Austria: Avoid Expensive Mistakes As Startup Employer

In addition to being an underestimated factor when it comes to financial liabilities, employment-law-related mistakes may also result in difficulties in the course of a company's sales process. For a better understanding of what can go wrong in employment relationships, three of the most common mistakes that employers make are listed below.

1. Mistake 1: Applying the wrong collective bargaining agreement (Kollektivvertag, "CBA")

1.1 What are the risks if the wrong CBA is applied?

CBAs include many provisions that deviate from the laws usually applicable to employment relationships. These may range from more favourable termination periods and dates to various benefits and additional payments, such as jubilee or severance payments, holiday pay or Christmas bonuses. Most importantly, CBAs set out mandatory minimum salaries.

If the employer does not observe the provisions of the CBA, employees may make claims for payments, eg if the employees were paid a lower salary than they were entitled to under the applicable CBA.

Also, the Austrian Law against Wage and Social Dumping (Lohn- und Sozialdumping Bekämpfungsgesetz) lays down penalties if the salary actually paid to an employee is below the minimum. Authorities then may impose fines of up to EUR 50,000 for every underpaid employee, which the company's managing director(s) will be liable to pay.

1.2 May the applicable CBA be chosen freely?

No. The CBA applicable to your company generally depends on the assignment of your company to one or more professional organisations of the Austrian Economic Chamber of Commerce (Fachverband der österreichischen Wirtschaftskammer). The assignment depends on the kind of business licence (Gewerbeberechtigung) that your company holds.

The professional organisations negotiate and conclude CBAs on behalf of their members. If a CBA was therefore concluded by the professional organisation your company is assigned to, it automatically applies to your company.

1.3 May more than one CBA be applied?

Generally, no. Even if your company is a member of various professional organisations and, thus, various CBAs appear to apply, just one collective bargaining agreement shall apply within a business (Grundsatz der Tarifeinheit). Following this principle, the CBA corresponding to the economic sector most relevant for the business applies if two or more CBAs collide within a company. If the sector cannot be identified, the CBA applicable to most of the employees applies instead.

Consequently, if your company is assigned to various professional organisations, you need to assess which of the services provided by your company is economically most relevant in order to figure out the applicable CBA.

2 Mistake 2: Incorrect qualification of employees as freelancers or independent contractors

2.1 What are the risks if employees are incorrectly qualified?

Employers often expect cost savings when concluding service contracts (Werkvertrag) or freelance contracts (Freier Dienstvertrag) instead of "regular" employment contracts (Dienstvertrag). Among other things, freelancers and independent contractors are not subject to minimum wages, special payments, paid vacation leave or overtime pay, statutory termination periods or working time restrictions. Furthermore, no payroll tax or social security contributions need to be paid for independent contractors. 

The conclusion of a service or freelance contract with a person who is actually working as a regular employee may therefore result in severe financial exposure for the employer, as the employee is likely to subsequently claim additional payments. In addition, social security contributions and taxes (including financial penalties) would be due and payable. Penalty fees under the Austrian Law against Wage and Social Dumping of up to EUR 50,000 may be imposed.

2.2 How can the correct qualification be determined?

In order to classify the contractual relationship as a service contract, freelance contract or regular employment contract, the overall picture of the actual situation has to be taken into account. The title of the agreement may only be an indication for a certain type of contract.

There are no concrete legal provisions on when a person is considered a "regular" employee. Generally speaking, the more integrated a person is into a regular work or company environment, such as the workplace, working hours, work pattern or organisational integration, the higher the risk that a freelancer or independent contractor could be qualified as a regular employee. In cases of doubt it is therefore advisable to consult a specialist in order to conclude a correct agreement and to avoid financial liabilities.

3 Mistake 3: No employment contracts or conclusion of employment contracts with inadequate content

3.1 What are the risks if no employment contracts or inadequate employment contracts are concluded?

In practice, the biggest problems usually arise in the event of termination of employment or a court dispute. The lack of an employment contract or an employment contract whose content is inadequate may lead to difficulties proving what the parties actually agreed. This may result in protracted and expensive court proceedings with an uncertain outcome.

It is therefore highly advisable to issue a proper written employment contract signed by both the employer and the employee. The contents of a written employment contract are deemed to have been mutually agreed and therefore carry high probative force.

3.2 Is the conclusion of a written employment contract mandatory?

No. An employment contract may either be concluded orally or in writing. However, if the employment contract is concluded orally the employer needs to provide the employee with a written service note (Dienstzettel) documenting the main rights and duties arising from the employment relationship.

Nevertheless, a service note has very limited probative force, since the employee's signature only proves that the service note was received. In case of a court dispute, the employee can prove that the contents of the service note are inconsistent with what was agreed orally.

3.3 Is there mandatory content for employment contracts?

The mandatory content of an employment contract or a service note is exhaustively listed in the law, including (i) the parties' names and addresses; (ii) the start date (and in case of fixed-term employment the end date) of the employment relationship; (iii) notice periods and dates; (iv) the habitual place of work; (v) the field of services; (vi) minimum salary and salary details; (vi) vacation days; (vii) information on working time; (viii) applicable CBA; and (ix) name of staff pension fund.

The parties are free to include additional clauses at their discretion, such as non-compete clauses, side line activities, confidentiality, bonus arrangements and the like.