Whole cells are usually used for oxygenase-catalysed biotransformations to ensure efficient cofactor recycling and to avoid problems with purification and stability of these complex, multi-subunit enzymes. Productivity in oxygenase-catalysed biotransformations is frequently restricted by toxicity of the substrates to the cells, but attempting to solve this problem using two-liquid phase reaction systems with conventional solvents provides only modest improvements in productivity. Therefore, we developed new, two phase systems using water-immiscible ionic liquids. Even though [NMeOct3][NTf2] and [P6,6,6,14][NTf2], inhibited growth of Escherichia coli by 39% and 23% respectively, both ionic liquids could be used to improve toluene dioxygenase-catalysed conversion of toluene to toluenecis-glycol using recombinant E. colicells. The two-liquid phase reaction system improved resistance to toluene toxicity by 8-fold, and product concentrations increased by 2.5-fold in shake flask cultures. Product concentrations and specific product yields were improved by 200% and 238% respectively in bioreactors with an unrestricted oxygen supply.