German High Court Invalidates Company Car Deduction Pacts as Wage Garnishment Thresholds Rise

A recent ruling from Germany’s Federal Labor Court (BAG) has upended long-standing employer practices for treating company cars as part of an employee’s garnishable income. The decision, handed down on March 25, 2026 (case number 5 AZR 38/25), declares certain deduction agreements void, forcing payroll departments to reassess how they value fringe benefits in garnishment cases.

Under the ruling, if the private-use value of a company car exceeds the portion of an employee’s earnings that can be garnished, the entire agreement on offsetting the car’s worth against wages is null and void. Workers in this situation can then demand the full in-kind benefit be paid in cash on top of their salary. The valuation must follow the standard 1-percent rule based on the car’s gross list price; the additional 0.03-percent surcharge for commuting between home and workplace is not factored into that calculation.

The changes come as new exemption thresholds for wage garnishment take effect on July 1, 2026. For single employees without dependents, the basic allowance rises to €1,590 per month in net income, shielding that amount from creditors. Parents or others supporting family members see higher limits: roughly €598 extra for the first dependent, and about €333 more for each of up to five dependents.

In most companies, the adjustment happens automatically through the HR department. But experts caution that employees whose garnishment ceilings have been set by a court order or by a public creditor must actively apply for the new limits. Any amounts over-garnished because older limits were not updated cannot be reclaimed later.

The Federal Fiscal Court also weighed in on vehicle-related disputes, rejecting a taxpayer’s attempt to deduct travel costs in a so-called “cross-use” scenario (case VI R 30/24). The case involved an employee who used his wife’s company car for business trips while driving his own sports car privately. The judges ruled that no deduction for business travel expenses was allowed, because a conscientious taxpayer would not have made the same arrangement — the swap was motivated largely by personal preference.

For companies dealing with insolvency proceedings, the legal framework remains strict. According to Section 114(1) of the German Insolvency Code, any claims to wages that were assigned before the insolvency filing remain enforceable for two years after the end of the calendar month in which proceedings opened. The courts also warn against “wage shifting” under Section 850h(1) of the Code of Civil Procedure: any side deals in which an employer provides benefits to a third party to reduce the garnishment quota are legally disregarded. The amount is still treated as part of the employee’s garnishable assets. Should disputes arise over assigned claims, the labor court retains jurisdiction — even for new creditors and the employer.

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