Does Your Small Business Need an HR Department?

Believe it or not, there are no federal or state laws governing whether a business should have an HR department. In fact, more than 25% of Fortune 100 companies have no chief human resources officer, and 35% of startups have forgone the HR department altogether.

Having an HR department can seem like an extra expense. However, it’s often an essential part of lightening the administrative load for small business owners to allow them to pursue strategic growth. In this way, the HR function is critical to business success.

When equipped with the right tools and technology, a good HR team can help small teams maximize their time and impact. Without it, businesses can risk experiencing low employee satisfaction, high turnover, and a lack of regulatory compliance.

For those small business owners still on the fence about hiring an HR professional, this piece will help you understand what HR is, why it’s important, when you should hire (or outsource) a team, and how doing so can help you get to the next level.

What Is Human Resources?

Human resources is the department (or person) that manages the company’s workforce to help it meet strategic goals. This function covers the entire employee lifecycle from hiring to termination. Human resources is also responsible for complying with all wage and labor laws, addressing employee concerns, and administering employee benefits.

What Do HR Teams Do, and Why Are They Important?

HR teams build and support the company’s workforce from the time an employee is hired until they leave the company. This often involves developing and implementing policies and addressing employee conflict and concerns, along with other responsibilities:

• Workforce development: evaluating and devising a plan to meet the company’s personnel needs
• Talent acquisition: writing and posting job descriptions and screening applicants
• Benefits administration: paying employees on time and ensuring their access to healthcare, paid time off, and other perks
• Compliance: Keeping policies and procedures in line with wage and labor laws
• Company culture: establishing norms that guide employee behavior at work

The size of an HR department will vary depending on the size of the small business. However, the department's importance does not waiver. This role is critical because half of Americans say that not having an HR department contributes to an unfavorable workplace environment.

HR tasks clearly require an in-depth understanding of effective people management, strategic leadership, and the legal landscape. Still, many small businesses delegate these tasks to people without an HR background who have other job responsibilities in addition to HR. In many cases, the business owner handles the HR function.

As you might imagine, this scenario can create undue administrative burden, lead to inadvertent mistakes, and increase compliance risk. Consequently, having a dedicated and highly trained HR professional or team can improve the overall HR experience and keep the company out of trouble.

When to Delegate HR

Like many other critical business decisions, there’s no set time at which every business owner should start thinking about hiring an HR leader or team. Statistically speaking, the average business has 1.7 HR staff members for every 100 employees. However, expert recommendations on that ratio can vary from 1.5 to 4.5 per 100 employees.

Knowing the importance of an HR department is one thing. Understanding when to hire someone for this function can be challenging. Small business leaders often struggle with knowing what size company needs an HR department and whether the business is large enough to warrant the investment.

As businesses begin to grow and departments take on specialized tasks, it may no longer be feasible for any employee to be responsible for HR tasks and their routine projects. When employees no longer have the time or capacity to help out with HR tasks, it’s likely time to think about hiring dedicated personnel.

Finally, it’s up to business owners to evaluate their own capacity to handle HR tasks. Processing payroll alone can take hours out of your week. If you’ve gotten to the point where you have to choose between HR administration and growing the business, it may be time to consider hiring a dedicated HR professional.

Should You Outsource HR?

Once you realize you need an HR professional or team, you may wonder whether you should hire these professionals in-house or outsource the work to another organization or software solution. It’s important to know that HR outsourcing isn’t uncommon. In fact, 57% of businesses currently outsource HR tasks.

When looking to outsource HR, many companies turn to either a professional employer organization or an administrative services organization. These services generally offer support with a variety of tasks, including the following:

• Payroll
• Compliance
• Documentation
• Performance management
• Benefits administration
• Recruiting, hiring, and onboarding

Delegating these tasks to a third party can reduce the administrative burden on business owners or other employees. However, there are downsides to outsourcing as well.

In many cases, you must relinquish a lot of control over the quality of services, and challenges with communication and customer service can affect employee satisfaction. Additionally, concerns about technology integration and data security may arise, which can lead to legal compliance issues.

Another way business owners can ease the administrative burden of HR tasks is by using dedicated HR software applications. Here’s a list of HR functions that comprehensive HR platforms like BambooHR support:

• Quick payroll and benefits administration
• Employee information database
• Time, attendance, and PTO tracking
• Employee onboarding and training
• Employee self-service needs (such as W-2 access)
• Recruiting and hiring functions like job descriptions, postings, and ATS functions

Overall, outsourcing can help business owners affordably handle HR tasks. However, this avenue is not without its challenges.

The right HR software, coupled with a skilled HR professional or team, can give you many of the same benefits of outsourcing without having to lean on a third party for them. As a result, it can help even the smallest teams boost productivity and have an outsized business impact.

What Are the Pros & Cons of Having an HR Department?

Having an HR department provides clear benefits for businesses of all sizes. These benefits can be especially pronounced in small businesses that are currently in a growth phase. There are many pros to having an HR team:

• Relieving the administrative burden of HR tasks
• Allowing employees to focus on their area of expertise
• Creating a better employee experience and workplace culture
• Having someone to think strategically about workforce development
• Having a trained expert to help reduce compliance risks

Still, there are a few challenges when it comes to having an HR department:

• Bearing the cost of hiring employees to handle HR functions
• Having to relinquish control to another individual or team

Business owners can begin to mitigate these problems by hiring team members who share the vision, mission, and values of the company. It’s also important for business owners with these concerns to know that with the right software tools, one individual or a small team can get a lot done.

Knowing that it's okay to start small often provides some relief and a huge return on investment for the costs associated with hiring HR professionals. Furthermore, customizable software tools can help business owners ensure that the HR team functions in line with the way they desire their business to operate.

How to Get Started

Getting started with HR requires you to first know what tasks you would like your HR department to manage. Here are some examples of the wide variety of functions to choose from:

• Recruiting
• Hiring
• Onboarding
• Policy development
• Payroll
• Benefits administration
• Performance management

Additionally, you’ll want to know how many HR professionals you need to hire. As a general rule of thumb, consider hiring one to two HR team members for every 100 employees. Also, be aware that as your company grows in size, this ratio will likely decrease.

Finally, consider the type of technology the department will need. It’s a good idea to choose HR software that supports and integrates many different functions, such as PTO hiring, payroll, and other tasks.