Can Compensatory Leave Replace Overtime Pay Under the Labour Codes?
Labour Codes—One Practical Question a Day | LabourCodes360.com · 2 November 2026
A production team works additional hours to complete an urgent order. The supervisor promises compensatory leave next month, and payroll records no overtime payment.
Everyone agrees to the arrangement. But before closing payroll, HR must check whether those hours attract statutory overtime.
Where overtime wages are legally payable, a company’s comp-off policy should not be treated as a substitute.
What does the OSH Code require?
Section 27 of the Occupational Safety, Health and Working Conditions Code, 2020 requires overtime wages at twice the wage rate when a covered worker exceeds the prescribed daily or weekly hours. The calculation must use whichever basis is more favourable to the worker. Overtime also requires the worker’s consent.
The provision is deliberately protective. It does not leave the rate to negotiation, and it does not permit an employer to decide unilaterally that time off is worth the same as the premium wage. The “more favourable to the worker” rule matters because daily and weekly thresholds can produce different results in the same week. A worker may exceed eight hours on one day without crossing the weekly limit, or may work a shorter week that still breaches the spread-over rules. In each case, the employer must compute the entitlement using the basis that gives the worker the higher amount, rather than the basis that is cheaper for payroll.
Consent is a separate condition. Overtime is not something an employer can impose as a routine extension of the working day. The requirement that the worker consent to overtime means that a pattern of compulsory extra hours, recorded only as “comp-off earned,” is vulnerable on two fronts: the hours may not have been validly required, and the wages may not have been validly replaced.
It is also worth noting what Section 27 does not do. It does not create a parallel entitlement to leave. It does not say that compensatory leave can be offered “in lieu” of overtime. And it does not authorise a policy that converts money into time after the fact. Those are all questions that must be answered by reference to other provisions, other laws, or the contract — not by reading a substitute into Section 27 itself.
How is compensatory holiday different?
Section 26(3) addresses replacement holidays where a worker loses weekly holidays because of an exemption order or rule. It does not create a general option to exchange statutory overtime wages for leave.
The distinction is easy to miss because both provisions use the language of “compensation.” But they compensate for different things. Section 26(3) is about the loss of a weekly rest day — the worker has been deprived of a holiday that the law would otherwise have secured, and the provision allows a replacement rest day to be given. Section 27 is about extra hours worked — the worker has given additional labour beyond the prescribed limits, and the provision requires a monetary premium.
For payroll, the distinction matters: replacement rest and payment for qualifying extra hours answer different compliance questions. A replacement holiday cannot be used to discharge an overtime liability, and an overtime payment cannot be used to discharge the obligation to provide replacement rest. An attendance system that records both as a single “comp-off” credit will blur the two and make it impossible to demonstrate compliance with either.
A practical example
Assume a covered worker has four hours of legally established overtime and an applicable ordinary hourly wage rate of ₹100.
The overtime amount would be:
Crediting four hours of leave should not automatically remove that payment. This illustration assumes the applicable overtime threshold has been crossed and the wage rate correctly determined.
The arithmetic is simple; the compliance question is not. Suppose payroll credits four hours of compensatory leave and closes the month without the ₹800. If the worker later claims the overtime, the employer must explain why the leave was treated as equivalent to a premium payment. Four hours of leave is worth four hours of ordinary wage — ₹400 in this example — not the ₹800 that Section 27 requires. The worker has, in effect, been asked to accept half the statutory entitlement in a different form.
That is why the attendance system should identify why additional attendance occurred. Was it extra work, a rearranged roster, work on a weekly holiday, or another situation? A single “comp-off earned” entry can conceal these differences. Extra work on a normal day may attract overtime under Section 27. Work on a weekly holiday may attract both a replacement holiday under Section 26(3) and, depending on the facts, overtime or a higher rate. A rearranged roster may attract neither, or may attract a different entitlement altogether. Each category needs its own code, its own calculation, and its own evidence.
A second worked example makes the point. Suppose the same worker has an ordinary hourly rate of ₹150 and works six hours of overtime in a week. The overtime amount is 6 × ₹150 × 2 = ₹1,800. If the employer credits six hours of leave, the value of the leave at the ordinary rate is ₹900. The gap is not a rounding error; it is the premium that the statute requires. A comp-off policy that treats the two as interchangeable systematically understates the entitlement, even where the parties believe they have agreed.
Are there special provisions?
Yes. Rule 65(5) of the final OSH Central Rules, 2026 contains a specific arrangement for working journalists, providing compensatory rest or double-rate wages for the overtime described there. Its category-specific scope must be checked; it should not be extended to the workforce generally.
The existence of this rule is instructive. If the general law already allowed leave to replace overtime, a special provision for journalists would be unnecessary. The fact that the rules create a specific option for a specific category suggests that the general position is different — and that any departure from the monetary entitlement needs an express legal basis. Employers in other sectors should not assume that the journalists’ rule can be borrowed by analogy.
Does this apply to every employee?
OSH coverage and statutory worker status must first be established. Other applicable laws may create separate entitlements. Employers must verify the appropriate Central or state rules, relevant exemptions and prescribed hours before deciding whether overtime has arisen.
Three variables drive the answer. The first is coverage: the OSH Code applies to establishments of a specified size and type, and the thresholds are not uniform across sectors. The second is worker status: managerial and administrative employees, and supervisors above the prescribed wage ceiling, may fall outside the statutory definition, in which case the comp-off question becomes a contractual one. The third is the applicable rule-set: Central rules apply to central-sphere establishments, while state rules govern most others, and the state rules may prescribe different hours, different thresholds, and different procedures.
The Code became effective on 21 November 2025. The final Central Rules were notified through G.S.R. 345(E), dated 8 May 2026. State-sphere employers must verify applicable state rules and saved transitional provisions before adopting the Central procedure. An employer that applies the Central calculation in a state with different rules may be compliant on one measure and non-compliant on another.
How should payroll and attendance systems be designed?
The practical answer is to separate the three concepts at the point of data entry, rather than at the point of payroll. Attendance records should distinguish extra hours worked on a normal day, hours worked on a weekly holiday, and hours that are genuinely part of a rearranged roster. Overtime approvals should be recorded with the date, the hours, the applicable rate, and the worker’s consent. Compensatory leave, if offered, should be recorded as a separate benefit with its own accrual and expiry rules, and the policy should state explicitly that it does not substitute for statutory overtime where overtime is payable.
This design has a secondary benefit. When an inspector or a tribunal asks why a particular payment was or was not made, the employer can point to a contemporaneous record rather than reconstructing the position from supervisors’ messages. The burden of proof in wage claims often falls heavily on the employer, and a clean record is the most effective defence.
Employer action checklist
- Review policies promising “comp-off instead of overtime.”
- Reconcile attendance, approved overtime and leave credits.
- Record the applicable threshold and calculation basis.
- Keep evidence of worker consent.
- Check special categories and exemptions separately.
Frequently asked questions
Consent is relevant to what was promised, but it generally cannot waive a statutory entitlement. If the employee is a covered worker and the hours qualify as statutory overtime, leave in lieu is unlikely to be a valid substitute unless the law, a settlement, or an award permits it.
No. Compensatory leave is typically measured in time at the ordinary rate, while statutory overtime is a monetary entitlement at twice the normal wage. Treating one as equal to the other understates the employee’s entitlement in most cases.
The statutory overtime provisions apply to workers as defined in the applicable code. Managerial and administrative staff, and supervisors above the prescribed wage ceiling, are generally outside that definition; for them, comp off is a contractual arrangement.
Voluntariness affects whether the employer can be said to have required the hours, but it does not automatically remove the entitlement where hours were in fact worked and recorded. The safer course is to document the basis on which the hours were worked and paid.
Yes. The labour codes leave significant space for state rules and for sector-specific provisions. Employers should verify the rules applicable to their establishment, state, and sector before relying on a comp-off practice.
Key references: OSH Code—Sections 26(3) and 27, page 29 · Final OSH Central Rules, 2026—Rule 65(5), page 187 · Code on Wages, 2019 (overtime rate and wage ceiling) · applicable state rules and registered settlements.
Effective date: The Code became effective on 21 November 2025. Final Central Rules were notified through G.S.R. 345(E), dated 8 May 2026.
The Bottom Line
Compensatory leave is a useful benefit, but it is not a general substitute for statutory overtime wages. Section 27 creates a monetary entitlement at twice the wage rate, calculated on whichever basis is more favourable to the worker and subject to the worker’s consent. Section 26(3) deals with replacement holidays for lost weekly rest — a different obligation answering a different question. Where overtime is legally payable, a comp-off policy cannot lawfully convert the premium into time off unless a specific provision, settlement, or award permits it. The safe course is to pay statutory overtime in money, offer comp off, if at all, as a separate and clearly documented benefit, and keep attendance records that distinguish extra work from rearranged rosters and holiday work. The cost of doing this properly is a policy review and a cleaner payroll system. The cost of not doing it is a wage claim that reconstructs months of entitlement from informal messages.
Expanded explainer · Labour Codes · Overtime & compensatory leave
