Many employers grant a company car to employees that can be used for private purposes. In the employment contract, they often reserve the right to revoke that benefit “at any time in sole discretion” or “for justified reasons”. In practice, most employers only exercise the right if the employee is released from active duties (garden leave) or before he/she goes on parental leave. This custom is supported by previous judgments of the German labour courts: The courts found in several cases that employers exercising their right to request the return of the car, must have a justified reason for doing so - but held that such reasons need not be specified or described in the employment contract itself.

The judgment of the Federal Labour Court

An employee gave notice of the termination of his employment to his employer. The employer then released the employee from active duties until the end of employment and demanded the return of the company car. According to the employment contract, the employer was entitled to revoke the car at its sole discretion.

The employee complied with the employer’s request but filed a claim for damages compensating him for the loss of his company car. The Federal Labour Court found that sending an employee on garden leave is indeed a reason generally justifying the return of the company car. However, the court held that employees must be made aware of circumstances in which they have to give back the car. Therefore, instances of when the employer may require the return of a company car must be set out in the employment contract. This is in contrast to previous case law. As the employment contract in question had no provision for the car to be returned after the employee’s release from active duties, the revocation of the company car was unlawful and the employer had to compensate the employee.

Effect on employers

Employers should redraft their standard contracts in order to make them consistent with the new judgment. Details and circumstances setting out when a car will be revoked should be listed. Of course, only justified reasons are admissible, for example the release of the employee from his/her active duties after notice of termination, prior to parental leave, etc.

Employers should attempt to agree the contractual amendment with their employees. Should employees refuse to agree to an amendment entitling the employer to revoke the company car, their behaviour may work against them during potential litigation: in its judgment, the Federal Labour Court held that employees must reasonably and fairly agree to such an amendment if proposed by the employer. Employees who do not accept clauses naming justified reasons for the return of the company car might be held to act unreasonably if they claim for damages after they returned the company car following a justified request.