Paying Out Days in Lieu in New Zealand: Rules for Employers

If you run a small business, “days in lieu” can feel like one of those payroll topics that should be simple - until someone asks to cash them up, you’re processing a resignation, or your team’s working weekends and public holidays.

The tricky part is that people often use “days in lieu” as a catch-all phrase for different legal entitlements (for example, time off in lieu for extra hours versus an alternative holiday for working a public holiday). Those aren’t the same thing, and whether you can pay out days in lieu depends on what entitlement you’re actually dealing with.

Below, we’ll walk you through what “days in lieu” usually means in NZ workplaces, when you can (and can’t) pay them out, how to document things properly, and what to watch for when an employee leaves.

What “Days In Lieu” Usually Means (And Why That Matters For Pay-Outs)

In day-to-day business, “days in lieu” commonly refers to either:

• Time off in lieu (TOIL) - time off granted instead of paying overtime or extra hours (this is mainly a contractual arrangement, not a universal statutory entitlement); or
• An alternative holiday - the legal entitlement that arises when an employee works on a public holiday (and it’s an “otherwise working day” for them) under the Holidays Act 2003.

This distinction matters because paying out days in lieu will be treated differently depending on which one you’re talking about:

• Alternative holidays are a Holidays Act entitlement and are closely tied to public holiday rules.
• TOIL is typically managed under your employment agreement/policies, so your business rules and record-keeping need to be clear (and lawful).

As a practical tip: when you’re discussing days in lieu with your team, try to use the correct label (“TOIL” versus “alternative holiday”). It prevents confusion later when someone asks for a payout and you’re trying to match it to the right legal category.

If your business uses TOIL regularly, it’s worth setting this out clearly in your Time Off In Lieu approach and ensuring your contracts and policies match how you actually run your roster.

When Can Days In Lieu Be Paid Out In NZ?

Employers often ask: “Can we just pay out days in lieu instead of managing leave?” The answer is: sometimes - but the “how” depends on the entitlement.

1) Paying Out TOIL (Time Off In Lieu)

Because TOIL is usually created by agreement (rather than automatically by statute), whether you can pay it out should be governed by:

• the employment agreement (or workplace policy) that explains how TOIL is accrued and taken; and
• general employment law requirements (for example, you must pay employees correctly for all time worked, and you can’t make unlawful deductions).

In many workplaces, TOIL is offered instead of paying overtime. If that’s how your business runs, make sure you’re also across the rules on Working Overtime, because a “time off” arrangement shouldn’t become a way of underpaying or creating ambiguity about what staff are owed.

So can TOIL be paid out? In practice, yes - if your agreement/policy allows it, or if you and the employee agree to it (particularly on termination, or if TOIL can’t be reasonably taken). But you should document it clearly and pay it through payroll with appropriate record-keeping. (How it’s taxed can depend on the payment type and the employee’s circumstances, so if you’re unsure, check with your payroll provider, accountant, or the IRD.)

2) Paying Out Alternative Holidays (Public Holiday Days In Lieu)

An alternative holiday arises when an employee works on a public holiday that would otherwise be a working day for them. When that happens, the Holidays Act generally requires:

• the employee to be paid time and a half for the hours actually worked on the public holiday; and
• the employee to receive an alternative holiday (a paid day off at a later time).

Can that alternative holiday be paid out? Yes, but the Holidays Act sets some specific rules. If the employee’s employment ends and they still have an alternative holiday owing, it must be paid out in their final pay. During employment, an alternative holiday is generally meant to be taken as paid time off - however, if the alternative holiday isn’t taken within 12 months of the employee becoming entitled to it, the employee can ask for it to be paid out, and the employer must pay it as soon as practicable (and the employee then gives up the right to take that day off).

Because this is a statutory entitlement, you should be cautious about informal “trade-offs” that try to cash it out early or skip it altogether. If you have rotating rosters or variable work patterns, it’s a good idea to get advice on your specific scenario so your public holiday pay, alternative holidays, and records all line up.

How To Calculate A Days In Lieu Pay-Out (So You Don’t Get Caught Out)

When an employee asks to have days in lieu paid out, your first step is to confirm what they have:

• Is it TOIL for extra hours?
• Is it an alternative holiday from a public holiday shift?
• Is it actually annual leave or another entitlement being described incorrectly?

Once you’ve identified the category, you’ll usually need to work out the value based on the employee’s relevant daily pay or average daily pay concepts under the Holidays Act (particularly for alternative holidays), or based on the agreed method in the employment agreement (for TOIL).

TOIL Conversion (Common Approaches)

TOIL is often tracked in hours. Common approaches include:

• Hour-for-hour: 1 extra hour worked = 1 hour TOIL accrued.
• Enhanced TOIL: e.g. 1.5 hours TOIL for each hour worked beyond a threshold (more common where you’re effectively mirroring overtime rates).

If you pay out TOIL, you’ll typically convert the owed hours into a dollar amount using the employee’s ordinary hourly rate (or another clearly-agreed method). The key is consistency and clarity - if your policy says TOIL is granted “instead of overtime”, you should ensure employees aren’t left worse off than they would be under a properly-paid arrangement.

Alternative Holiday Pay-Out (Public Holidays)

An alternative holiday is usually paid as a day’s pay when it’s taken. If it’s being paid out (most commonly at termination, or after a valid 12-month cash-out request), you’ll generally need to calculate what that day would have been worth if taken.

Where small businesses get stuck is with:

• employees with variable hours (hospitality, retail, trades);
• commission or allowances; and
• irregular rosters.

Those factors can affect what “a day” is worth. If you’re unsure, get help early - underpaying final entitlements is one of the quickest ways for an otherwise smooth resignation to turn into a dispute.

What To Put In Your Employment Agreements And Policies To Manage Pay-Out Requests

If you want to manage pay-out requests without constant back-and-forth, your best friend is a well-drafted employment agreement (supported by a short, practical policy).

At a minimum, consider covering:

• How TOIL is approved (e.g. pre-approval required, who can authorise).
• How TOIL accrues (hour-for-hour, enhanced rates, minimum increments).
• When TOIL must be taken (e.g. within 3 months, within the same roster cycle).
• Whether TOIL can be paid out (and in what circumstances: by agreement, on termination, when it can’t reasonably be taken).
• How TOIL is valued if paid out (e.g. base hourly rate, ordinary pay, or another method).
• Record-keeping (where it’s tracked and how employees can check their balance).

You can usually fold these terms into your Employment Contract so that expectations are set from day one, rather than negotiated in the moment when someone’s leaving or asking for cash instead of time off.

Also keep in mind: public holiday entitlements (including alternative holidays) don’t disappear just because your agreement says something different. Agreements can add to minimum entitlements, but they can’t contract out of them (except in limited circumstances allowed by law).

What Happens When An Employee Leaves: Final Pay And Days In Lieu Paid Out

The most common time employers deal with paying out days in lieu is when someone resigns or you’re terminating employment.

Final pay calculations can include a mix of entitlements, such as:

• unpaid wages up to the last day worked;
• annual leave owing;
• alternative holidays owing (if any);
• contractual TOIL owing (if your agreement treats it as payable); and
• any other contractual payments or reimbursements.

If the employee is working out (or not working out) their notice period, it’s also worth knowing how Payment In Lieu Of Notice works, because it’s a separate concept - but it often gets bundled into the same final pay conversation.

Be Careful About “Wiping” TOIL Or Alternative Holidays On Exit

It can be tempting to treat days in lieu as informal (“we’ll sort it out later”), but this is where problems start.

If TOIL is promised or accrued under your agreement/past practice, and you don’t deal with it properly on termination, you risk:

• a wage arrears claim;
• a dispute about final pay calculations; and
• damage to your offboarding process and reputation (especially in small industries).

Where a termination is complex (for example, performance issues, misconduct allegations, or a breakdown of the relationship), it’s usually worth getting tailored help and using a structured process like an Employee Termination Documents Suite so that the exit is legally compliant and properly documented.

Document Any Agreement To Pay Out Mid-Employment Or On Exit

If you and the employee agree to cash out TOIL while they’re still employed, put it in writing. Even a short confirmation email can help, as long as it clearly states:

• what is being paid out (e.g. “8 hours TOIL”);
• how it was calculated; and
• when it will be paid (usually the next pay run).

If you’re paying out an alternative holiday, it’s also worth recording why it’s being paid out (for example, because employment has ended, or because the employee requested cash-out after it remained untaken for 12 months).

This reduces the risk of a later dispute like: “I thought that payment was for something else” or “I still have that day owing.”

Common Compliance Risks For Small Businesses (And How To Avoid Them)

Most issues we see aren’t because employers are trying to do the wrong thing. They happen because “days in lieu” sits at the intersection of rostering, payroll, and legal minimums - and small errors can compound over time.

Mixing Up Public Holiday Rules

If someone works on a public holiday that’s an otherwise working day, they may be entitled to:

• time and a half for hours worked; and
• an alternative holiday.

If you only give them “a day in lieu” but forget time and a half, you may underpay them. If you pay time and a half but forget to track the alternative holiday, you may end up with a hidden leave liability.

Inconsistent TOIL Practices

In many small businesses, TOIL starts informally (“just take Friday afternoon off next week”) and becomes a regular expectation. That’s fine - but once it’s a pattern, it’s harder to unwind without conflict.

To stay consistent, make sure you have:

• a clear approval process;
• a single tracking system (even a simple spreadsheet is better than nothing); and
• a clear rule on whether TOIL expires, rolls over, or gets paid out.

Not Keeping Good Records

Even when everyone’s acting in good faith, poor records make it hard to prove:

• how much TOIL was accrued;
• which public holidays were worked;
• whether an alternative holiday was taken; and
• whether a payout has already been made.

Good record-keeping is also what allows you to answer staff questions quickly - which matters when you’re trying to run a business and don’t have time for long back-and-forth.

Trying To Fix Budget Pressures By Reducing Entitlements

If things are tight and you’re tempted to “pause” TOIL accruals, force staff to take leave, or change hours, be careful. Changes to working arrangements should be managed properly (and often require agreement and consultation). If you’re considering roster changes, it’s worth reading up on Reducing Staff Hours so you don’t accidentally create a bigger legal issue while trying to solve a short-term operational one.

Key Takeaways

• “Days in lieu” can mean different entitlements in practice - most commonly TOIL for extra hours or an alternative holiday for working a public holiday - and the rules for pay-outs depend on which it is.
• Paying out days in lieu is usually easiest (and lowest risk) to handle at termination, but TOIL can often be paid out mid-employment if your agreement/policy allows it and you document it clearly.
• Alternative holidays are a Holidays Act entitlement linked to public holiday work. They must be paid out on termination, and they can generally only be paid out during employment if the employee requests cash-out after the alternative holiday has remained untaken for 12 months.
• How you calculate a payout matters - especially for staff with variable rosters, allowances, or commission - because “a day” may not always be a simple flat figure.
• Your employment agreement and policies should spell out TOIL rules, including approval, accrual rates, timeframes for taking it, and whether/how it can be paid out.
• Clear records reduce disputes and help you manage leave liabilities, payroll accuracy, and smooth offboarding when staff resign.

If you’d like help setting up (or reviewing) your employment terms so TOIL and public holiday entitlements are handled properly - including situations where days in lieu are paid out - you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.