Guest article by Axel Menzel, Inpact HR
Underestimated HR risks in building a foreign branch — from start-up to liquidation
Anyone setting up a branch in Germany, Austria or Switzerland from abroad has usually been through a great deal before the subject of staff even reaches the table: market analysis, legal form, tax structure, sometimes the first lease as well. At the latest when the first local employees are to be hired, the question arises: “So how do we actually do this — from an HR point of view?”
Out of that experience I would like to pick four subjects that are repeatedly underestimated in practice when foreign organisations establish themselves in the DACH region. The examples are drawn largely from German law; in Austria and Switzerland the logic is often similar with different details, which I point to where it matters.
1. The first employees on board: posting, contractor — or local employment straight away?
This question comes up almost always at the very beginning. The parent abroad has decided on market entry in the DACH region, and now someone is needed on the ground. The intuitive reflex: “Let’s just send someone over from here.” Or: “Let’s test it with a freelancer first.” Either can be right — but both have pitfalls that are often not present to mind at head office.
Option 1: posting from head office. For a short, clearly delimited set-up phase — three to six months of project work, exploring the market, building the first structures — posting with an A1 certificate is an established model. For social security purposes the employee stays in the home system. What matters to know: local protective rules apply to a posting as well — in Germany the Posted Workers Act (AEntG), in Austria the LSD-BG, in Switzerland the Posted Workers Act — each with its own notification duties and minimum standards. Anyone working on the ground for longer than one or two years also moves into a grey area: for tax purposes a permanent establishment often arises, and for social security an extension beyond 24 months becomes a matter for the authorities. My advice: posting yes, but with a clear timetable and a defined handover point to local employment.
Option 2: contractor / freelancer. The apparently simplest route — and the most dangerous. Germany examines bogus self-employment under § 7 SGB IV, Austria through the ASVG, Switzerland through the AHV compensation offices. In all three countries the position is the same: anyone who in fact works like an employee (subject to instructions, integrated into the organisation, with no market presence of their own) will be classified as an employee in the status determination procedure — with social security contributions assessed for several years plus late payment surcharges. Contractor models really only work where self-employment is lived out in the day-to-day business as well: several clients, own tools, a clear separation of content and instructions. For the first country manager of a local branch that is almost never the case.
Option 3: local employment from the outset. Where market entry is thought of strategically and for the long term, local employment — through a subsidiary of your own or a branch registered for wage tax — is almost always the cleanest route. It brings effort with it (payroll, social security registrations, local employment contracts) but it creates a clear legal basis. A company with no legal entity of its own in the target country that nevertheless wants to employ there can use an employer of record in the interim — though it is not intended as a permanent solution.
2. The local employment contract is not a form but a strategic decision
Once the decision for local employment has been taken, the next subject arrives: the employment contract itself.
In France the CDI (contrat à durée indéterminée) is a comparatively standardised document. Much is governed by the relevant sectoral collective agreement (convention collective), and the room for manoeuvre in the individual contract is limited — but clear.
In Germany and Austria the picture is different. The individual employment contract is a central steering instrument. Whatever is not in the contract, or is drafted loosely, will in case of doubt be resolved in the employee’s favour. German law on standard terms (§§ 305 ff. BGB) is applied to employment contracts — with the result that apparently harmless clauses (bonus reservations, transfer clauses, overtime provisions, repayment clauses for training) are regularly struck down in a dispute where they have been drafted superficially. Austria has a comparable logic through §§ 879 ABGB and the binding effect of collective agreements. In Switzerland the contractual latitude is traditionally wider; the difficulty there lies rather in the mandatory protective provisions of the Code of Obligations (OR), which many foreign contracts simply ignore.
From my experience in groups I know this: anyone falling back on a “global standard contract for foreign branches” drafted centrally at headquarters risks finding, at the first real conflict — a bonus payment, the end of a probationary period, a dismissal — that the provisions agreed will not hold. My practical advice: invest once, before the first hire, in clean contract templates, differentiated by level of function, fixed term and remuneration model. That investment repays itself tenfold at the first conflict.
3. Co-determination is not a bogeyman — but it works differently
This is a subject where the expectations of international clients and the DACH reality diverge particularly often.
French companies know mechanisms of employee representation — the CSE, the délégués syndicaux. But the German and Austrian systems are built differently: more cooperative in design, and at the same time equipped with hard legal levers once a works council has been elected. In Switzerland employee representation (under the Participation Act) is considerably weaker — so anyone who knows only the Swiss experience regularly underestimates the German and Austrian systems.
The works council in Germany (BetrVG) and in Austria (ArbVG) has a genuine right of co-determination in many personnel and social matters — which means that without its agreement the employer simply cannot implement certain measures. That includes matters such as the scheduling of working time, overtime, the introduction of technical monitoring systems (which covers many cloud-based HR systems, for instance) and practice on hiring and transfers.
A works council is not an opponent — but it is not a sparring partner with whom you “just informally” introduce a new bonus scheme either. Anyone who ignores this in the set-up phase, or involves the council too late, pays twice in case of doubt: once in the gap in trust that opens up, and once in laborious renegotiation.
4. If you are going in, think the exit through as well
This is the point people are least keen to discuss at market entry — but it belongs in an honest picture of HR.
Where a foreign group finds after some years that the DACH market does not work as hoped, or where a global restructuring programme reaches the local subsidiary, the assumption at headquarters is often: “Fine, we announce the closure, pay a few settlements, and in six months the matter is done.”
In the DACH region that expectation is very regularly disappointed. I have been responsible at management level for a complete closure and liquidation of an Austrian logistics subsidiary with several hundred employees — including social plan negotiations and collective redundancy procedures. Three lessons from that experience:
The closure itself takes months, not weeks. Collective redundancy procedures are subject to formal requirements in all three countries — with notification duties to the AMS or the Agentur für Arbeit and consultation procedures with the works council. Anyone who breaches a deadline or a formality risks the dismissals being ineffective — with the consequence that wages continue to run although operations have long since ceased. Social plan negotiations can drag on for six months.
The legal aftermath is the real risk. Even after the closure has been announced, the social plan concluded and the settlements paid, proceedings can continue: unfair dismissal claims, claims based on an alleged transfer of undertaking (§ 613a BGB / AVRAG / Art. 333 OR — all three with a similar protective effect) — particularly where parts of the business are continued in some form, including by third parties. Such proceedings can run for years.
The tax and accounting consequence is something nobody wants to see in the set-up phase, but it becomes acute in the closure phase: a local subsidiary cannot simply be “closed” while proceedings are still running or residual risks remain. The liquidation drags on — and with it the duty to make provisions for litigation risks, residual claims and liabilities not yet settled. Anyone who has budgeted too tightly here is unpleasantly surprised when the final accounts still have to be drawn up two or three years after operations actually ceased.
What does that mean for entry? From the very first local employment relationship, a legal relationship builds up that is expensive and lengthy to unwind in case of doubt. A group should therefore ask itself strategically whether it has a business case for DACH market entry that can also bear an orderly closure, with appropriate provisions for the social plan, settlements, litigation risks and the liquidation period. That is not pessimism — it is sound risk management.
Three recommendations for building HR in DACH
First: settle the employment model before you look for people. Anyone who finds the person first and then considers how to employ them usually ends up with the worst option.
Second: plan for local HR expertise from the outset. That does not have to be a full-time HR manager. But it takes someone who can draft the first contracts properly and, in case of doubt, say no when the parent proposes a solution that will not hold in DACH. That is exactly what interim models are for — pragmatic, time-limited, with a clear handover plan.
Third: think the exit through from the start. Not out of any lack of commitment — but as sound risk management. Anyone who knows at entry that a possible closure will not be done in six months but in two to three years, with provisions to match, makes better strategic decisions about team size, employment model, choice of location — and about when the right moment is to build local structures.
About the author
Axel Menzel is an interim HR manager and HR consultant based in Vienna. Through his consultancy Inpact HR he supports companies in the DACH region through critical phases — from building the HR function through growth and transformation to restructuring and business closures. His work focuses on employment law and the law on employing foreign nationals (certified), negotiations with social partners, and expatriate management with a regional focus on central and eastern Europe.
Before working independently he held HR leadership and managing director roles in German and international groups in the FMCG, technology and logistics sectors, supporting organisations through critical phases from market entry through restructuring to the liquidation of subsidiaries.
Contact: axel.menzel@inpact-hr.com · LinkedIn