What is HR? And Why It’s Important for Small Businesses

Believe it or not, there are no federal or state laws governing whether a business should have an HR department. In fact, 88% of employees have worked for a small company with no dedicated HR person.

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 in order to allow them to pursue strategic growth. In this way, the role of HR is absolutely critical to business success.

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

If you’re a small business owner still on the fence about hiring an HR department, we’ll help you understand what HR is, why it’s important, when you should hire (or outsource) HR services, and all the benefits HR departments can bring.

What is HR?

Human resources (HR) are the department in charge of managing a company’s workforce. HR responsibilities include handling all employee-related matters—from onboarding to offboarding—to help the business meet strategic goals.

The role of HR also involves ensuring that the company complies with all wage and labor laws, effectively addresses all employee concerns, manages staff performance, and administers suitable employee benefits.

HR departments also provide short-term guidance and long-term strategy for managers and company leadership in all of these functions.

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 a range of other HR roles and responsibilities, such as:

Recruitment and onboarding

Finding and attracting top talent to fill open positions, including writing job descriptions, evaluating applications, interviewing candidates, and selecting the best person for the job.

Once a candidate is selected, the HR department also oversees onboarding to ensure the new hire gets acclimated to organizational culture, understands their job responsibilities, and can access all the tools and technology they need for the job.

Payroll and benefits

HR departments evaluate budgets, laws, and industry trends to decide on a compensation strategy and determine what benefits should be offered. The department then becomes responsible for processing payroll, calculating and paying employment taxes, and administering benefits such as healthcare, paid time off, and other perks so that employees can properly access them.

Performance management

HR responsibilities include developing systems to measure employee performance. They also create and oversee training programs that help employees gain the skills needed to improve their performance.

Employee support

Employee support requires a broad range of functions, including developing policies and procedures to help employees thrive, answering questions, resolving disputes, and administering discipline. The HR department may also create and launch diversity, equity, and inclusion initiatives and find ways to keep employees happy and engaged.

In today's world, the role of HR often involves supporting remote employees and ensuring they remain connected to company culture.

Administrative management

A large part of human resources is managing the department's day-to-day functions. This includes a variety of roles and responsibilities, from processing leave requests to ensuring proper storage of employee records.

Administrative management also involves distributing policies, obtaining signatures as recognition that employees have seen them, and disseminating notices and announcements.

Compliance

Though most departments must adhere to laws and regulations on some level, HR departments have one of the most daunting jobs in this regard. This is because HR departments have to comply with more than a dozen laws related to employee classification, wages, and workplace safety, as well as accessibility, benefits, wage deductions, and leave policies.

What are the pros & cons of having an HR department?

Having an HR department provides clear benefits for businesses of all sizes. These advantages can be especially pronounced in small businesses that are currently in a growth phase, as managing people and processes becomes increasingly important.

There are many pros to having an HR department, such as:

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

Still, there are a few challenges that come with having an HR department. These include:

• Bearing the cost of hiring employees to handle HR roles and responsibilities
• Having to relinquish control to another individual or team
• Addressing employees’ misconceptions or stereotypes about HR departments

Business owners can begin to mitigate these problems by hiring team members who share and understand the company’s values, vision, and mission. 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 department functions in line with the way they desire their business to operate.

Should you outsource HR?

Once you realize you need an HR department, you may wonder whether you should hire these professionals in-house or outsource HR services from another organization or software solution. It’s important to know that HR outsourcing isn’t uncommon, particularly for small businesses. In fact,  57% of companies outsource at least one HR function and approximately 24% of small businesses use outside companies to take on the role of HR.

When outsourcing HR services, many companies turn to either a professional employer organization (PEO) 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
• Training and development
• Inspections and audits

When you sign a contract with a PEO, they become a co-employer, which means that they’re an employer of record with the IRS. This allows them to take on legal responsibility for the tasks outlined in your contract, such as payroll and benefits administration.

Another way business owners can ease the administrative burden of HR tasks is by using dedicated HR software applications to automate HR tasks. HR professionals who want to get the benefits of outsourcing without actually having to entrust their HR functions to a third party can benefit from technical solutions like human resource information system (HRIS) software.

Here’s a list of HR practices that comprehensive HR platforms like BambooHR support:

• Easy 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

What are the benefits of outsourcing HR?

There are many benefits of outsourcing HR roles and responsibilities to a third party. For example:

• Delegating key HR tasks can reduce the administrative burden on business owners or other employees, freeing up more time spent on growing the business in other ways.
• Outsourcing can help business owners affordably handle HR responsibilities. Rather than hiring a full-time HR department, companies can access professional expertise as and when they need.
• Using third-party HR services or software can lessen legal and compliance risks, helping businesses avoid penalties, disputes, and costly mistakes.
• Gaining access to HR expertise can enable better decision-making. By outsourcing HR services, businesses can learn about and exercise best practices, make informed decisions, and implement policies that benefit both the company and its employees.

Next steps: Build an HR department for your small business

Now that you know about the importance of HR, you may wonder how to build an effective HR department. These seven small business HR tips and best practices will help you achieve that goal.

1. Assess your current HR needs, considering what you already do well and what you struggle with. Pull any HR reports you can access through software platforms, such as hiring reports, employee value reports, or engagement surveys. Closely audit how well you’re keeping up with compliance, as this is often one of the most critical areas for improvement.

1. Identify roles and duties for your HR team and decide who will be tasked with which duties. Note key HR roles and responsibilities and distribute them according to knowledge levels and personal strengths. Make sure you’re setting priorities according to what’s most important.

1. Establish the budget for your HR team for everything from compensation to software to employee rewards. Once you’ve decided how much you’ll pay your HR personnel, try consulting your checklist of key HR practices to set a budget for each category. You’ll likely have to optimize that budget along the way.
2. Recruit the right team members to ensure HR personnel effectively manage employees and stay compliant. You can recruit top talent by ensuring the role is well-defined and choosing candidates based on experience and knowledge of HR practices. Make sure to fine-tune your job descriptions to closely align with your needs.

All in all, HR plays an important role in the performance and success of any business, regardless of size. Effective HR departments not only ensure compliance with employment laws and manage administrative tasks, but also support employee development, engagement, and retention. Whether managed in-house with the help of HRIS or outsourced to specialists, investing in strong HR practices will always have a positive impact on a company.