Federal Labour Court: Garden leave following dismissal

In a recent landmark ruling, the Federal Labour Court (BAG) has clearly rejected blanket release clauses (judgment of 25 March 2026 – 5 AZR 108/25). Employers are therefore well advised to review their standard employment contract templates and revise them where necessary.

In practice, employment contracts frequently contain release clauses which entitle the employer, without any restrictive conditions, to release the employee from work (place the employee on garden leave) following termination until the expiry of the notice period. In the recent past, there has already been a growing trend in lower court case law to regard such unrestricted release clauses as invalid. We recently drew attention to this here. The Federal Labour Court has now confirmed this case law, thereby significantly restricting current practice – the giving of notice and ‘automatic’ immediate release from work.

The Federal Labour Court’s ruling

According to the Federal Labour Court, blanket release clauses constitute an unreasonable disadvantage to the employee and are therefore invalid on the grounds of a breach of the law governing standard terms and conditions.

In the case underlying the Federal Labour Court ruling, the claimant had been working as a regional sales manager in the field sales force since 2022. The employee was provided with a company car for this purpose, which could also be used privately. The employer was to be able to reclaim this vehicle in the event of the employee’s release from work. A clause in the contract permitted the employer to release the employee “upon or following termination – regardless of which party gave notice” without further conditions, while continuing to pay remuneration.

After the employee had resigned, the employer released him from work and required the return of the company car. The employee subsequently claimed compensation for loss of use resulting from the withdrawal of the vehicle. The key issue was therefore whether the release from work – and, consequently, the withdrawal of the company car – was based on a valid contractual clause.

The Federal Labour Court held that the clause in question was invalid, as it placed the employee at an unreasonable disadvantage within the meaning of law governing standard terms and conditions. The constitutionally protected interest of employees in continuing to work until the end of the employment relationship outweighed the employer’s general interest in a unilateral release from work. By virtue of its blanket wording, the clause deprived the employee from the outset of the opportunity to assert an overriding interest in continued employment in the individual case.

Nevertheless, the Federal Labour Court did not (yet) award the claimed compensation for loss of use. Even in the absence of a valid release clause, an employer may still be entitled to release an employee from work if, in the specific circumstances, the employer’s interest in doing so outweighs the employee’s interest in continued employment. This assessment was remitted to the lower court.

Implications for practice

The Federal Labour Court’s ruling does not mean that a release from work following termination is generally impermissible.

Rather, the Court has confirmed that standardised, blanket clauses are invalid. A different assessment may apply where a release clause has been individually negotiated and is therefore not subject to the rules on standard terms and conditions. In addition, standard-form clauses may remain valid if they restrict the employer’s right to release from work by linking it to specific conditions, such as the protection of trade or business secrets, risks of competitive activity, a seriously impaired relationship of trust, or the cessation of any meaningful employment opportunity.

Irrespective of the contractual framework, an individual balancing of interests is required in every case. Even where a release clause is valid, a release may be unjustified in the circumstances – and, conversely, justified even where the clause itself is invalid.

Action required for employers

In light of this landmark decision, employers should review their standard employment contract templates for blanket release clauses and revise them where necessary to ensure a more balanced formulation. This creates a more robust basis for lawful release from work.

In addition, prior to place an employee on garden leave, employers should assess and document whether they have a legitimate interest that outweighs the employee’s interest in continued employment. Such documentation is essential in anticipation of potential disputes. Employers should also critically review whether ancillary contractual provisions – particularly those relating to the return of company cars or variable remuneration components – should be linked to the existence of a legally effective release from work.

Failing this, employers face an increased risk that employees will successfully challenge a release from work and will have to be reinstated. Where further provisions are tied to an invalid release, this may also result in significant additional exposure, such as liability for compensation for loss of use following the unjustified reclaiming of a company car.