Managing overtime and employee wellbeing is a constant balancing act for Australian employers. If you’re looking for a fair, flexible way to recognise extra hours without immediately increasing payroll costs, time in lieu (also called TOIL or “time off in lieu”) can be a practical option.
The key is using TOIL correctly. The rules aren’t one‑size‑fits‑all in Australia - they depend on the Fair Work system, including the relevant modern award or enterprise agreement (EA), as well as what your employment contracts and policies say. Missteps can lead to underpayments, disputes and regulator attention.
In this guide, we’ll explain what TOIL is, when you can offer it instead of overtime pay, how to set up a compliant arrangement, and how to handle accruals and payouts. Our goal is to help you reward extra effort in a way that’s legal, transparent and good for your team.
What Is Time In Lieu (TOIL)?
Time in lieu is paid time off that an employee takes later, instead of being paid for approved overtime now. In practice, an employee works additional hours (for example, outside ordinary hours or on a weekend), then takes the equivalent time as paid leave at a later date - subject to the rules that apply in your workplace.
TOIL sits alongside, but is different from, other entitlements:
- Overtime pay: Many awards and EAs require overtime to be paid at penalty rates (for example, time‑and‑a‑half or double time). Some instruments allow you and an employee to agree to TOIL instead. It’s one or the other for the same hours - not both.
- Annual leave: TOIL is not annual leave under the National Employment Standards (NES). It’s a separate arrangement that arises from overtime. It should be tracked separately to annual leave in your system.
Because TOIL is an alternative to overtime pay, it must be handled carefully and in line with any instrument that covers your employees. If you’re unsure what counts as overtime in your business, it’s worth revisiting your obligations around overtime laws.
Is TOIL Legal In Australia? (And When Can You Use It?)
Yes - TOIL is lawful in Australia when it’s done in accordance with the Fair Work framework and any applicable industrial instrument. The details, however, are award/EA‑ or contract‑dependent.
Here’s the general landscape:
- If a modern award or EA applies: Many awards include a specific TOIL clause that sets out when TOIL can be used, how it’s calculated, whether agreement must be in writing, when it must be taken, and when it must be paid out. If an award or EA applies, those rules take priority. You’ll usually need to follow the process it prescribes to the letter. If you need help interpreting coverage or clauses, consider getting support on modern awards.
- If an employee is award/EA‑free: You can still implement TOIL via your contracts and policies, provided the arrangement doesn’t undercut NES entitlements or the minimum wage. The terms you agree in writing will govern how TOIL works for that role.
TOIL is common in professional and office environments, but it’s used across many industries. The key is confirming whether your team is covered by an award or EA, and then aligning your practice with those rules.
How To Set Up A Compliant TOIL Arrangement
A clear, consistent process is essential. The steps below reflect best practice and highlight where award/EA rules may set different requirements.
1) Confirm Coverage And Define “Overtime” In Your Context
Start by working out whether each role is covered by a modern award or enterprise agreement. This will influence almost everything else - including who can accrue TOIL and on what terms.
Then map your “ordinary hours” for each role (the hours during which penalty rates don’t apply). This needs to match the award/EA, or the Employment Contract for award‑free employees.
2) Put It In Writing (Where Required) And Make It Clear
Many awards require a written agreement to take TOIL instead of receiving overtime pay. Some require a written agreement for each occasion; others allow a standing agreement plus records. Award‑free roles should still have the arrangement set out in the contract and a policy so everyone understands the rules.
Make sure your documentation answers the practical questions employees will have. A workplace policy and your staff handbook can sit alongside your contracts to explain the process in plain English.
3) Decide How TOIL Will Be Calculated
Calculation methods are usually dictated by the applicable award/EA. There are two common approaches:
- Hour‑for‑hour: One hour of TOIL for one overtime hour worked.
- Penalty‑rate equivalent: If overtime would be paid at, say, 150%, the employee receives 1.5 hours of TOIL for each overtime hour worked.
Which method applies depends on the instrument or, for award‑free staff, your contract/policy. If the instrument doesn’t permit TOIL, you generally must pay overtime instead. For context on rates, see this overview of overtime rates.
4) Track Hours And Approvals Reliably
Accurate records are critical. Keep timesheets for overtime worked, approvals for TOIL, and records of TOIL taken. Many awards specify the records you must keep; even when they don’t, good record‑keeping protects both you and your staff.
It’s wise to require pre‑approval for overtime (and therefore TOIL accrual) to avoid disputes. Align this with how you manage rosters and leave, and consider how TOIL requests will interact with your rostering obligations.
5) Set Fair Timeframes For Taking TOIL
Many awards specify a period within which TOIL must be taken (commonly within six months). Some allow extension by agreement; others require payout if it isn’t taken by the deadline. For award‑free employees, include a reasonable timeframe in your contract/policy so balances don’t hang around indefinitely.
As with any leave, operational requirements matter - but be reasonable and consistent. Encouraging employees to use TOIL promptly helps manage fatigue and avoids large accruals.
6) Align Payroll With Your Rules
Your payroll settings should match your TOIL rules: how accrual is recorded, how TOIL is taken (paid at ordinary rate), and when a payout is triggered. If your instrument requires payout at the overtime rate in certain circumstances, configure your system accordingly. This is also a good time to check broader leave settings (for example, how you handle annual leave loading if it applies in your workplace).
Paying, Accruing And Expiry: The Rules That Commonly Apply
This is where employers often trip up. The right approach depends on the instrument and your written terms, so treat the points below as general guidance and always check the rules that apply to your workforce.
Do Employees Get Paid For TOIL?
- When TOIL is taken: The employee is paid at their ordinary rate for the hours of TOIL leave (as if they worked those hours).
- When TOIL isn’t taken in time (award/EA roles): Many awards require any unused TOIL to be paid out at the applicable overtime rate once the deadline passes. However, not every instrument says the same thing - check the exact clause.
- Award‑free roles: Payout rules come from what you’ve agreed in the contract/policy. A common approach is to pay out remaining TOIL at the relevant overtime equivalent if it’s not used within the set timeframe, but you need to follow your own written terms and ensure they don’t undercut minimum entitlements.
If employment ends and a TOIL balance remains, most arrangements require a payout - often by reference to the overtime rate for the hours that generated the TOIL. Again, check your instrument/contract. If you’re processing a final pay, it’s worth reviewing your final pay obligations to ensure everything is correct.
Does Annual Leave Accrue On TOIL? What About Overtime Hours?
- During overtime that generates TOIL: Annual leave generally accrues based on ordinary hours, not overtime. So the extra overtime hours themselves typically do not increase annual leave accrual, unless your instrument states otherwise.
- When an employee is taking TOIL: TOIL is paid leave. Annual leave continues to accrue while an employee is on paid leave in most cases, which typically includes paid TOIL, but always confirm if your award/EA has a specific rule.
What Happens To Unused TOIL?
Three common scenarios appear in awards/EAs and contracts:
- Use within a timeframe: TOIL must be taken within a set period (e.g. six months from accrual). Balances are managed so they don’t drift.
- Payout if not used: If TOIL isn’t taken in time, many instruments require a payout at the overtime rate. Others allow different mechanisms, so read the clause carefully.
- On termination: Accrued but untaken TOIL is usually paid out in the final pay, commonly at the overtime equivalent. Your instrument or contract should spell this out.
The safest approach is to avoid large balances by encouraging timely use and by setting reminders before expiry dates. This supports wellbeing and keeps your liabilities predictable.
Best‑Practice TOIL Policy: What To Include
Even if your award/EA prescribes key rules, a clear policy helps everyone know how TOIL works day to day. You can house it in your staff handbook and summarise the arrangement in each relevant Employment Contract.
Consider covering:
- Eligibility: Which roles can earn TOIL (and whether this differs for full‑time, part‑time and casual employees).
- Approval process: Who approves overtime and TOIL, how to request it, and how it links to your rostering practices.
- Calculation method: Hour‑for‑hour or penalty‑rate equivalent, as dictated by the instrument or agreed for award‑free roles.
- Timeframes: When TOIL must be taken and any caps (e.g. max balance) to prevent large accruals.
- Payout rules: When unused TOIL is paid out and at what rate (consistent with the award/EA or your contract).
- Interaction with other leave: How TOIL sits alongside annual leave, personal/carer’s leave and public holidays.
- Record‑keeping: Timesheets, approvals and payroll entries required, including any award‑specific record rules.
- End of employment: How remaining balances are handled in final pay.
Embedding your TOIL policy in a broader staff handbook keeps your approach consistent with other workplace rules (like hours of work, leave approvals and conduct). A short, plain‑English workplace policy also makes it easy for managers to follow the same process across teams.
Finally, train your managers. Many compliance issues arise because day‑to‑day supervisors don’t realise that a casual “take Monday off instead” can trigger specific award obligations. A short briefing and a template approval form go a long way.
Common Pitfalls (And How To Avoid Them)
- Using TOIL where the award doesn’t allow it: If the instrument says overtime must be paid, you generally can’t replace it with TOIL. Confirm coverage early and stick to the rules.
- No written agreement when one is required: Many awards require a written agreement to take TOIL instead of overtime pay. Use a simple template and keep it on file.
- Incorrect calculations: Applying hour‑for‑hour when the instrument requires penalty‑rate equivalence (or vice versa) causes underpayments. Lock in your method and configure payroll accordingly.
- Letting balances linger: Open‑ended TOIL leads to fatigue and ballooning liabilities. Set clear timeframes and prompt employees to use TOIL within them.
- Not paying out when required: Where an award/EA says unused TOIL must be paid at the overtime rate after a deadline or on termination, you must follow it.
- Assuming overtime hours increase annual leave accrual: Accrual is usually based on ordinary hours only. Don’t over‑credit leave because extra hours were worked.
- Forgetting the rest of the framework: TOIL is one part of your employment settings. Review related issues like breaks, rostering and classification alongside your TOIL arrangements. If in doubt, it can help to get tailored advice from an employment lawyer.
Key Takeaways
- Time in lieu (TOIL) lets you offer paid time off later instead of paying overtime now, but the rules depend on the applicable award, EA and your written terms.
- Many awards require a written agreement for TOIL, set a timeframe for taking it and prescribe how it’s calculated and paid out - always check the clause for your workforce.
- Employees are paid at their ordinary rate when taking TOIL; unused TOIL is often paid at the overtime rate when required by the instrument or your contract.
- Annual leave typically does not accrue on overtime hours, but it usually continues to accrue while an employee is on paid TOIL; confirm if your instrument has a specific rule.
- A clear TOIL policy, consistent approvals, accurate records and aligned payroll settings are essential to stay compliant and avoid underpayments.
- Embed TOIL rules in your Employment Contracts, support them with a workplace policy and staff handbook, and sense‑check calculations against overtime rates.
If you’d like a consultation on setting up or reviewing a time in lieu (TOIL) arrangement for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
