diff --git a/components/ws-manager-mk2/controllers/status.go b/components/ws-manager-mk2/controllers/status.go
index 5e5f33f1a42635..f2fecbb4953ce3 100644
--- a/components/ws-manager-mk2/controllers/status.go
+++ b/components/ws-manager-mk2/controllers/status.go
@@ -440,10 +440,12 @@ func (r *WorkspaceReconciler) extractFailure(ctx context.Context, ws *workspacev
 				if !ws.IsHeadless() {
 					return fmt.Sprintf("container %s completed; containers of a workspace pod are not supposed to do that", cs.Name), nil
 				}
-			} else if !isPodBeingDeleted(pod) && terminationState.ExitCode != containerUnknownExitCode {
+			} else if !isPodBeingDeleted(pod) && terminationState.ExitCode == containerUnknownExitCode {
+				return fmt.Sprintf("workspace container %s terminated for an unknown reason: (%s) %s", cs.Name, terminationState.Reason, terminationState.Message), nil
+			} else if !isPodBeingDeleted(pod) {
 				// if a container is terminated and it wasn't because of either:
 				//  - regular shutdown
-				//  - the exit code "UNKNOWN" (which might be caused by an intermittent issue and is handled in extractStatusFromPod)
+				//  - the exit code "UNKNOWN" (which might be caused by an intermittent issue
 				//  - another known error
 				// then we report it as UNKNOWN
 				phase := workspacev1.WorkspacePhaseUnknown
diff --git a/components/ws-manager-mk2/controllers/workspace_controller_test.go b/components/ws-manager-mk2/controllers/workspace_controller_test.go
index a284c2224fa28c..665752a23fae8f 100644
--- a/components/ws-manager-mk2/controllers/workspace_controller_test.go
+++ b/components/ws-manager-mk2/controllers/workspace_controller_test.go
@@ -218,6 +218,40 @@ var _ = Describe("WorkspaceController", func() {
 			})
 		})
 
+		It("should handle workspace failure with unknown exit code", func() {
+			ws := newWorkspace(uuid.NewString(), "default")
+			m := collectMetricCounts(wsMetrics, ws)
+			pod := createWorkspaceExpectPod(ws)
+
+			markReady(ws)
+
+			// Update Pod with failed exit status.
+			updateObjWithRetries(k8sClient, pod, true, func(pod *corev1.Pod) {
+				pod.Status.ContainerStatuses = append(pod.Status.ContainerStatuses, corev1.ContainerStatus{
+					LastTerminationState: corev1.ContainerState{
+						Terminated: &corev1.ContainerStateTerminated{
+							ExitCode: containerUnknownExitCode,
+						},
+					},
+				})
+			})
+
+			// Controller should detect container exit and add Failed condition.
+			expectConditionEventually(ws, string(workspacev1.WorkspaceConditionFailed), metav1.ConditionTrue, "")
+
+			expectFinalizerAndMarkBackupCompleted(ws, pod)
+
+			expectWorkspaceCleanup(ws, pod)
+
+			expectMetricsDelta(m, collectMetricCounts(wsMetrics, ws), metricCounts{
+				restores:      1,
+				startFailures: 0,
+				failures:      1,
+				stops:         map[StopReason]int{StopReasonFailed: 1},
+				backups:       1,
+			})
+		})
+
 		It("should clean up timed out workspaces", func() {
 			ws := newWorkspace(uuid.NewString(), "default")
 			m := collectMetricCounts(wsMetrics, ws)