How to Master HR: A Guide for Small Businesses

How important is human resources? According to one survey, 88% of small-business employees have worked for a small business with no HR department, and half say it contributes to a harmful workplace. While no law requires businesses to have an HR manager or department, not having one can lead to increased compliance risk and a lack of employee trust and satisfaction.

Creating an HR department requires an investment, but it can secure the future of your workforce and organization. If you’re ready to take the next step, this guide will explain human resources, its importance for your small business, and the key functions your HR leader will serve.

You’ll also discover what mistakes to avoid in building your HR department and what automated tools can help your HR manager be efficient and effective. We know firsthand how the right hire, tools, and technology can come together to help your small team maximize time and impact.

What Is Human Resources (HR)?

Human resources is the department or personnel overseeing all employee-related matters for an organization. These matters can include workforce planning, recruiting, hiring, onboarding, employee management, termination, and offboarding.

The term HR is often used interchangeably with HRM—human resources management. Both terms cover the everyday processes and tasks involved in keeping the HR department running. They also include tasks like liaising with department heads to identify skills gaps, launching employee wellness initiatives, and executing disciplinary actions.

Those in the HR department have many key responsibilities:

• Recruitment and retention: Finding skilled talent and keeping them long-term
• Compensation and benefits: Determining pay, determining and administering benefits packages, and running payroll
• Engagement and advocacy: Keeping employees happy and productive, addressing grievances, and answering questions
• Training and development: Increasing employee performance and supporting career aspirations
• Legal and regulatory compliance: Calculating correct withholding, filing and paying taxes, and adhering to labor laws
• Records retention: Organizing and storing employee records according to regulatory rules
• Handbook and policy manual maintenance: Developing, distributing, implementing, updating, and enforcing company policies
• Change management: Preparing managers and employees for growth and strategic pivots

While larger businesses often have specialists who manage each area, small businesses usually have one or two people covering all of these tasks. This makes human resources for small businesses even more crucial, as limited resources mean that every person must be vigilant, creative, and strategic about getting things done.

Why Is HR Important for Your Small Business?

Dedicated HR personnel are essential for small businesses for several reasons. First, this department performs key functions important to business operations, employee relations, and overall business performance and growth. Having this department helps managers focus on their own departments and business owners zero in on growth opportunities.

Another function small business HR performs is keeping the business out of legal trouble by maintaining regulatory compliance. This involves ensuring legal hiring practices, correctly classifying and paying employees, withholding and paying taxes, and enforcing anti-discrimination and anti-harassment policies.

The small business HR department optimizes the employee-employer relationship by providing clarity and support to employees, managing performance, offering skill development opportunities, ensuring fairness in policy enforcement, and advocating for employees when meeting with leadership. These tasks also empower employee performance, which ultimately drives organizational success.

With all of these benefits, why do only one-third of Inc. 100 startups have an HR professional on staff? Many of them are waiting for their business to grow to a certain size. However, there is no “perfect size” at which a company should hire HR personnel.

If there are only a few employees, business owners may be able to get by without HR for a while. However, many experts believe small businesses should hire at least one HR professional once they hit the 100-employee milestone. The average ratio is 1.7 HR staff for every 100 employees.

Small business owners should also consider hiring HR staff when the business is experiencing (or will soon experience) major leadership or strategic direction changes. Additionally, HR staff is needed when the business owner or staff member handling HR tasks can no longer keep up and starts making preventable mistakes that jeopardize compliance.

What Are the Key Functions of HR in a Small Business?

According to SHRM, “Implementing proven human resources practices is critical to small business growth and could even be the deciding factor between success and failure.” Understanding those proven practices is much easier when you are familiar with the following key functions that act as their foundation.

Recruitment and Retention

Recruitment and retention includes tasks like creating job descriptions; managing the recruiting, hiring, and onboarding processes; creating and managing employment contracts, and documenting employee information.

HR managers also implement and maintain diversity, equity, and inclusion (DEI), employee wellness, sustainability, and other types of initiatives. With 57% of Gen Z graduates expecting employers to acknowledge social issues that impact employees, these initiatives promote employee retention.

Compensation and Benefits

This category includes responsibilities such as establishing and managing the company’s compensation strategy, determining and administering benefits, ensuring regulatory compliance, running payroll, and withholding and paying taxes. The fact that 40% of employers believe employees would leave their roles for a company with better benefits underscores the importance of these tasks.

Engagement and Advocacy

Employee engagement and advocacy encompasses tasks like providing support and guidance through open communication, building employee morale, fostering a culture of inclusion, and maintaining a safe and productive work environment. Companies with high engagement experience an 81% reduction in absenteeism, up to a 43% reduction in turnover, and a 23% increase in profitability.

Training and Development

Skill-building is crucial to attracting and retaining top talent—87% of Gen Z graduates consider it important when evaluating job opportunities. In this area, professionals are tasked with developing and maintaining learning and development programs and opportunities, providing additional training on essential protocols, and facilitating team and skill-building activities.

Legal and Regulatory Compliance

Some statistics show that the error rate on open enrollment applications can be as high as 25%. Others estimate that up to 90% of employers have open enrollment errors.

You can avoid similar mistakes with an HR professional who understands compliance and executes requirements according to the Fair Labor Standards Act and other federal and state laws. Additionally, HR is responsible for displaying required notices regarding employee rights and ensuring those rights are appropriately protected.

Records Retention

The IRS and other regulatory agencies have laws governing the length of time employers must keep personnel files. Research shows many employers use the seven-year rule, which covers most federal and state requirements. HR professionals provide secure storage for these records, including I-9s, performance management files, payroll documents (including W-4s), and medical disability information.

Handbook and Policy Manual Maintenance

Reportedly, 66% of employers face challenges getting employees to read their employee handbook. HR professionals are tasked with developing and distributing policy handbooks and ensuring employees have received notice of critical policies.

HR professionals are also responsible for explaining the policies. They must ensure employees understand company procedures, develop and distribute mission and value statements, and document compliance.

Change Management

Employees who feel connected to company culture are 3.7 times more likely to be engaged, 68% less likely to burn out, 55% less likely to be looking for another job, and 5.2 times more likely to recommend their workplace. When a culture change is needed, HR professionals manage it to ensure employees connect to the new culture.

In this process, HR professionals are responsible for documenting and communicating about organizational and policy changes. They must also implement process improvements to boost business performance and employee success.

Once business owners have a firm grasp on these and other responsibilities, they’ll be ready to learn how to set up their HR personnel for success.

How to Build an HR Department for Your Small Business and What Mistakes to Avoid

Now that you know why an HR solution is important, you may wonder how to build an effective one. These seven small business HR tips and best practices will help you achieve that goal.

Assess Your Current HR Needs

To assess your current HR needs, consider what you already do well and what you struggle with. To gain insight, 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 because this is often one of the most critical areas for improvement.

Identify Roles and Duties for Your HR Team

If you’re hiring more than one person, decide who will be tasked with which duties. Note the key functions of HR and distribute them according to knowledge levels and personal strengths. Make sure you’re setting priorities according to what’s most important. Additionally, review your HR job descriptions to ensure they include crucial competencies based on key HR functions.

Establish the Budget for Your HR Team

Your HR team will need a budget 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 functions to set a budget for each category. Don’t assume that your budget will automatically be perfect. Remember, you’ll likely have to optimize that budget along the way.

Recruit the Right Team Members

Hiring the right team will 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.

Choose the Right HR Solution for Your Business Needs

A human resources information system (HRIS) will automate routine tasks, reduce compliance errors, and help HR teams securely and efficiently collect, store, and gather insight from data. Small businesses should select a comprehensive platform with robust features and a user-friendly interface to get the most out of their investments.

Determine the KPIs That Will Help You Measure Success

You won’t know if your HR team is doing well unless you have a way to measure their progress. A few common HR KPIs to track include time-to-hire, employee turnover, employee satisfaction, training costs, employee engagement, and productivity. Make sure your performance and other data are always up to date, as this will give you the most accurate picture of your progress.

Track, Assess, and Adjust as Necessary

Over time, you’ll need to tweak your HR strategies and processes. Constantly tracking and assessing data will help you make informed adjustments based on accurate information. Once you’ve established your HR department, this will allow you to maintain it for long-term success.

What Tools and Automations Can Power HR in Your Small Business?

Manual processes are a hindrance for today’s HR teams. Over 25% of HR professionals have missed out on top talent because of inefficient hiring practices. Others spend hours managing payroll manually or end up making costly mistakes in tax calculations. An HRIS can change this by automating routine tasks:

• Recruiting
• Hiring
• Onboarding
• Payroll
• Taxes
• Performance management
• Benefits administration

While you can invest in separate tools for these functions, comprehensive platforms like BambooHR save time and money. Best of all, these platforms are customizable for your business operations and give you access to robust data and insights to help you make informed decisions.