Paid Leave after Termination: Key Takeaways from a New German Federal Labor Court Decision on Employment Contracts and Company Cars

Once a German employment relationship has been terminated, employers often seek to remove the terminated employee from day-to-day operations as quickly as possible—whether for data-protection reasons, to safeguard customer relationships, or to preserve workplace peace. The usual solution is paid leave until the expiration of the notice period. This approach is practical, well-established, and commonly included as a standard clause in German employment contracts. 

In a recent decision, however, the Federal Labor Court (Bundesarbeitsgericht, “BAG”) curtailed this practice where no objective grounds for placing the employee on paid leave exist. This practice, and the ruling discussed below, arise under German employment law, which differs fundamentally from at‑will employment like in the United States. 

In a judgment issued March 25, 2026 (5 AZR 108/25), the BAG held that paid-leave release clauses that entitle the employer to place employees on paid leave at its sole discretion, without stating reasons and without any balancing of interests, are unenforceable. The justification is persuasive: A blanket clause disregards the employee’s potentially legitimate interest in actually performing their work. It thereby deprives the employee of the possibility to assert such interest at all—an outcome the BAG qualifies as an unreasonable disadvantage within the meaning of German employment law.

Consequences for differentiated clauses?

For well-advised companies, this should come as no surprise. The courts’ tendency to view such blanket provisions critically has been evident for years. Many carefully drafted employment contracts therefore do not contain general paid leave clauses, but rather differentiated provisions—for example, with employee-friendly limitations, defined and objectively verifiable grounds, or proportionality safeguards. The press release announcing the judgment does not conclusively reveal whether, and to what extent, such clauses will withstand scrutiny in light of this ruling.

The BAG’s wording—namely, that the clause at issue cuts off the employee’s ability to assert, in a specific case, an increased interest in continued actual employment (i.e., actively working rather than being sidelined)—may indicate that employees must be expressly afforded this possibility in the contractual language itself. A definitive assessment will only be possible once the full reasons for the judgment are published.

Littler Tip: Employers should review their release clauses as soon as the reasons for the judgment are available and adjust them if necessary.

No exclusion of paid leave

It can already be stated that paid leave for employees remains permissible even in light of the recent judgment by the BAG. Such leave is legally possible even without a corresponding clause in the employment contract, provided that the interests of employer and employee are weighed against each other and the employer’s interest in granting leave prevails after a case-by-case assessment. This is likely to be the case particularly in situations involving serious allegations, such as theft or sexual harassment.

Littler Tip: Employers should document both the reasons for, and the balancing of interests underlying, any granted leave in a verifiable manner.

Revoking company car use—but doing it properly

For many employers, the company car is the real point of contention. Why should an employee on paid leave continue to be entitled to private use of a vehicle paid for by the company?

The answer lies in remuneration law: Where a company car is also provided for private use, this constitutes a benefit in kind (monetary advantage) which, as a matter of law, forms part of the employee’s remuneration. It cannot be unilaterally withdrawn. Absent a contractual right of revocation, withdrawal is impermissible. For that reason, most company car agreements include a revocation clause that ties withdrawal to specific conditions—for example, placement on paid leave.

In this decision, the BAG did not address the validity of such clauses—the review ended at the ineffective paid leave clause. Since paid leave remains possible even without an effective clause, revocation provisions relating to company cars should be drafted in a manner that appropriately reflects the parties’ interests. Under the case law to date, this means that the benefit in kind attributable to the company car must amount to less than 30% of total remuneration; the grounds for revocation (e.g., justified paid leave) must be specifically stated; and an employee-friendly reasonableness safeguard should be included.

Littler Tip: An ineffective revocation may oblige the employer to pay compensation for loss of use; however, it does not mean that the employee may retain the vehicle. Employers should consistently demand its return. If the employee refuses without justified cause, this may—following a prior warning—justify summary termination under German law. Importantly, revocation should take effect only at month-end, to avoid additional compensation claims.

Do employers now face an increased risk of litigation?

A natural consideration: If the BAG says that paid leave is no longer so easily imposed, will employees now exploit this systematically and increasingly seek interim injunctive relief?

In our view, this is unlikely. An employee receiving continued pay while staying at home has little incentive to pursue legal recourse. This is particularly true given that German courts view injunctions compelling active employment as an exceptional remedy. That may change where tangible benefits fall away as a result of the paid leave—for example, the company car. Even then, however, the hurdles for interim relief are high: In addition to the substantive claim, the applicant must establish grounds for an injunction, i.e., demonstrate particular urgency. The requirements vary by each regional appellate labor court (Landesarbeitsgericht), roughly comparable to a U.S. circuit court, but in many German states, courts apply a stringent standard, requiring a specific interest in continued actual employment.

Moreover, in such cases employees are often not genuinely seeking continued employment. Rather, interim injunctive proceedings are used to exert pressure on the employer in settlement negotiations, particularly regarding severance. As a result, in most cases such proceedings are likely either to expedite a settlement or yield no material advantage for the employee.