The linear ubiquitin assembly complex (LUBAC) comprises 3 components: HOIP, HOIL-1, and Sharpin, of which HOIP and HOIL-1 are both members of the RBR subfamily of E3 ubiquitin ligases. HOIP catalyses the formation of Met1-linked ubiquitin oligomers (also called linear ubiquitin), but the function of the E3 ligase activity of HOIL-1 is unknown. Here, we report that HOIL-1 is an atypical E3 ligase that forms oxyester bonds between the C terminus of ubiquitin and serine and threonine residues in its substrates. Exploiting the sensitivity of HOIL-1–generated oxyester bonds to cleavage by hydroxylamine, and macrophages from knock-in mice expressing the E3 ligase-inactive HOIL-1[C458S] mutant, we identify IRAK1, IRAK2, and MyD88 as physiological substrates of the HOIL-1 E3 ligase during Toll-like receptor signaling. HOIL-1 is a monoubiquitylating E3 ubiquitin ligase that initiates the de novo synthesis of polyubiquitin chains that are attached to these proteins in macrophages. HOIL-1 also catalyses its own monoubiquitylation in cells and most probably the monoubiquitylation of Sharpin, in which ubiquitin is also attached by an oxyester bond. Our study establishes that oxyester-linked ubiquitylation is used as an intracellular signaling mechanism.