Guest article: Market Entry into the DACH Region

When setting up a subsidiary in Germany, Austria, or Switzerland from abroad, organisations usually have a lot of work behind them before the topic of Human Resources even comes up: market analysis, legal form, tax structure, and sometimes even the first lease agreement. The question then arises, at the latest when the first local employees are to be hired: “How do we actually do this – HR-wise?”

Based on this experience, I would like to highlight four topics that are repeatedly underestimated in practice when foreign organisations seek to establish a presence in the DACH region. The examples are predominantly based on German law; in Austria and Switzerland, similar logics often apply with different detailed regulations, which I will refer to in the relevant places.

1. Getting the First Employees on Board: Secondment, Contractor – or Immediate Local Employment?

This question almost always arises right at the beginning. The parent company abroad has decided on a market entry into the DACH region, and now needs someone locally. The intuitive reflex: “Let’s just send someone from here.” Or: “Let’s first test this with a freelancer.” Both can be the right choice – but both have pitfalls that are often not present in the headquarters.

Option 1: Secondment from the Headquarters. For a short, clearly demarcated set-up phase – three to six months of project work, market exploration, establishing initial structures – secondment with an A1 certificate (EU social security form) is an established model. In terms of social security law, the employee remains in the home system. Important to know: Even in the case of a secondment, local protection provisions apply – in Germany the Arbeitnehmer-Entsendegesetz (AEntG) (Posted Workers Act), in Austria the LSD-BG (Wage and Social Dumping Combat Act), and in Switzerland the Entsendegesetz (Posted Workers Act) – each with its own notification obligations and minimum standards. Anyone who works locally for longer than one to two years is also moving into a grey area: a permanent establishment often arises for tax purposes, and extending the social security cover beyond 24 months becomes a matter for the authorities. My advice: Secondment, yes, but with a clear time schedule and a defined handover point to local employment.

Option 2: Contractor / Freelancer. The supposedly easiest way – and the most dangerous. Germany checks for Scheinselbstständigkeit (bogus self-employment) according to § 7 SGB IV (German Social Code), Austria via the ASVG (General Social Security Act), and Switzerland via the AHV-Ausgleichskassen (Old Age and Survivors’ Insurance Compensation Funds). The principle applies in all three countries: Anyone who factually works like an employee (direction and control, integration, no own market presence) will be classified as an employee in the status determination procedure – resulting in subsequent demands for social security contributions for several years plus late payment surcharges. Contractor models really only work where self-employment is also lived out in day-to-day business: multiple clients, own tools, clear demarcation of content and instructions. This is almost never the case for the first Country Manager of the local subsidiary.

Option 3: Local Employment from the Start. If the market entry is strategically and long-term, local employment – through an own subsidiary or a branch office with payroll tax registration – is almost always the cleanest way. It involves effort (payroll accounting, social security registrations, local employment contracts), but it creates a clear legal basis. If you don’t have your own legal entity in the target country but want to hire there, you can temporarily use an Employer of Record – but this is not intended as a permanent solution.

2. The Local Employment Contract is not a Form, but a Strategic Decision

As soon as the decision for local employment has been made, the next topic arises: the employment contract itself.

In France, the CDI (contrat à durée indéterminée) is a comparatively standardised document. Much is regulated by the respective industry collective agreement (convention collective), and the scope for individual contracts is limited – but therefore also clear.

The situation is different in Germany and Austria. The individual employment contract is a central steering instrument here. Anything that is not in the contract or is vaguely formulated will, in case of doubt, fall in favour of the employee. The German law on general terms and conditions (AGB-Recht, §§ 305 ff. BGB) is applied to employment contracts – with the result that seemingly harmless clauses (bonus reservations, transfer clauses, overtime regulations, reimbursement clauses for training) are regularly annulled in disputes if they are superficially formulated. Austria knows a comparable logic via the §§ 879 ABGB (General Civil Code) and the binding effect of the Kollektivverträge (collective agreements). In Switzerland, the contractual scope is traditionally broader; the pitfall there lies more in the mandatory protection provisions of the Obligationenrecht (OR) (Code of Obligations), which many foreign contracts simply ignore.

From my corporate experience, I know: Anyone who relies on a “global standard contract for foreign subsidiaries” formulated centrally in the headquarters risks that the regulations made will not be sustainable in the event of the first real conflict – bonus payment, end of the probationary period, termination. My practical advice: Invest once in clean contract templates before the first hiring, differentiated by function level, fixed-term, and compensation model. This investment will pay for itself ten times over in the first conflict.

3. Employee Co-determination is not a Bogeyman – but it Works Differently

A topic where the expectation of international clients and the DACH reality particularly often diverge.

French companies know co-determination mechanisms – CSE, Délégués Syndicaux. But the German and Austrian systems are structured differently: designed to be more cooperative, yet equipped with hard legal levers as soon as a Works Council (Betriebsrat) is elected. In Switzerland, employee representation (Mitwirkungsgesetz – Participation Act) is designed to be significantly weaker – so anyone who only knows the Swiss experience regularly underestimates the German and Austrian systems.

The Works Council in Germany (BetrVG – Works Constitution Act) and in Austria (ArbVG – Labour Constitution Act) has a real right of Mitbestimmung (co-determination) in many personnel and social matters – meaning: without its consent, the employer simply cannot implement certain measures. These include topics such as working hours, overtime, the introduction of technical monitoring devices (which includes many cloud-based HR systems, for example), or hiring and transfer practices.

A Works Council is not an opponent – but it is also not a sparring partner with whom you can “just informally” introduce a new bonus regulation. Anyone who ignores this in the set-up phase or involves them too late pays double in case of doubt: once in the resulting trust gap, and once in tenacious renegotiations.

4. When Entering, You Should Consider the Exit

The topic least willingly discussed during market entry – but it is part of an honest HR picture.

When a foreign group determines after a few years that the DACH market is not working out as hoped, or when a global restructuring program affects the local subsidiary, the assumption at the headquarters is often: “Okay, then we announce the closure, pay some severance, and in six months the matter is closed.” This expectation is very regularly disappointed in the DACH region. I was responsible for a complete closure and liquidation process of an Austrian logistics subsidiary with several hundred employees at the management level – including Social Plan negotiations and mass redundancy procedures. Three lessons from this practice:

The closure itself takes months, not weeks. Mass redundancy procedures are subject to formal requirements in all three countries – with notification obligations to the AMS (Austrian Public Employment Service) or the Agentur für Arbeit (German Federal Employment Agency) and consultation procedures with the Works Council. Anyone who violates deadlines or formalities risks the ineffectiveness of the dismissals – with the consequence that wage payments continue, even though the operation has long since ceased. Social Plan negotiations can drag on for half a year.

The legal aftermath is the real risk. Even after the announcement of the closure, a completed Social Plan, and paid severance, proceedings can continue: dismissal protection claims (Kündigungsschutzklagen), claims regarding an alleged transfer of undertaking (Betriebsübergang) (§ 613a BGB / AVRAG – Austrian Employment Contract Law Adjustment Act / Art. 333 OR – all three with similar protective effect) – especially if parts of the business are continued in some form, even by third parties. These proceedings can drag on for years.

The tax and balance sheet consequences are something no one will want to see during the set-up phase, but they suddenly become acute in the closure phase: A local subsidiary cannot simply be “closed” as long as proceedings are still running or residual risks exist. The liquidation drags on – and with it the obligation to make provisions for litigation risks, residual claims, and unfulfilled liabilities. Anyone who has calculated too tightly here will be unpleasantly surprised when the last balance sheet has to be drawn up two or three years after the actual cessation of business.

What does this mean for the entry? From the very first local employment relationship, a legal relationship is built up that is, in case of doubt, expensive and lengthy to dismantle. A group should therefore strategically ask whether it has a business case for DACH market entry that can also withstand the case of an orderly closure with adequate provisions for the Social Plan, severance, litigation risks, and liquidation period. That is not pessimistic – that is solid risk management.

Three Recommendations for Setting up HR in DACH

First: Clarify the employment model before you look for people. Anyone who finds the person first and then considers how they will be employed usually ends up with the worst option.

Second: Plan for local HR expertise from the start. This doesn’t have to be a full-time HR manager. But it needs someone who can properly set up the first contracts and, in case of doubt, can also say No when the parent company proposes a solution that is not tenable in DACH. This is exactly what interim models are for – pragmatic, time-limited, with a clear handover plan.

Third: Consider the exit from the very beginning. Not out of a lack of commitment – but as solid risk management. Anyone who knows upon entry that a possible closure will not be completed in six months, but in two to three years with corresponding provisions, makes better strategic decisions about team size, employment model, location choice – and about when the right time 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 during critical phases – from setting up the HR function, through growth and transformation processes, to restructurings and business closures. The focus of his work is on employment and foreign employment law (certified), social partner negotiations, and expat management with a regional focus on Central and Eastern Europe.

Before becoming self-employed, he worked as an HR manager and managing director in German and international corporations in the FMCG, Tech, and Logistics sectors, and supported organisations in critical phases from market entry through restructurings to the liquidation of subsidiaries.

Contact: axel.menzel@inpact-hr.com · LinkedIn