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05 December 2012
Provision of company car for private use as component of salary
Right of revocation in employment contract
Possibility to revoke company car without contractual provision
Notice period for revocation
Obligation to compensate for unlawful revocation of company car
The provision of a company car that is also for private use is a popular way of promoting employee loyalty. However, disputes often arise when the employer demands that the car be returned. Under what conditions is this possible, and must the employer observe a notice period? This update considers the legal requirements for valid revocation of the right to use a company car and illustrates the consequences if such revocation is carried out in an unlawful manner.
If an employer provides an employee with a company car which may also be used privately, this constitutes a benefit in kind with monetary value, and thus a component of the salary. The employee must tax the non-cash benefit of private use pursuant to Section 8(2) Sentences 2 ff as read with Section 6(1) No 4 of the Income Tax Act. The basis for taxation may be determined by either providing individual documentation (in particular, by furnishing a log book) or, in accordance with common practice, taxing a monthly charge for use. In the latter case, the monthly benefit for private use is set at 1% of the gross list price. In addition, there is a tax on the benefit for travel between residence and place of work of 0.03% of the gross list price per kilometre.
In accordance with Section 6(1) No 4 Sentence 2 of the Income Tax Act, taxation is always for a full calendar month. This is relevant with regard to the question of whether the employer can also demand that a company car be returned during the course of a month.
Without a contractual basis, the employer may not unilaterally interfere with the mutual relationship of work performed and compensation and demand that a company car provided for private use be returned.
The employer may retain a unilateral right to revoke the company car in the employment contract. The requirements of case law with respect to such contractual clauses are quite stringent.
Clauses in which the employer retains the right to revoke the company car "at any time" are invalid, according to case law of the Federal Employment Court, since they unreasonably disadvantage the employee (Section 308 No 4 as read with Section 307 of the Civil Code).(1) The grounds under which the employer may revoke the company car must be specified in the employment contract itself.
Possible grounds for revocation include the employee being granted gardening leave in connection with the end of his or her employment, the employee losing his or her driving licence or if the company is experiencing financial difficulties. In the latter case, under recent case law of the Federal Employment Court, it is insufficient if the contractual clause stipulates only that the company car can be revoked "for economic reasons". Rather, the economic reasons must be specified in the contractual clause itself (eg, a decrease in profits of a certain amount).
Even without a contractually agreed right of revocation, or if such a right of revocation does not meet the strict requirements of case law and is therefore invalid, as a rule the employer may also demand that the company car be returned if the employee is no longer entitled to remuneration. This is the case, for example, if the period for continued payment of remuneration in the event of illness has expired, during parental leave or sabbatical (but not during compulsory maternity leave), or if the employee participates in a strike.(2)
The employee must also return the company car if the employment relationship ends. This also applies as a rule if the employee has contested the dismissal and court proceedings are still pending.
In a March 21 2012 decision(3) the Federal Employment Court addressed the issue of whether the employer must observe a certain notice period when demanding the return of a company car.
An employee terminated the employment relationship herself with effect from June 30 2009. On June 9 2009 the employer released her from her duty to perform work with continued remuneration until the end of the employment relationship. The employment contract granted the employer the right to demand that the company car, which was also for private use, be returned in the event of gardening leave. The clause did not stipulate a notice period with respect to the obligation to return. Thus, on June 9 2009 the employer also demanded that the company car be returned with immediate effect, which the employee complied with. However, she later demanded compensation for the immediate loss of use of the company car.
The Federal Employment Court departed from the decision in the previous instance and clarified that the contractual right of revocation was not invalid merely because it did not contain a notice period for demanding the return of the car. Such a notice period is not provided for under statute. However, exercise of the right of revocation by the employer in a specific case must reflect reasonable discretion pursuant to Section 315 of the Civil Code. The employer must always observe the interests of the employee that are worthy of protection. Therefore, as a rule, the employer may demand the return of a company car only with a reasonable notice period. In this case, the court held that revocation was permissible with effect from June 30 2009 (the date on which employment ended). The court based its decision on the fact that the employee had to pay tax on the benefit for private use of the company car for the entire month of June 2009 pursuant to Section 6(1) No 4 of the Income Tax Act. Thus, revocation of the company car resulted not only in the loss of use, but also in a noticeable reduction of monthly income. In the court's view, the interests of the employee in using the taxed benefit outweighed the interests of the employer in immediate revocation of the company car in this case. In addition, the company car was the only car available to the employee; she had no other vehicle to use.
If an employer demands the return of a company car without justification (eg, if the employment contract does not contain a valid right of revocation or if a required notice period for revocation is not observed), the employee is entitled to compensation pursuant to Sections 280(1) and 283 of the Civil Code. As a rule, compensation for loss of use is based on the tax value of the right to private use. Therefore, the employer must pay compensation of 1% per month of the gross list price of the car at the time when it was first registered.
If the employer wishes to demand the return of a company car that is also provided for private use, even though the employer is still obliged to pay remuneration under the employment contract, the crucial issue is whether a valid right of revocation has been agreed in the employment contract. Great care must be exercised when formulating such contractual clauses. If the clause is invalid and the employer nevertheless demands that the company car be returned, it is likely that the employee will be able to claim compensation. The same applies if the employer wrongly demands that the company car be returned too early. With respect to the March 21 2012 decision of the Federal Employment Court, it must be assumed that the employer may demand only that a company car be returned at the end of the month without compensation.
For further information on this topic please contact Bjoern Gaul, Bernd Roock, Antje-Kathrin Uhl or Eva Schäfer-Wallberg at CMSHasche Sigle by telephone (+49 711 9764 248), fax (+49 711 9764 96249) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com).
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