The decision stems from a suit brought on by three families who saw a parent stay out of work longer than they intended, resulting in lost wages, due to a lack of space at childcare facilities or Kitas.
Judges decided that Leipzig failed to provide enough childcare, to which all children older than the age of one are entitled, and thus cost the families money. The city has to pay €15,000 to the families, plus interest.
City managers still have the opportunity to appeal the decision.
In Germany, parents are entitled to 15 months of paid parental leave, of which no one parent can take less than three months or more than 12 months. A mother or a father can take as much as three years to stay home with their young children, but will only get paid for a portion of that time.
The law only recently changed to stipulate that Kita places, which are publicly subsidised, had to be available to all children over 12 months, however, the availability of spots in Kitas or through home-based childminders has yet to meet demand.
Lawyers for Leipzig said the city was working on increasing the number of Kita spots available, but has seen construction and planning delays.
But the court said that city planners should have prepared for that and made other arrangements.
According to the federal statistics agency, around a third of children under three are in a Kita or in the care of a childminder in Germany.
A spokesperson for the German Association of Towns and Municipalities said that the decision is the first of its kind, while adding that there have been other cases that have been decided outside of courts in other cities.
In Stuttgart last year, another court ordered that the city had to take over the costs of a private – and more expensive – Kita, though no money was awarded in the case.