Yes, this would still be closest proximity. Column 3 of 'Z' contains the linkage distances between the two clusters merged in that row. So if the third column in your example has distance values of 0 or between 0 and 1, that is fine. That is still closest proximity.
If you look at the example in the 'linkage' documentation, you will see that the third column of 'Z' contains values of 0 and between 0 and 1, as well as values greater than 1:
