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Understanding the difference between overtime pay vs. time in lieu

Understanding different payment terms can be confusing. There's ordinary time, overtime and time off in lieu to make sense of.

By Nigel Ward CEO and Director, Australian Business Lawyers & Advisors

Understanding different payment terms can be confusing. There’s ordinary time, overtime and time off in lieu to make sense of.

Given the penalties for getting things wrong, it is important to understand when an employee is entitled to be paid overtime for the hours they have worked or whether providing time in lieu of paying overtime is available for you and an employee, and if so what rules apply.

WHEN WOULD AN EMPLOYEE BE ENTITLED TO OVERTIME?

If the employee is not covered by a modern award or enterprise agreement, then whether they can earn overtime is a matter for their employment contract.

Very few employees not covered by a modern award or enterprise agreement get overtime in Australia. Some shift supervisors do in the heavy manufacturing sector, but this is rare.

If the employee is covered by a modern award or enterprise agreement, then whether they can earn overtime will be set out in the modern award or enterprise agreement.

When overtime applies can vary greatly between modern awards. It usually includes an employee working:

more than a certain number of hours each day or week
outside of a certain spread of hours
(for part-time employees) more than their usual hours each day or week.

HOW IS OVERTIME CALCULATED?

In modern awards (and most enterprise agreements) overtime payments are based on a multiple of an employee’s ordinary time hourly rate of pay. Modern awards that provide for overtime require overtime to be paid:

At 150% (time and a half) of an employee’s ordinary time hourly rate for the first two or three hours of overtime worked
At 200% (double time) of an employee’s ordinary time hourly rate after the two or three hours of overtime worked.

Some modern awards provide different overtime payment arrangements for:

shift workers
working overtime on Saturday
working overtime on Sunday
working overtime on a public holiday.

HOW MUCH OVERTIME CAN AN EMPLOYEE WORK IN A WEEK?

The question is answered in the National Employment Standards. An employee does not have a right to work overtime unless you have created one through your employment contracts. Deciding that overtime is needed is a matter for the employer.

In simple terms, an employer can ask an employee to work “additional hours” each week as long as the request is reasonable. Keep in mind an employee can decline the request if it is unreasonable for them.

Additional hours are:

for a full-time employee: anything over 38 hours a week
for other than a full-time employee: the lesser of 38 a week or the employee’s ordinary weekly hours.

Clear as mud, right?

It’s a little unusual as it requires two very similar but not identical tests for the employer and employee:

the original request needs to be reasonable
the right to refuse must be based on unreasonableness.

So it could be reasonable in the circumstances for the employer to request additional hours to be worked, but then in the circumstances of a given employee, the request could be unreasonable.

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EXAMPLE

The afternoon shift were asked to stay back and do three hours of overtime to finish off a production run.

In the circumstances, the request was reasonable, but for one employee on the afternoon shift, it was unreasonable. He was a single parent, and primary carer for his three-year-old son who he had to pick up from daycare and no other care arrangements could be organised given the short notice.

In considering what is reasonable or unreasonable in the circumstances, the legislation requires the following to be taken into account:

risk to health and safety
the employee’s personal circumstances such as family responsibilities
the needs of the business
whether the employee will be paid overtime, penalty rates or other compensation
whether the employee’s level of remuneration reflects an expectation of working additional hours
any notice given by the employer of the request
any notice given by the employee of their intention to refuse
the usual patterns of work in the industry or part of the industry the employee works in
the nature of the employee’s role and level of responsibility
whether the hours worked are in accordance with any applicable weekly averaging provisions found in all modern awards or under the Fair Work Act 2009
any other relevant matter.

TIME OFF IN LIEU OF OVERTIME

Time off in lieu of overtime applies when an employee works additional hours and instead of being paid overtime agrees to take paid time off work during their ordinary hours of work instead of being paid the overtime payment – called “time off in lieu” or “TOIL”.

For some employers, TOIL is valuable business flexibility as it allows them to substitute a form of leave for what would otherwise be an additional payment and therefore cost.

TOIL is used quite a lot in the public sector and also in sectors like health, social welfare and personal care as well as for many clerical office roles. It tends to suit jobs where the employee can be off for a short period without disrupting the usual workflow.

You can see this in an office environment where a clerical worker might take an early-mark on a Friday afternoon at 2pm as TOIL rather than be paid overtime earned at another time.

This may cause little disruption to the workflow of the office, save the business from paying the overtime and provide valuable work-life balance for the employee.

CAN ANYONE USE TOIL?

No, they cannot.

If the employee is not covered by a modern award or enterprise agreement, then whether they can substitute overtime pay for time off is a matter for their employment contract.

Given that very few of these employees are likely to earn overtime, it is very rare for them to have TOIL provisions in their employment contract, but it does happen.

If the employee is covered by a modern award or has an enterprise agreement apply to them, then your obligations to pay overtime and ability to offer TOIL will be found in these documents.

ARE THE TOIL RULES ALL THE SAME?

In a modern award, they are similar but not always the same. Most have the following features:

Taking TOIL is by agreement with the employee concerned (often in writing).
The time off usually needs to be taken within a set period (often six months).
The time off needs to be taken at a mutually agreed time.
The employee can elect to be paid the overtime as pay at any time.
If there is a time period in the modern award and time off has not been taken during that period, the employer must pay the employee for the overtime worked.
An employer cannot put an employee under pressure to take TOIL.
If the employee’s employment comes to an end, the TOIL/overtime must be paid out.

HOW IS TOIL CALCULATED?

One of the things you have to watch out for in modern awards is how the amount of time off is calculated. In some, it is an hour off for each hour of overtime worked and in others the hours off equal the paid hours.

For instance, if an employee worked two hours overtime to be paid at time and a half (150%) they would be entitled to three hours pay at their ordinary time hourly rate.

In this example, some modern awards will say that if the employee wants TOIL:

they can have two hours off (because they worked two hours of overtime), while others could say
they can have three hours off (because they were owed three hours pay).

Many but not all modern awards provide for time off in lieu of overtime.

Industries covered by modern awards that include time off in lieu include:

retail
restaurants, cafes
hospitality
transport
general manufacturing.

IF MY EMPLOYEE IS COVERED BY A MODERN AWARD AND ASKS FOR TOIL, MUST I GIVE IT TO THEM?

Remember its “by agreement”.

TOIL may sound like a good option for your business, but remember it can only be used by agreement under modern awards (and likely enterprise agreements).

If your employee works overtime and asks for TOIL but it does not suit you, politely say no. Neither you nor your employee is under any obligation to agree to TOIL.

It is important to get this right so get in touch with our Workplace Advice Line today.

Nigel Ward CEO and Director, Australian Business Lawyers & Advisors

Nigel Ward is one of Australia’s leading advocates and practitioners in employee and industrial relations with more than 30 years of strategic business planning experience.

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