Human Resources (HR)

What does human resources mean?

Human Resources (HR, in German Personalwesen or Personalmanagement) describes the corporate function that plans, steers and administers all tasks relating to employees. These include workforce planning, recruitment and selection, contracts and payroll, compensation, development and separation. The term also stands for the department that carries out these tasks.

In young companies, the founders do the HR work themselves, and payroll lies with the tax adviser or a payroll bureau. As the company grows, a separate HR function emerges, in larger organisations often following the three-pillar model of HR business partners, a Center of Excellence for specialist topics and a service centre for administration. In funding rounds and company sales, HR topics are among the core areas of review.

Areas of responsibility

• Planning and recruitment: headcount plan, job profiles, search, selection and conclusion of contracts.
• Administration: employment contracts, payroll, time recording, certificates and personnel files.
• Compensation and equity participation: salary bands, variable pay, fringe benefits, company pension schemes and participation programmes such as an ESOP or VSOP.
• Development: onboarding, further training, career paths and succession planning for key positions.
• Employment law and co-determination: warnings and dismissals, cooperation with the works council, protection of employee data.

The administrative tasks must run reliably and without errors; the shaping tasks decide on the quality and retention of the workforce. If both are handled by the same people without priorities, the urgent regularly displaces the important.

Legal framework in Germany

The employment relationship rests on the employment contract under Section 611a of the German Civil Code (Bürgerliches Gesetzbuch, BGB). Under the German Act on Documenting the Terms of Employment (Nachweisgesetz), the employer must document the essential contract terms. General protection against dismissal applies after more than six months of employment if the establishment as a rule employs more than ten employees (Section 1(1) and Section 23(1) of the German Protection Against Dismissal Act, Kündigungsschutzgesetz, KSchG). In establishments with as a rule at least five permanent employees entitled to vote, a works council can be elected (Section 1 of the German Works Constitution Act, Betriebsverfassungsgesetz, BetrVG), which co-determines in many personnel and social matters.

For freelancers, the status under social security law must be clarified. If the activity is in fact dependent employment (colloquially false self-employment, Scheinselbständigkeit), claims for subsequent payment of social security contributions are a risk. A status determination procedure with the German Pension Insurance (Deutsche Rentenversicherung) creates clarity in advance.

HR topics in due diligence

In due diligence, investors and buyers check whether employment contracts and managing director contracts are available complete and signed, which notice periods and non-competes apply to key persons, and whether contracts contain change-of-control clauses. Such clauses grant special rights on a change of owner, for example a special right of termination or a special payment. Also checked are participation commitments including undocumented promises, the transfer of rights to work results (IP assignment), the status of freelancers, pension commitments, works agreements and pending disputes. Findings affect purchase price, warranties and indemnities.

In a share deal, the purchase of the shares, the company remains the employer and the employment relationships continue unchanged. In an asset deal and in the transfer of parts of a business, the employment relationships of the assigned employees pass to the acquirer with all rights and obligations under Section 613a BGB. Those affected must be informed in text form and may object within one month; a dismissal because of the transfer is invalid. Key persons are often additionally retained through retention bonuses.

Worked example

A company plans ten hires with a gross annual salary of EUR 70,000 each. The employer's social security contributions and levies are assumed, for simplicity, at 20%; the actual values depend on the contribution rates and assessment ceilings in force.

• Employer contributions: 70,000 × 20% = EUR 14,000
• Workplace, equipment and software: EUR 5,000 per year
• Fee of a recruitment consultancy, one-off 20% of annual salary: EUR 14,000
• Full cost per position in year one: 70,000 + 14,000 + 5,000 + 14,000 = EUR 103,000
• Full cost from year two: 70,000 + 14,000 + 5,000 = EUR 89,000
• Planning with gross salaries only: 10 × 70,000 = EUR 700,000
• Actual costs in year one: 10 × 103,000 = EUR 1,030,000, that is, EUR 330,000 more than planned

The actual costs in year one are around 47% above a plan that takes only gross salaries into account. In the financial model this shortens the runway of liquidity, and investors correct the plan themselves in their review.

Distinction from related terms

• HR Business Partner: a role within the HR function that advises a business unit. Human resources comprises the entire function.
• Organisational development: the planned change of structures and cooperation. The HR function supports it; responsibility remains with the management.
• Headcount plan: the planning of positions, timing and costs. It is a tool of the HR function and part of the financial model.

Common mistakes

• HR work only after the first conflict. An employment law dispute without orderly contracts and files costs more than building them up in good time.
• Verbal participation commitments. Participation promises without a written basis become known at the latest in due diligence and delay the transaction.
• Inconsistent contracts. Different generations of contracts without provisions on work results and confidentiality make the review harder and weaken the company's rights.
• No salary bands. Without comprehensible pay levels, salary depends on negotiating skill. The resulting imbalances can later be corrected only with effort.
• Freelancer status unchecked. Long-standing, fully integrated freelancers are a frequent review topic with a risk of subsequent claims.

Frequently asked questions

From when does a company need a dedicated HR position?

In practice often at around 30 to 50 employees. Before that, payroll and employment law advice can be outsourced; selection and leadership remain a task of the management.

Which HR tasks can be outsourced?

Payroll, time recording and employment law advice well; selection, onboarding and leadership hardly. These tasks determine the quality of the workforce and stay in the company.

Do employment relationships pass to the buyer in a company sale?

Not in a share deal, because the employer stays the same. In an asset deal they pass to the acquirer under Section 613a BGB, to the extent that the employees are assigned to the transferred business or part of a business and do not object.

Which HR metrics interest investors?

Above all turnover, time to fill open positions, retention after twelve months and personnel costs in relation to revenue. They show whether the planned build-up of staff is feasible.

The Roemer Capital view

Before a funding round, we reconcile the headcount plan in the financial model with full costs. We also look at the foundations that investors will later check: signed contracts of key persons, documented participation commitments and provisions on work results. The employment law assessment lies with the company's law firm; we assess the economic consequences.

In the sale process, the HR section is among the parts of the data room that should be ready within 24 hours. We clear up open points such as unresolved freelancer relationships or verbal promises with the client before a buyer raises them as a purchase price deduction.