In our article on the Federal Labor Court’s press release of 25 March 2026 (5 AZR 108/25), we had already discussed why blanket garden leave clauses may be unenforceable. The Court’s published reasoning now provides further guidance on drafting garden leave clauses, placing employees on garden leave in individual cases, and revoking company car benefits during the notice period.
Garden Leave: Greater Clarity for Contract Drafting
We already discussed the key takeaway from the press release, namely that blanket garden leave clauses may be unenforceable, in our earlier article. The Court’s published reasoning now provides important additional clarification.
1. An Employee’s Resignation Does Not Automatically Reduce Their Interest in Continued Employment
The challenged clause permitted garden leave following any termination, regardless of which party had given notice. That element alone was not objectionable. Garden leave clauses may, in principle, continue to be linked to any termination.
However, Germany’s Federal Labor Court (Bundesarbeitsgericht, BAG) made clear that employees generally retain a legally protected right to continue working even after submitting their resignation. A resignation alone therefore does not justify garden leave. Employers must still demonstrate, in the individual case, that their reasons for placing the employee on garden leave outweigh the employee’s interest in continuing to work.
Unlike many common law jurisdictions, German employment law recognizes an employee’s legally protected interest in continued employment. Employees may therefore retain a legitimate interest in remaining professionally active, maintaining business relationships, gaining additional experience, or avoiding potential reputational disadvantages associated with being removed from active duties.
2. Not Every Garden Leave Clause Is Unenforceable
More recent employment contracts often no longer provide for blanket rights to place employees on garden leave, but instead make such leave subject to specific conditions or include employee-friendly limitations. The Federal Labor Court does not object to garden leave clauses as such. Rather, the difficulty with the clause at issue was that it effectively eliminated the need for a case-specific assessment and left the employee no opportunity to assert, in the specific case, an increased interest in continuing to work.
Going forward, garden leave clauses should therefore be tied to defined grounds for placing the employee on garden leave and should expressly provide for a case-by-case balancing of interests. Employers are unlikely to be able to justify garden leave solely by arguing that compensation will continue to be paid. In the Court’s view, continued payment alone is not sufficient to outweigh the employee’s interest in remaining actively employed. Additional disadvantages, such as the withdrawal of a company car benefit, may reinforce this point.
3. Garden Leave Remains Possible Even Without an Enforceable Clause
A carefully drafted garden leave clause remains advisable. It creates transparency and can anticipate, at the contractual level, the balancing of interests required when considering garden leave. However, the absence of an enforceable clause does not automatically mean that garden leave is impermissible.
Even in that scenario, an employer may still be able to place an employee on garden leave where legitimate and sufficiently weighty business interests justify such a measure. The Federal Labor Court made clear that this does not necessarily require serious employee misconduct in every case. Employers therefore retain flexibility even without an enforceable clause, provided that the circumstances of the individual case justify placing the employee on garden leave.
Revocation of Company Car Benefits: Greater Practical Clarity
The published reasoning also provides greater clarity regarding clauses permitting the revocation of company car benefits. The Federal Labor Court confirmed the validity of the clause at issue and further clarified the requirements applicable to such provisions.
From an employer’s perspective, three points are particularly relevant:
Revocation requires a legitimate business reason.
Lawful garden leave may constitute such a legitimate business reason and should be expressly identified as a potential basis for revocation.
The economic consequences of revocation must be foreseeable for the employee.
An enforceable revocation clause alone is not sufficient. Revocation stands or falls with the garden leave on which it is based. Arbitrary or unlawful garden leave cannot provide the required legitimate business reason. Employers should therefore not only review their company car clauses, but above all ensure that any decision to place an employee on garden leave is legally sound and properly documented.
What Matters Going Forward
The key takeaway from the Court’s reasoning is not that garden leave clauses or company car provisions are inherently unenforceable. Rather, the focus is shifting to the specific decision to place an employee on garden leave.
Employers who treat contract drafting, garden leave decisions, and company car provisions as interconnected elements of an overall employment strategy will remain well positioned to comply with the Court’s requirements going forward.
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