: while (true) { (() => { label: while (false) {} })(); }
+   ·                                ─────
+   ╰────
+  help: Replace `label: while (false) {}` with `while (false) {}`.
+
+  ⚠ eslint(no-unused-labels): 'label:' is defined but never used.
+   ╭─[no_unused_labels.tsx:1:1]
+ 1 │ label: while (true) { (() => { label: while (false) {} })(); }
+   · ─────
+   ╰────
+  help: Replace `label: while (true) { (() => { label: while (false) {} })(); }` with `while (true) { (() => { label: while (false) {} })(); }`.
diff --git a/crates/oxc_semantic/src/builder.rs b/crates/oxc_semantic/src/builder.rs
index df2904d365127..72efa3b9ca517 100644
--- a/crates/oxc_semantic/src/builder.rs
+++ b/crates/oxc_semantic/src/builder.rs
@@ -267,6 +267,9 @@ impl<'a> SemanticBuilder<'a> {
 
         let jsdoc = if self.build_jsdoc { self.jsdoc.build() } else { JSDocFinder::default() };
 
+        #[cfg(debug_assertions)]
+        self.unused_labels.assert_empty();
+
         let semantic = Semantic {
             source_text: self.source_text,
             source_type: self.source_type,
@@ -1215,7 +1218,7 @@ impl<'a> Visit<'a> for SemanticBuilder<'a> {
     fn visit_labeled_statement(&mut self, stmt: &LabeledStatement<'a>) {
         let kind = AstKind::LabeledStatement(self.alloc(stmt));
         self.enter_node(kind);
-        self.unused_labels.add(stmt.label.name.as_str());
+        self.unused_labels.add(stmt.label.name.as_str(), self.current_node_id);
 
         /* cfg */
         let label = &stmt.label.name;
@@ -1241,7 +1244,7 @@ impl<'a> Visit<'a> for SemanticBuilder<'a> {
         });
         /* cfg */
 
-        self.unused_labels.mark_unused(self.current_node_id);
+        self.unused_labels.mark_unused();
         self.leave_node(kind);
     }
 
diff --git a/crates/oxc_semantic/src/label.rs b/crates/oxc_semantic/src/label.rs
index 260c84641662d..699d08410987e 100644
--- a/crates/oxc_semantic/src/label.rs
+++ b/crates/oxc_semantic/src/label.rs
@@ -4,34 +4,48 @@ use oxc_syntax::node::NodeId;
 pub struct LabeledScope<'a> {
     pub name: &'a str,
     pub used: bool,
-    pub parent: usize,
+    pub node_id: NodeId,
 }
 
 #[derive(Debug, Default)]
 pub struct UnusedLabels<'a> {
-    pub scopes: Vec<LabeledScope<'a>>,
-    pub curr_scope: usize,
+    pub stack: Vec<LabeledScope<'a>>,
     pub labels: Vec<NodeId>,
 }
 
 impl<'a> UnusedLabels<'a> {
-    pub fn add(&mut self, name: &'a str) {
-        self.scopes.push(LabeledScope { name, used: false, parent: self.curr_scope });
-        self.curr_scope = self.scopes.len() - 1;
+    pub fn add(&mut self, name: &'a str, node_id: NodeId) {
+        self.stack.push(LabeledScope { name, used: false, node_id });
     }
 
     pub fn reference(&mut self, name: &'a str) {
-        let scope = self.scopes.iter_mut().rev().find(|x| x.name == name);
-        if let Some(scope) = scope {
-            scope.used = true;
+        for scope in self.stack.iter_mut().rev() {
+            if scope.name == name {
+                scope.used = true;
+                return;
+            }
         }
     }
 
-    pub fn mark_unused(&mut self, current_node_id: NodeId) {
-        let scope = &self.scopes[self.curr_scope];
-        if !scope.used {
-            self.labels.push(current_node_id);
+    pub fn mark_unused(&mut self) {
+        debug_assert!(
+            !self.stack.is_empty(),
+            "mark_unused called with empty label stack - this indicates mismatched add/mark_unused calls"
+        );
+
+        if let Some(scope) = self.stack.pop() {
+            if !scope.used {
+                self.labels.push(scope.node_id);
+            }
         }
-        self.curr_scope = scope.parent;
+    }
+
+    #[cfg(debug_assertions)]
+    pub fn assert_empty(&self) {
+        debug_assert!(
+            self.stack.is_empty(),
+            "Label stack not empty at end of processing - {} labels remaining. This indicates mismatched add/mark_unused calls",
+            self.stack.len()
+        );
     }
 }