diff --git a/cloudinit/config/cc_mounts.py b/cloudinit/config/cc_mounts.py
index 1b4230c51d0..ccfda25847c 100644
--- a/cloudinit/config/cc_mounts.py
+++ b/cloudinit/config/cc_mounts.py
@@ -587,7 +587,16 @@ def handle(name: str, cfg: Config, cloud: Cloud, args: list) -> None:
     cfg_lines = ["\t".join(entry) for entry in updated_cfg]
 
     dirs = [d[1] for d in updated_cfg if d[1].startswith("/")]
-
+    for entry in updated_cfg:
+        fstype = entry[2]
+        options = entry[3]
+
+        if fstype == "overlay" or "overlay" in options:
+            for opt in options.split(","):
+                if opt.startswith("upperdir="):
+                    util.ensure_dir(opt.split("=", 1)[1])
+                elif opt.startswith("workdir="):
+                    util.ensure_dir(opt.split("=", 1)[1])
     for d in dirs:
         try:
             util.ensure_dir(d)
diff --git a/tests/unittests/config/test_cc_mounts.py b/tests/unittests/config/test_cc_mounts.py
index 80dbf5c6e11..2a8ed7a4ee9 100644
--- a/tests/unittests/config/test_cc_mounts.py
+++ b/tests/unittests/config/test_cc_mounts.py
@@ -534,6 +534,25 @@ def test_fstab_mounts_combinations(self):
             """  # noqa: E501
             ).strip()
         )
+    
+    def test_overlay_dirs_are_created(self, mocker, fake_fs):
+        ensure_dir = mocker.patch("cloudinit.config.cc_mounts.util.ensure_dir")
+
+        cc = {
+            "mounts": [
+                [
+                    "overlay",
+                    "/mnt/test",
+                    "overlay",
+                    "lowerdir=/a,upperdir=/upper/path,workdir=/work/path",
+                ]
+            ]
+        }
+
+        cc_mounts.handle("", cc, self.mock_cloud, [])
+
+        ensure_dir.assert_any_call("/upper/path")
+        ensure_dir.assert_any_call("/work/path")
 
 
 class TestCreateSwapfile: