Private use of a company car - risk of subsequent payments

Federal Labour Court, judgement of 31 May 2023 - 5 AZR 273/22

Background: The so-called truck-ban

Remuneration must always be calculated and paid in Euros. Remuneration in kind can only be agreed as part of the remuneration if this is in the interests of the employee or the nature of the employment relationship.

This so-called truck ban was introduced in response to a widespread practice in early industrialisation. Employers often used the truck system to pay wages in the form of inferior goods valued at inflated prices.

The relevant German provision for the truck ban is section 107 of the German Industrial Code (“GewO”). It also stipulates that the value of the agreed remuneration in kind must be taken into account when calculating the garnishable part of the salary. This regulation ensures that the employee is paid at least the non-garnishable part of their remuneration in cash so that they can cover their living expenses.

Initial case: net wage claim by the employee

In its ruling of 31 May 2023 (5 AZR 273/22), the 5th Senate of the Federal Labour Court clarified important aspects of the provision of company cars in connection with the truck ban.

The employer had provided the employee with a company car for private use. The employer accounted for the employment relationship taking into account the non-cash benefit of the private use of the company car according to the so-called 1% rule and for journeys between home and work according to the so-called 0.03% rule.

In 2020, the employee demanded the subsequent payment of net wage differences in the amount of €29,639.14. He based the claim on the fact that the employer had not complied with the truck ban and the regulations on garnishment limits when paying his remuneration for more than three years.

Valuation of a company car as a remuneration in kind - 0.03% rule is not taken into account

The Federal Labour Court ruled that the provision of a company car, including for private use, regularly constitutes consideration for the work owed and is therefore a remuneration in kind. As a remuneration in kind, its value must be taken into account when calculating the garnishable part of the salary and may not exceed this.

To determine the garnishable part of the salary, the value of the non-cash benefit of a privately usable company car is to be taken into account at 1% of the list price at the time of initial registration plus the costs for special equipment including VAT (so-called 1% rule).

On the other hand, the supplement to be recognised for the use of the company car for journeys between home and work (so-called 0.03% rule) is not to be taken into account. This amount is (only) relevant under income tax law. According to the Federal Labour Court's ruling - and contrary to the employee's view in the original proceedings - the 0.03% supplement is not a remuneration in kind and is therefore not to be regarded as remuneration for the employee. Rather, according to established case law of the Federal Fiscal Court, the purpose of the surcharge under the 0.03% rule is to compensate for deducted but not actually incurred income-related expenses. It is therefore merely a necessary adjustment item for the - lump sum - deduction of income-related expenses.

This result is confirmed by a further consideration of the Federal Labour Court: because the crediting of the supplement is kilometre-dependent, the employee would have it in his power to influence the amount of remuneration by simply relocating his place of residence, thus overriding the relationship between performance and consideration.

Possible claim for subsquent payment by the employee

If the value of the company car calculated according to the 1% rule exceeds the garnishable part of the employee's salary, the company car agreement is null and void. In this case, the employer has not paid out the entire non-garnishable part of the employee's remuneration in euros, contrary to the statutory provision. As a result, the employee is entitled to subsequent payment in euros of the amount corresponding to the value of the remuneration in kind.

The employee's maintenance obligations must also be taken into account when determining the garnishable part of the salary: depending on the number of dependants, the garnishment allowance increases. This can also lead to the company car agreement becoming null and void during the course of the agreement, namely if the employee only then becomes liable to pay maintenance or if further maintenance obligations are added.

The employee must return the remuneration in kind granted in the past to the employer in accordance with the rules of the law of enrichment, which can lead in particular to the objection of unjust enrichment.

Practical tip - avoidance of subsequent payments when granting a company car

The Federal Labour Court's ruling poses a number of challenges for HR practices. Employers should check the employees' respective garnishment allowances in order to avoid becoming liable for expensive back payments. This should include the employee's net salary, maintenance obligations and remuneration in kind. On the basis of the calculated garnishment allowances, it must be ensured that the remuneration paid out in Euros does not fall below the garnishable net wage.

There is a risk of subsequent payment in particular when a company car is provided for private use. The more expensive the company car and the lower the employee's (net) income, the higher the risk of the company car agreement being null and void and the employer being obligated to make additional payments.

The garnishment allowances also change if the relevant data changes. Thus, employers should also keep an eye on this and obligate employees to notify any changes (e.g. marital status, maintenance obligations) immediately.