If you run a business (or you’re managing your first team), overtime can creep up fast. A late client call, a weekend event, an urgent job that has to go out today - suddenly someone’s worked extra hours and you’re wondering what you can legally offer in return.
That’s where “time in lieu” comes in. In plain terms, it’s when an employee takes paid time off later instead of being paid extra money for additional hours worked.
This guide is updated to reflect current, practical workplace expectations in New Zealand, including the way businesses are managing flexibility and record-keeping today. Let’s walk through what time in lieu is, when it makes sense, and how to set it up properly so you stay compliant and avoid misunderstandings.
What Does “Time In Lieu” Mean In New Zealand?
Time in lieu (often shortened to TIL or called TOIL - time off in lieu) is an arrangement where an employee works extra time and, instead of receiving additional pay for those extra hours, they receive equivalent paid time off at a later date.
Here’s the key point: time in lieu isn’t an automatic legal entitlement under New Zealand employment law in the same way that annual leave or sick leave is.
Instead, time in lieu is generally:
- Contract-based (it’s agreed in the employment agreement), or
- Policy-based (set out in a workplace policy and applied consistently), or
- Agreed case-by-case (for example, in writing after a particular overtime shift).
Because it’s not a “standard” statutory leave type, the risk with time in lieu is usually not that it’s illegal - it’s that it’s unclear. Unclear arrangements are where disputes happen (and where payroll mistakes and employee claims can follow).
A Quick Example Of Time In Lieu
Let’s say your employee normally works 9am–5pm Monday to Friday (40 hours/week). One week, they work an additional 4 hours on Saturday to cover a short-notice job.
If you agree to time in lieu, they might take 4 hours off (paid) the following week, such as leaving at 1pm on Friday.
Simple in theory - but the details matter (like whether those extra hours were actually “overtime”, whether penalties apply, and how you record and approve it).
Is Time In Lieu Legal In NZ?
Yes, time in lieu can be legal in New Zealand, but it needs to be implemented in a way that still meets your minimum employment law obligations.
At a high level, the main legal “guardrails” are:
- The Employment Relations Act 2000 (good faith obligations and enforceable employment terms)
- The Holidays Act 2003 (minimum leave entitlements and “otherwise working day” concepts for leave payments)
- Minimum wage compliance (employees must still receive at least the minimum wage for all hours worked, when averaged across the pay period)
- Clear, agreed terms in the employment agreement or an agreed workplace policy
In practice, most time in lieu problems come from one of these situations:
- The employee thinks they were promised time off, but there’s no clear record.
- The employer assumes time in lieu applies, but the employee expects overtime pay.
- The time in lieu “bank” builds up and is never taken (and becomes a messy liability).
- Different employees are treated differently, creating fairness and process issues.
If you want time in lieu to run smoothly, it’s usually best to bake it into a clear Employment Contract and a simple approval/recording process.
When Should You Offer Time In Lieu (And When Should You Pay Overtime)?
Time in lieu can be a great option when you want to reward extra effort but also protect cash flow - especially for small businesses with seasonal work or project spikes.
That said, it’s not always the best fit. The “right” option depends on your industry, the role, and what the employment agreement says.
Time In Lieu Can Make Sense When:
- The extra hours are occasional (not every week).
- The employee actually wants flexibility and will realistically be able to take the time off.
- Your workplace can accommodate time off later without disrupting operations.
- You agree on the rate (for example, 1 hour worked = 1 hour off, or a higher rate if you choose).
Paying Overtime Can Be Better When:
- Overtime is frequent or expected (for example, busy retail periods, ongoing understaffing, constant project deadlines).
- The employee is unlikely to be able to take time off (and the “bank” will just grow).
- Your agreement or workplace culture treats overtime as paid, and changing that would create dissatisfaction or disputes.
- A higher rate is required under an applicable employment agreement, policy, or established custom/practice.
One practical tip: if you’re using time in lieu regularly, it’s a sign you may need to review workloads, staffing levels, and how your overtime arrangements are drafted (including whether your employment terms still match the reality of the role).
How Do You Set Up A Time In Lieu Agreement Properly?
The easiest way to avoid confusion is to treat time in lieu like any other workplace entitlement: define it, document it, and apply it consistently.
Here are the main areas you should cover.
1) Put The Arrangement In Writing
Ideally, time in lieu is addressed in the employee’s employment agreement, including:
- When time in lieu may be offered (for example, pre-approved overtime only)
- Whether time in lieu is the default option or by agreement each time
- How accrual works (1:1 or another rate)
- How and when it must be taken
- What happens on termination (for example, paid out or forfeited - noting forfeiture can be risky if not clearly agreed)
If you’re hiring, updating, or standardising your terms, it’s also worth ensuring your Employment Contract reflects how your business actually operates (especially if roles regularly require extra hours).
2) Be Clear About Approval (Before The Overtime Happens)
A common source of disputes is an employee doing extra hours, then later saying, “I’m taking Friday off in lieu.” If you didn’t agree to that, you can end up in a difficult position.
To keep things clean, set a rule such as:
- Overtime must be approved in advance by a manager, and
- Time in lieu must be requested and approved before it’s taken.
This doesn’t need to be complicated - even an email trail or a timesheet approval workflow can be enough, as long as it’s consistent.
3) Decide Whether Time In Lieu Accrues At A Flat Rate Or A Loaded Rate
There’s no single “mandatory” time in lieu rate in NZ law (unlike some other jurisdictions), so you can agree a rate that fits your workplace - provided minimum entitlements are met and the agreement is genuinely agreed.
Common approaches include:
- 1:1 (1 hour overtime = 1 hour paid time off)
- 1:1.5 (commonly used where the overtime is particularly inconvenient)
- Time in lieu plus overtime pay (less common, but some businesses do this for retention)
If your team is covered by specific contractual overtime rates, you’ll want to ensure your time in lieu system doesn’t accidentally undercut what you’ve already promised.
4) Track Time In Lieu Like You Track Any Other Leave
If you can’t prove what’s accrued and what’s been taken, you’re relying on memory - and that’s rarely a good place to be when someone resigns or raises a complaint.
At a minimum, keep records of:
- Date and hours of approved overtime
- Whether it was paid or accrued as time in lieu
- Time in lieu balance
- Date and hours of time in lieu taken
- Manager approval notes
This is also helpful for payroll accuracy and for demonstrating fair treatment across your team.
5) Align Time In Lieu With Your Other Leave And Payroll Settings
Time in lieu often interacts with:
- Annual leave bookings
- Public holiday entitlements
- Sick leave and other paid leave
- Rostering and “otherwise working day” calculations
If you’re already dealing with questions around leave management, it can help to have clear written rules for your whole leave framework (including when leave can be directed or managed in quieter periods). For example, many businesses also need clarity on whether staff can be directed to take leave in certain circumstances, which often comes up alongside time in lieu planning.
What Are The Common Risks With Time In Lieu (And How Do You Avoid Them)?
Time in lieu is meant to create flexibility, not admin headaches. But if it’s not handled carefully, it can turn into a dispute about money, fairness, or broken promises.
Here are the big risks we see, and what you can do to reduce them.
Risk 1: Time In Lieu Becomes An Uncontrolled “Leave Bank”
If employees accrue time in lieu but never take it, it can become:
- a morale issue (“I’m always working extra and never getting it back”), and
- a financial liability (especially if you end up paying it out when they leave).
How to avoid it: set a cap (for example, no more than X hours accrued), and require time in lieu to be taken within a defined period (for example, within 3 months of accrual) unless otherwise agreed.
Risk 2: Disagreement About Whether Overtime Was “Approved”
If your workplace is informal, an employee might assume extra time was necessary and therefore “counts”. You might see it differently.
How to avoid it: have a clear rule that time in lieu only applies to pre-approved overtime, and make sure your managers apply it consistently.
Risk 3: Inconsistent Treatment Across Employees
If one employee gets time in lieu for staying back late, but another employee is told “that’s just the job”, you can quickly run into trust issues (and potentially formal complaints).
How to avoid it: define which roles are eligible, what counts as overtime, and how approvals work. Consistency is key.
Risk 4: Confusion When Someone Resigns Or Is Terminated
This is where time in lieu can get legally and emotionally messy. The questions usually are:
- Is the employee entitled to be paid out for untaken time in lieu?
- Can the employee take time in lieu during their notice period?
- Can you require them to take it, or do you pay it out?
How to avoid it: write down what happens on termination. If you are paying out amounts on exit (whether for leave or notice), it’s also important you document it correctly and calculate it properly, including situations involving payment in lieu of notice.
Risk 5: Minimum Wage Or Payroll Compliance Issues
Even if your staff are salaried, you still need to ensure that what they’re paid meets minimum legal requirements when you look at hours actually worked. Time in lieu can sometimes mask the fact that someone is regularly working beyond what was anticipated for the salary set.
How to avoid it: regularly review hours, workload, and whether the remuneration still reflects the role. If overtime is routine, it may be more appropriate to restructure the role, the salary, or the overtime clause.
Key Takeaways
- Time in lieu is when an employee takes paid time off later instead of being paid extra money for additional hours worked.
- In New Zealand, time in lieu isn’t a standard statutory entitlement like annual leave - it usually depends on what you’ve agreed in writing (in an employment agreement or policy).
- The safest approach is to document time in lieu clearly, including eligibility, approval requirements, accrual rate, how it’s recorded, and what happens when employment ends.
- Without good record-keeping, time in lieu can become a “leave bank” that creates disputes and unexpected liabilities.
- Time in lieu should be managed in a way that still meets your minimum wage and leave payment obligations, and it should be applied consistently across your team.
- If overtime is becoming frequent, it’s usually a sign you should review your employment terms, resourcing, and workload expectations.
If you’d like help setting up (or reviewing) your time in lieu arrangements and employment terms so you’re protected from day one, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
