Germany: General Exemption Clauses are Invalid

A blanket provision in an employment contract that entitles an employer to release an employee whose employment has been terminated from performing work until the end of the notice period while continuing to pay their salary is invalid because it unreasonably disadvantages the employee.

The Federal Labour Court has issued a ruling with significant implications for the drafting of employment contracts: A standard clause in an employment contract stating that the employer may unilaterally place the employee on garden leave “upon or following the issuance of a notice of termination” while continuing to pay compensation is invalid.

The ruling is highly relevant in practice because suspensions following termination are common in the day-to-day operations of many companies. Such measures are often intended to avoid workplace tensions, protect sensitive information, or simplify organizational transitions. However, the ruling states that a blanket prior authorization in a standard employment contract is insufficient for this purpose. An employer cannot simply override the employee’s interest in actually being assigned work during their notice period through a general contractual clause.

 

Background

The ruling was based on a case involving a field sales representative. The employer provided the employee with a company car that could also be used for personal purposes. This benefit could be revoked if the employee was released from the obligation to perform work. The standard-form employment contract contained a clause stating that the employer was entitled to release the employee from work duties upon or after notice of termination, while continuing to pay compensation. After the employee had given notice of termination in accordance with the notice period, the employer released him from his work duties until the end of the notice period and requested that he returns the company car. The employee complied.

The employee considered the release from work to be impermissible and demanded compensation for loss of use due to the withdrawal of the company car. The Federal Labour Court held the garden leave clause to be invalid and remanded the case to the Regional Labour Court because it remains to be examined whether, in this specific case, the employer’s overriding interests worthy of protection justified the release from work, regardless of the invalid clause.

 

Key Issues

The relevant clause allowed the employer to unilaterally release the employee from the obligation to work until the end of the notice period. Such a provision fails to acknowledge the fact that employees generally have not only a claim to remuneration but also a legitimate interest in actual employment. This interest can carry significant weight, for example, for professional reputation, maintaining client relationships, preserving professional skills, or even for one’s personal self-image as a working professional.

It is important to draw a clear distinction: The Federal Labour Court has not ruled that garden leave following termination is generally prohibited. Only the blanket, pre-formulated contractual clause is invalid. This must be distinguished from the question of whether, in a specific individual case, there are objective reasons justifying a release from work duties.

Such reasons may include, for example, the protection of trade and business secrets, a concrete risk of influencing customers or employees, massive disruptions to workplace harmony, or other significant operational interests. Whether these conditions are met cannot be determined abstractly in advance in the contract; they must be specifically demonstrated and weighed in each individual case.

Practical Points

• The case decided by the Federal Labour Court demonstrates that garden leave cannot often be considered in isolation. In this instance, the garden leave was coupled with the withdrawal of the company car for personal use. Under labour law, the ability to use a company car for personal purposes generally constitutes a monetary benefit and thus a component of compensation. If this right of use is revoked without a valid basis, claims for compensation may arise.
• When employers put an employee on garden leave a specific balancing of interests in the event of termination should be carried out and documented clearly. The more sensitive the employee’s position within the company, the more likely the leave may be justified in individual cases. The key factor remains a clear and transparent justification of the employer’s specific interest.
• In reality, employees rarely complain about garden leave, however especially with regard to senior employees there may be a risk that garden leave is challenged. Furthermore, like in the case decided by the court, garden leave may have an effect on monetary benefits and thereby can increase the likelihood of claims if garden leave is not justified.