Outsourced HR vs fractional HR in Germany: what you can hand off, what stays with the employer

What can you outsource in an HR department?

Executing tasks with a fixed procedure can be outsourced: ongoing payroll, maintenance of personnel files and master data, handling applications up to the shortlist, drafting employment contracts and certificates from your templates, and the notifications to social security bodies. What these tasks have in common is that the decision about what to do is already made and only the execution is open.

What you cannot outsource is the employer position itself. Whoever has employees remains the contracting party, the person who gives instructions and the debtor of the pay. The decisions that converge in an HR department are also hard to deliver as a service: whom you hire, whom you dismiss, how you negotiate with the works council and which pay structure you want depend on knowing your company, and an external provider running a standard process does not.

An in-between form are tasks involving judgment, such as recruiting for hard-to-fill roles or support in separations. Here you can buy the execution while the decision stays in-house. That works when someone inside the company can assess the results. If nobody can, you receive results you cannot check. That is exactly what fractional HR is for.

The following selection helps with a first sort. It is orientation, not an expert opinion.

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What stays with the employer even when a provider does the work

Liability for wage tax stays with the employer. Section 42d(1) of the Income Tax Act (EStG) says the employer is liable for the wage tax it has to withhold and pay over. A payroll provider can miscalculate and the tax assessment still comes to you. Your right of recourse against the provider follows from the contract and does not replace liability towards the tax office.

Social security works the same way. Under section 28e(1) of Social Code IV (SGB IV) the employer has to pay the total social security contribution. The provider calculates and reports, the duty to pay remains yours. Anyone outsourcing payroll should therefore set spot checks, for instance reviewing the first three payroll runs and then every quarter.

Who may perform payroll for third parties at all is governed by the Tax Advisory Act (StBerG). Sections 2 and 5 prohibit unauthorised assistance in tax matters. Section 6(1) no. 1 StBerG exempts ongoing payroll under narrow conditions: it must be carried out under the responsibility of a person who, after commercial training, has worked at least three years in bookkeeping for at least 16 hours a week. For you that means: ask the provider on what basis it does payroll, and get the answer in writing.

On top comes what no contract transfers: duty of care towards employees, being reachable in a conflict, and being the face towards the workforce. If a colleague asks about parental leave and the answer comes from a hotline that does not know your works agreement, you lose trust inside your own house.

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How do you handle data protection when HR tasks are outsourced?

With a data processing agreement under Article 28 GDPR, before the first record flows. The agreement sets out the subject matter and duration, the nature and purpose of the processing, the categories of data and the data subjects. You may only choose processors that provide sufficient guarantees for technical and organisational measures. Under section 26(1) BDSG employee data may only be processed as far as necessary for the employment relationship. That applies to the provider too.

Two clauses are easily overlooked. First, sub-processors: under Article 28(2) GDPR the provider may not engage another processor without your prior written authorisation, specific or general (for the access an external HR lead should get in daily work, see access to employee data for interim HR managers). Ask for the list before you sign, because a payroll provider almost always works with a data centre, a print shop and a support service. Second, control: Article 28(3)(h) obliges the provider to supply evidence and to allow and contribute to audits, including inspections. That is your right, and it only helps if you use it once.

Roles follow the actual circumstances. The European Data Protection Board's Guidelines 07/2020 make clear that the label in the contract does not decide who is controller and who is processor. A provider that uses employee data for its own purposes, for example benchmarks, is no longer a mere processor. So check whether it uses the data for anything else, and prohibit it in the contract.

The fine range is high. Infringements of the obligations of controllers and processors under Articles 25 to 39 GDPR, which include Article 28, can be fined up to 10 million euros or up to 2 percent of worldwide annual turnover, whichever is higher.

How common a data processing agreement is on the market shows in my review. I analysed 165 HR tools from personnel administration, recruiting, selection and employee experience. For 55 of them I found a statement on the data processing agreement on the provider's pages: publicly viewable for 40, on request for 10, and by click-through in the account for 5. Among the 17 payroll tools with AI features it was 3. That does not mean the rest offer no contract. It means you often have to ask for it.

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When does outsourcing become a business transfer?

When an organised unit passes to the provider. Section 613a(1) sentence 1 BGB: if a business or part of a business passes to another owner by legal transaction, the new owner steps into the rights and obligations of the existing employment relationships. If your HR department has four people who move to the provider together with rooms, systems and processes, that is typically a transfer of part of a business.

Merely contracting out a task is not. In its judgment of 24 May 2005 (8 AZR 333/04), the Federal Labour Court held that the mere continuation of an activity by a contractor is not a business transfer. What mattered was whether the new owner takes over the main workforce, a part of the staff that is essential in number and expertise. In the case decided, taking over 60 percent of the employees in a labour-intensive activity was not enough. The Court of Justice of the European Union had already ruled on 11 March 1997 in Süzen (C-13/95) that losing a contract to a competitor is not in itself a transfer under the Directive. It applies where assets are transferred or an essential part of the workforce is taken over.

In practice: if you outsource payroll and your colleague in payroll stays or is redeployed while the provider works with its own staff, it is usually a functional succession. If the unit's employees, systems and processes move across, a transfer of part of a business may exist. Drawing the line is case-by-case work for a specialist employment lawyer, but you can prepare the order of questions yourself.

If a business transfer exists, the consequences are clear. The affected employees must be informed in text form before the transfer (section 613a(5) BGB), they can object in writing within one month of receiving that information (subsection 6), a dismissal because of the transfer is invalid (subsection 4), and the former employer is jointly and severally liable with the new owner for obligations that arose before the transfer and fall due within one year (subsection 2).

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What does this mean for the works council?

Involve it early, even if no business transfer exists. Under section 80(2) of the Works Constitution Act (BetrVG) the works council's right to information also covers the employment of persons who are not in an employment relationship with the employer. Section 92(1) sentence 1 BetrVG names these persons expressly within personnel planning. Anyone bringing providers into HR processes therefore has a duty to inform before the question of co-determination even arises.

The second question is whether the outsourcing is an operational change. Section 111 BetrVG obliges companies with, as a rule, more than twenty eligible employees to inform the works council of planned operational changes in good time and comprehensively and to consult it. Operational changes include, among others, the curtailment or closure of essential parts of the operation and fundamental changes to the organisation of the operation. Whether outsourcing an HR department counts depends on how essential it is to the operation and how many employees are affected. Handing a two-person administration to a payroll provider is different from handing over an entire department.

Third, section 87(1) no. 6 BetrVG can apply if the provider works with technical systems designed to monitor employees' behaviour or performance. That happens quickly with time recording, attendance analysis or AI-assisted evaluation. Section 26(6) BDSG makes clear that the participation rights of employee representatives remain unaffected.

A simple sequence helps: inform the works council before choosing the provider, go through the criteria together, and present the draft contract with the data processing agreement before signing. That costs two conversations and reduces the risk of the outsourcing ending up in the conciliation board later.

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When does fractional or interim fit better than outsourcing?

When the problem is steering and not execution. A payroll provider does not answer questions about building the pay structure, handling the works council or a separation. Anyone who has HR specialists but nobody who decides and judges the providers' results does not have an outsourcing problem but a leadership problem.

Fractional HR means an experienced HR lead works a fixed part of the week for your company. That fits when your need is permanent but does not fill a full-time role. Such a person can also steer the outsourced providers: scope the tasks, review contracts, read the results critically and face the works council. The two models therefore complement each other more than they compete. The choice between fractional, interim and a permanent hire is covered in more detail on the page Interim, Fractional, or a Permanent Hire.

Interim is the form for a limited window: the HR lead is absent, a restructuring is due, or an outsourcing needs to be prepared first. An interim person can set the outsourcing up cleanly, with works council, data protection and handover process, and hand over to providers or a successor at the end. The contract form matters here. Someone who is integrated into your organisation and follows your instructions can count as an employee under section 611a BGB or as a temporary agency worker under section 1 AÜG.

An example from my own experience shows the direction can also run the other way. At a consumer goods group I brought talent acquisition in-house that had previously run externally. That saved 300,000 euros in recruiting costs. The example is no argument against outsourcing. It shows the question has to be asked again every year: is the task stable and frequent enough to run better and cheaper in-house? In personnel administration I saw the counterpart: manual effort fell from 30 to 5 hours a week without the task leaving the house. There the solution was not outsourcing but a better process.

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What belongs in the contract and the checklist?

The following list summarises what should be settled before signing. It does not replace a contract review, but it orders the questions to put to your provider. Each point traces back to one of the provisions above or to a sequence I consider sensible.

Tick off what is settled on your side. The list stays saved in your browser, and the button below copies the state as text.

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How I approach the question when a company contacts me

I first ask what the company wants to outsource and why. If nobody leads HR as a whole and the outsourcing is meant to plug the hole, it is useful but does not solve the problem. It takes load off the existing team and leaves the leadership question open.

I work as a fractional and interim HR manager and so have an interest in the answer. I say it openly: if your task is ongoing payroll and someone in-house checks the results, you do not need me for it. Then a good payroll provider with a clean contract is the right choice, and at most I help read the contract against the points of the checklist. If works council, leadership questions, separations or building up HR are in the room, a lead with a mandate is the better lever.

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