FAQ | Company cars – employment law issues

Company vehicles are generally part of the employer’s equipment. Private use by an employee must therefore be expressly authorised by the employer. A fact that is often overlooked is that travel between the company’s premises and the employee’s home counts as private use. From an organisational standpoint, it may often make sense for employees to take a company car home with them, even though it is not approved for private use, so that they can drive straight to a customer the next morning, for example. An agreement should therefore be put in place covering this type of use, as well as the question of whether an employee is permitted to take short detours or do private shopping on the way home in a company car. Failure to do so may mean that the circumstances and the employer’s acceptance of the situation are taken to indicate that private use is permitted, thus triggering a number of related issues.

Apart from this risk to the employer, if an employee uses a company car for private purposes despite this not having been agreed or authorised, he or she is liable to pay compensation to cover wear and tear and fuel consumption, for example. This also constitutes a breach of employment law obligations, which may lead to a warning being issued. In extreme cases, immediate dismissal is possible (see for example the Mecklenburg-Western Pomerania Regional Labour Court ruling of 21 June 2022 – 5 Sa 245 / 21).

The same also applies to non-compliance with other duties and requirements imposed by the employer, for example if the employee is in breach of a ban on alcohol or on allowing someone else to use the vehicle.

If the employee is entitled to private use of a company car, this right generally remains in place even if the employee is absent from work. This applies in particular to periods of leave, short-term sickness and maternity leave (generally six weeks before and eight weeks after the birth, see section 3 of the Maternity Protection Act (Mutterschutzgesetz – MuSchG)). The right to use the vehicle privately also remains unchanged if the employee is released from work but continues to be paid.

Private use of a company car constitutes a non-cash benefit in the form of a benefit in kind, i.e. it is part of the employee’s remuneration. Supreme court case law has established that provision of a company car with private use permitted is an additional consideration for the work performance owed, making it a primary obligation on the part of the employer. It therefore follows that as long as the employer is obliged to pay remuneration, the employee may also use the company car for private purposes (Federal Labour Court (BAG), judgment of 14 December 2010 – 9 AZR 631 / 09).

That being said, there is some leeway for the employer to demand the return of a company car without paying any compensation even in the context of an existing employment relationship and without an explicit agreement. This applies in particular to cases of unpaid release from work/unpaid holiday (e.g. a sabbatical), parental leave or long-term sick leave, i.e. illnesses where the period of continued remuneration has expired (generally six weeks, see section 3 (1) of the Continued Remuneration Act (Entgeltfortzahlungsgesetz – EFZG), unless a longer period has been agreed in a collective agreement or the individual contract). In these circumstances, the employer’s request that the vehicle be surrendered will normally be justified.

If an employee is allowed to use a vehicle privately, special equipment is frequently requested, or a higher-quality vehicle than the employee is entitled to based on his or her position. If the employer wants to accommodate such wishes, it is free to reach an agreement with the employee under which the latter makes a reasonable contribution towards the additional cost (see e.g. Federal Labour Court (BAG), judgment of 9 September 2003 – 9 AZR 574 / 02).

Problems may nonetheless arise if the employment ends but the lease on the company car continues and the vehicle as equipped can no longer be used within the company. The same applies if an employee who is given the car is not willing to accept the additional cost. Various judgments have been handed down in this kind of scenario, but ultimately all of them are based on the principle that the operational risk with regard to the continued usability of the company car lies with the employer. The only likely exceptions are where there is no business reason for providing the employee with a company car, i.e. if it is acquired solely at the employee’s request. In these cases, the employer should ensure that the lease requires the employee to take over the lease if the employment ends before the contract expires, due to the employee resigning of their own volition (and not being terminated by the employer).

If an accident occurs involving a company car or the car is damaged in some other way, the crucial factor is whether this happened during business use or private use.

If the employee was travelling on business, employee liability principles automatically apply. Accordingly, if the employee was grossly negligent or acted with wilful intent, he or she must bear the entire loss alone. With ordinary negligence, the damage is allocated between the employee and the employer. An employee who only commits slight negligence is not liable and is consequently not obliged to pay compensation. Case law regards gross negligence as actions such as driving under the influence of alcohol, driving without a licence, exceeding the permitted speed limit, driving when excessively tired and running red lights. It also includes putting the wrong fuel in a company vehicle. However, this company-internal damage settlement mechanism only applies to the relationship between employee and employer – the employee has unlimited liability towards third parties. The employer should thus also take out fully comprehensive insurance. If it fails to do so, the prevailing view is that the employee is only liable up to the usual excess limit.

If an employee damages a company car while using it privately, he or she is liable for damage caused intentionally or negligently. There is no liability privilege in such cases. Travel between work and home is also considered to be private use, although any fully comprehensive insurance policy does cover travel for private purposes.

If a company car is damaged during unauthorised private use, unlimited liability for compensation applies. This is also the case if the employee allows someone else to drive a company car which only the employee is allowed to use privately, contrary to a contractual agreement. Here the employee is also liable to the employer for damage for which the third party is not responsible, as the employee is negligently in breach of contractual obligations.

The employee is also liable for damage to the vehicle caused by wilful and grossly negligent improper use or care. If, for example, the employee fails to check the oil level regularly and this results in engine damage, he or she is also liable in accordance with the principles of employee liability. The Regional Labour Court (LAG) Cologne has even ruled that it is part of an employee's duties to treat the vehicle provided to him with care and not to cause any damage that goes beyond the usual signs of wear. In the case in question, the vehicle was returned heavily soiled and full of cigarette smoke. The judges ruled that the employee had to pay compensation.

Apart from the issue of liability in the event of damage dealt with in section 4, the question arises as to whether there are employment law consequences if the driver of a company car violates road traffic regulations.

At the most basic level, an employee travelling on company business in a company vehicle must, as a matter of course and like any other road user, comply with road traffic regulations. If the employee endangers road users with the employer’s company vehicle in the course of performing his or her contractual duties, this in itself constitutes a valid reason for termination without notice (Schleswig-Holstein Regional Labour Court, judgment of 8 October 2015 – 5 Sa 176 / 15). This applies especially to drivers whose main duty is to drive a company vehicle (such as truck drivers) and to field staff who cannot perform their role without a vehicle, since violating road traffic regulations constitutes a breach of their primary contractual obligation.

But even those who do not necessarily need their company car for work purposes can be given a warning and may be dismissed if they are in breach of traffic regulations, because such violations are also violations of secondary obligations under their employment contract, in particular the obligations arising from a company car agreement. Such agreements typically require the employee to agree to comply with traffic regulations and to inform the employer without delay if their driving licence is temporarily or permanently withdrawn.

Furthermore, an employer who provides an employee with a vehicle for private use can reserve the right to revoke this use (see section 7 for details). For more information on this topic, see our blog post on Company cars and road traffic regulations (StVO): speeding with consequences.

Almost all modern vehicles are now equipped with a GPS-based navigation system, primarily for planning, finding and displaying routes. But GPS systems can also allow tracking of a vehicle and thus of the employee. Conventional navigation systems only receive GPS geodata and cannot forward it (to third parties). The vehicle’s location can only be determined if an additional transmitter is installed.

The advantages of this type of comprehensive GPS tracking system for employers are obvious:

• Crime prevention, since stolen vehicles can be located
• Coordination of work assignments to avoid duplicated/multiple trips
• Monitoring unauthorised private travel
• Better monitoring of working hours

The use of a GPS tracking system is not absolutely prohibited under data protection law. However, the following restrictions must be taken into account, while also bearing in mind the EU’s General Data Protection Regulation (GDPR), which has been in force since 25 May 2018:

• Widespread, routine and permanent vehicle tracking is not permitted, even with the consent of employees, except where it is needed for planning purposes. Only data that is actually required for operational purposes may be collected. The use of tracking systems is not regarded as necessary if the employee’s location can also be obtained directly from the employee (e.g. by phoning him or her).
• The intended purpose must be clearly documented and communicated to employees in a transparent manner. In particular, employees must be informed about the purpose and scope of data collection and about their information rights regarding the stored data.
• The other information obligations under the EU General Data Protection Regulation must also be met. This means that employees must be informed when exactly a vehicle is being tracked (e.g. by means of an indicator light on the device). Failure to provide this information constitutes secret surveillance of employees, which is prohibited.
• Employees must also be informed about the rules around their entitlement to access the stored data as well as with regard to logging storage activity and determining the period for which the data will be stored.

(For details, see the Guidance on Employee Data Protection published by the Baden-Württemberg State Commissioner for Data Protection and Freedom of Information, 2nd edition, March 2018, p. 36 ff.)

If private use of a company car is permitted, the employer is well advised to give careful consideration to the conditions under which private use can be refused at a later date and to include a contractual provision to this effect.

To be effective, a revocation clause of this type in the employment contract or company car policy must meet the legal requirements for terms and conditions, i.e. in particular it must be sufficiently transparent. A clause stipulating that permission can be revoked “at any time” is invalid according to supreme court case law. Instead, the proviso itself must (exclusively) specify objective reasons for revocation (Federal Labour Court (BAG), judgment of 13 April 2010 – 9 AZR 113 / 09). General references to reasons of conduct or personal reasons are likewise too broad, rendering them insufficient, as is a simple reference to “business reasons” without further specifying the reason for revocation on these grounds (see Hanover Regional Labour Court, judgment of 28 March 2018 – 13 Sa 305 / 17).

The following examples are cited in case law and the literature as admissible grounds for revocation:

• (Effective) release of the employee from the obligation to perform work duties
• Weak earnings performance by the company/the relevant department, stating specific metrics (e.g. EBIT)
• Use of company car no longer cost-effective (requires a minimum level of business use to have been agreed in the form of the number of business travel days or business mileage per year)
• Use of the company car in breach of contract or violations of the company car agreement

Case law does not require the revocation clause to include a time limit. It should be noted, however, that under fairness rules a balance of interests test can lead to the employer only being allowed to demand the company car back after granting a run-off period. The employer’s interest in prompt return of the car and the employee’s interest in continued private use must be included in the required balancing of interests.

If the employment ends, the employee must return the company car on the date of termination. Details such as the return location and time, and the contact person, should be exactly defined in advance.

If there is any dispute between the parties around the termination of employment in general or the date of termination, a distinction must be made between the following cases:

If the employee does not have permission for private use, the employer can use its managerial authority to demand the return of the company car at any time – just like with any other item provided to the employee exclusively for work purposes (laptop, mobile phone, keycard, etc.). If the employee does not duly return the company car, he or she is liable to pay compensation.

If private use had been agreed, the employee is entitled to use the car until the date of termination, in the same way as he or she is entitled to payment of any other remuneration component. This means that the employee can generally continue to use the company car even if released from work duties by the employer (see also section 2). The employer must also cover the running costs and repair costs during this period. It is advisable to expressly include release from work duties among the grounds for revocation in the company car agreement (see section 7).

It should nevertheless be noted that if termination proves to be invalid, the employer is committing a breach of contract by withdrawing the company car. The employee is entitled to compensation (usually in the amount of the value of private use, referred to as compensation for loss of use). This entitlement of the employee to compensation can, and should, be excluded by means of a termination settlement (Federal Labour Court (BAG), judgment of 5 September 2002 – 8 AZR 702 / 01).

As an alternative to returning the company car when employment comes to an end, a right of purchase by the employee can also be agreed.

If the company car is owned by the company itself, the company can sell it, usually at a fixed price or at the wholesale price. Two points in particular should be noted:

If a low (or excessively low) purchase price is agreed, this reduced purchase price is deemed to be a severance payment as per section 34 of the Income Tax Act (Einkommensteuergesetz – EStG). In addition, the warranty for material defects cannot be effectively excluded when selling a company car to an employee who is leaving the company (see section 434 ff. of the German Civil Code (Bürgerliches Gesetzbuch – BGB)), as the employer is always regarded as a trader within the meaning of section 14 of the BGB according to the case law of the Federal Labour Court (BAG). To ensure that the sale does not have unexpected consequences for the employer, it is therefore advisable to sell the company car through a used car dealer. The employer can exclude the warranty in relation to the car dealer, who must then accept the warranty vis-à-vis the employee.

In the case of a leased vehicle, the final decision does not lie solely with the employer. The employer can only agree to the employee taking over the contract and seek to ensure that the lessor consents to this.

If a member of the works council is provided with a company car not only for use in the exercise of their office but also for private use, the principle of works council membership as an honorary office (section 37 (1) of the Works Constitution Act (Betriebsverfassungsgesetz – BetrVG)), the prohibition on preferential treatment and discrimination (section 78, BetrVG) and the prohibition on a reduction in remuneration (section 37 (2), BetrVG) must be observed and any conflict of interests resolved. The assessment must always be performed on a case-by-case basis. However, the following general scenarios are possible:

• Company car for performing works council duties:
  In this scenario, the works council (collectively or the individual members/chair) receives a company car in order to be able to carry out its duties effectively, without any entitlement to private use. This scenario does not raise any issues. In some cases, especially in large companies, it may be not just useful, but also necessary to provide a company car for the works council – solely for the purpose of performing works council duties.
• Company car for private use due to being a works council member:
  It is not permitted for a works council member to be provided with a company car that is also available for private use simply due to their membership of the works council, since this is not compatible with what is an unpaid voluntary role.
• Existing entitlement to use a company car for private purposes prior to being elected:
  A distinction must be made between the above scenario and instances where an employee was in possession of a company car with permission for private use prior to being elected to the works council. The employee may then continue to use the car as a works council member, both for business and private purposes. This arises from the prohibition on any reduction in remuneration, which requires that a person’s terms of remuneration must remain unchanged during their membership of the works council.

The first consideration is that the works council only has co-determination rights when there is a collective aspect. Decisions affecting individuals do not meet the criteria for involvement of the works council. This means that if the employer wants to provide a company car to a single employee only, for example in order to strengthen the employee’s commitment to the company, or if other exceptions are agreed for an individual employee, the works council has no right of co-determination.

The following co-determination rights may otherwise apply:

a) Section 87 (1) No. 1, BetrVG – matters relating to the rules of operation of the establishment and the conduct of employees in the establishment

The works council has a right of co-determination pursuant to section 87 (1) No. 1 of the BetrVG if the company establishes rules of conduct for use of a company car. This could include requiring a logbook to be kept or compliance with specific safety regulations, for example.

The works council has no participation rights with regard to the equipment specification of a company car.

b) Section 87 (1) No. 6, BetrVG – the introduction and use of technical devices designed to monitor the behaviour or performance of the employees

Co-determination rights pursuant to section 87 (1) No. 6 of the BetrVG may apply with regard to navigation or GPS tracking systems in company vehicles. This will be the case if the technical equipment is objectively suitable for monitoring the behaviour or performance of the employee; the employer’s intention is irrelevant in this regard. As set out in section 6, there are two cases to distinguish:

• Navigation device fitted: A normal navigation device does not collect or record any data and does not track the employee. The driver merely enters a destination. Third parties cannot determine whether or not the driver is taking that route. A standard navigation device is therefore not subject to co-determination.
• GPS transmitter fitted: The situation is different if a GPS transmitter is additionally installed in the vehicle. This makes continuous monitoring of employees technically possible, giving rise to a right of co-determination by the works council (see for example Kaiserslautern Labour Court, decision of 27 August 2008 – 1 BVGa 5 / 08).

c) Section 87 (1) No. 10, BetrVG – questions related to remuneration arrangements in the establishment

If a company car is used solely for business purposes, there is no right of co-determination insofar as the business use does not increase the employee’s wealth and does not save him or her any private expenses.

If private use of a company car is permitted, the employee receives a non-cash benefit. Section 87 (1) No. 10 of the BetrVG is then generally relevant. But here again, co-determination applies solely to the specific rules on private use, not to details of the vehicle’s equipment. A typical example of this would be the question of which usage restrictions apply to the employee.

If a company’s employees are partly dependent on a car for their work, but don’t need it all the time, it might be worthwhile for the employer to operate a vehicle fleet. Employees can then reserve and use a vehicle from this pool as required. In theory, the company can also offer the option of hiring the vehicle for a degree of private use. However, if the employment contract stipulates entitlement to a permanent company car, the employee cannot be referred to a fleet.

An additional option is for the employer to work with private car-sharing providers. This is a low-cost alternative to the company having its own cars or fleet of vehicles. The main advantage is that the scheme can be made available to a wider group of employees compared to conventional company cars. In many cases, service providers now even offer special conditions of use for companies. Having said that, car-sharing services are usually only available in major cities and conurbations.

Any costs incurred by the employee when registering with the provider should be covered by the employer if the vehicle is needed for business purposes. The employee can then use the cars as they wish after making a reservation via an app. Invoices for business journeys are sent to the driver by email after the end of the trip and can be submitted to the accounts department in exactly the same way as taxi invoices. Some providers even offer corporate credit card billing. If an employee wants to use the car-sharing service privately as well, it is advisable to set up two accounts so the employee can choose between “business journey” and “private journey” at the start of a journey. The employer is, of course, free to pay for the employee’s private journeys if it wishes to grant the employee a benefit. It should be borne in mind that this then constitutes a non-cash benefit for the employee, to which tax and social security law applies.

Here again, commuting between the workplace and the employee’s home address is a private matter, but if the employee drives to a customer using a car-sharing vehicle and then drives home from there, this typically constitutes a complete business journey that must be paid for by the employer.