The Complete Guide to HR for Small Businesses in 2023
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As a small business owner or manager, you’re used to wearing many hats. Not only are you responsible for strategic oversight and leadership of your business, you’re also heavily involved in day-to-day tasks, especially when it comes to HR.
But the scope of HR functions, even for a small business, is vast. It can quickly overwhelm your time, and you might find yourself spending hours on HR paperwork and administration. You barely have enough time to make sure nothing is slipping through the cracks, let alone focus on developing and growing your business.
Unsurprisingly, having enough time to do everything is one of the top five worries for small business owners.
That’s why the need to delegate HR—either to another person or a team within your organization—inevitably arises. But how do you know when it’s the right time to do this? And how do you set up a dedicated HR person or team?
Read on to find out!
What Is HR?
HR stands for human resources. The Society for Human Resource Management (SHRM) defines HR management as “the process of managing an organization’s employees…to effectively meet an organization’s goals.”
An HR team is ultimately responsible for the full employee experience, from hiring through to termination, resignation, or retirement—and everything in between.
- Recruitment and retention
- Compensation and benefits management
- Payroll, including tax compliance
- Employee satisfaction, engagement, safety, and well-being
- Onboarding and offboarding
- Performance reviews
- Employee rewards and recognition
- Developing and maintaining employee resources such as training manuals and employee handbooks
- Creating company culture
- Employee participation and communication
- Training and development
- Time tracking and attendance
- Labor law compliance
Small businesses deal with HR issues from the moment they hire their first employee. With only a handful of staff, it might be possible to manage HR tasks yourself in addition to your management and ownership responsibilities. But as your business grows, it’s easy to see how this list becomes too much for one person to manage alone!
Key HR functions for small businesses
Key areas of human resources for small businesses are:
- Recruitment and retention
- Compensation and benefits
- Employee engagement
- Training and development
- Labor law compliance.
Let’s take a closer look at each of these and why they’re important for your business.
Recruitment and retention
Attracting and retaining top talent is one of the most important HR functions for small businesses. But it doesn’t come cheap. Quality recruitment and retention practices take time and money to develop and put in place.
Recruitment involves preparing job descriptions, creating a framework for hiring decisions, managing the recruitment process including interviews, completing compliance paperwork such as employment contracts and work eligibility documents, and designing and implementing an onboarding process.
Diversity, equity, and inclusion (DEI) is an important aspect of recruitment for businesses of all sizes. DEI needs to be more than a token gesture. It must permeate every level and function of your organization, including HR. DEI is an important factor in attracting top talent—almost 80% of employees want to work for an organization that values DEI.
In addition to attracting new talent, HR is also responsible for retention policies and practices. Strategies aimed at increasing employee satisfaction and engagement, as well as training and development, are good ways to improve employee retention.
Compensation and benefits
HR is typically responsible for determining an organization’s compensation philosophy, compensation strategy, and pay structure including base pay and additional pay.
When designing a pay structure, you need to be aware of any statutory minimum wages as well as what your competition is offering employees.
An important part of your compensation package is employee benefits, such as health insurance, paid leave, flexible working hours, commissions, and employee wellness programs. Benefits matter to employees. While salary is important, 79% of employees would accept new or extra benefits over a pay rise.
Like statutory minimum wages, it’s important to identify any benefits you must provide by law. These depend on your location and may include benefits such as workers’ compensation, paid time off, and disability insurance.
Another aspect of compensation is payroll and taxes. Even for small businesses with limited employees, these processes can quickly become complex and time-consuming. Many small business owners underestimate how much time payroll can take, which can be almost five hours each pay period.
Employee engagement is the connection an employee has to an organization and its goals. It plays an important role in the success of your business. It can directly affect your profitability—engaged employees are more productive and less likely to be absent from work. On the other hand, 74% of actively disengaged employees are looking for new work or keeping an eye out for other opportunities.
HR handles the design of strategies and processes addressing any underlying issues affecting engagement, such as boosting employee morale. Doing so improves retention and your bottom line.
Training and development
Offering ongoing professional development opportunities to your employees is crucial to increasing motivation and engagement levels. Employees are hungry for chances to learn new skills. In a Deloitte survey, almost 80% of Millennials identified formal workplace training, on-the-job training, and professional development as important to help them perform at their best.
A well-designed training and development program also helps prepare employees for internal promotions, saving you the cost of recruiting externally.
HR’s training and development responsibilities include preparing an employee handbook that sets out your company mission, core values, expectations of employees, company policies, and disciplinary and termination procedures.
Labor law compliance
Even for small businesses, there are a vast range of labor laws and regulations that govern employee interactions. One of the main functions of HR is to track any developments in labor laws and regulations and ensure your organization is fully compliant with them.
As an example, US-based small businesses need to consider their obligations under a series of federal laws including:
- The Occupational Safety and Health Act of 1970
- Title VII of the Civil Rights Act of 1964
- The Age Discrimination in Employment Act of 1967
- Titles I and V of the Americans with Disabilities Act of 1990
- The Family and Medical Leave Act
- The Fair Labor Standards Act
- The National Labor Relations Act
The cost of regulatory non-compliance can be high, resulting in large fines or other penalties. Other costs include reputational damage and disruption to your business while you deal with the issue. Most importantly though, employees want to know you’re committed to compliance issues designed to protect them.
The Benefits of Delegating HR
Effective HR is essential to the success of a business, regardless of its size. HR sets the tone for internal communication, and directly impacts your company culture, as well as your bottom line. Your employees are your most valuable resource—taking care of their well-being through HR policies and procedures must be a priority.
Appointing a dedicated HR person or setting up an HR department requires an initial investment of time and money. But there are many advantages to doing so, both in the short and long term.
- Saves you time. As the owner or manager of a small business, your time is extremely valuable. Taking on HR responsibilities on top of running the business can weigh you down with a large workload including time-consuming administrative tasks and document management. By delegating HR, you can free up your time to focus on other high-level management and strategic decisions aimed at growing your business.
- Saves you money. The cost of making wrong HR decisions—or not making decisions at all—can be expensive. For example, when it comes to bad hires, Gallup conservatively estimates that the cost of replacing an employee can be 0.5-2 times their annual salary.
A dedicated HR person or team can focus their time and resources on making quality, effective HR decisions. They can also develop better efficiencies by standardizing and centralizing HR processes and decision-making.
- Develops in-house HR expertise. By appointing a specific person or team to manage HR, you can start to build up your organization’s institutional knowledge. Doing so allows those in HR roles to become specialists, with specific knowledge of your organization and its employees. This combination increases the chances of more effective HR decision-making.
- Ensures compliance. Given the complexity and ever-changing nature of labor laws and regulations, it’s unrealistic to expect you to keep on top of compliance while managing the business at the same time. A dedicated HR team has the time and knowledge to track developments, maintain the necessary records, and manage audits. Failing to follow necessary laws and regulations can be costly, so delegating your HR responsibilities is a worthwhile investment.
An alternative—HR outsourcing companies
Rather than appointing a dedicated HR person or creating an in-house HR team, some small businesses use human resources outsourcing services, such as a Professional Employment Organization (PEO).
A PEO acts as a stand-in employer for an organization, contracting with employees on the organization’s behalf. This structure allows the PEO to handle a range of administrative HR functions on behalf of the small business, including payroll, taxes, employee benefits, workers’ compensation, compliance, and other HR support.
If you’re considering this option, it’s important to weigh up the costs and benefits. For small business owners, the prospect of outsourcing HR administration can be attractive—it saves you a lot of time and puts your HR in the hands of an experienced third party.
But PEOs typically charge high fees for their HR services for small businesses. Engaging an HR outsourcing service can also stifle your organization’s institutional knowledge, which can be especially useful as your business grows. Employees may also have reservations about dealing with a third party for employment issues
When Is the Right Time to Delegate HR?
The right time to appoint dedicated HR professionals or create an in-house HR team depends on your business’ circumstances, including budget, projected growth, and size.
As a general rule of thumb, many HR specialists say you should consider delegating HR functions when your organization grows to more than 10 employees. At this point, managing HR can become too much for a small business owner or manager, especially where compliance is concerned, as compliance requirements can be complex, densely worded, and evolve often.
Other indicators include when:
Errors start to occur, for example, compliance requirements are missed
The organization faces a period of significant change or growth
You’re simply unable to keep up with day-to-day HR processes as well as your other work
HR processes take up the majority of your time, leaving you unable to focus on strategy-level work
When you reach this point, it’s time to seriously consider appointing a dedicated HR person or team.
How To Set Up an HR Department in 7 Steps
The process for delegating HR is specific to your business’ circumstances and depends on factors including the age and size of your business, its projected growth, and industry. As a starting point, here are eight steps to help you identify your HR needs and set up an internal HR department.
Assess your current HR position
Understanding the current state of HR within your organization helps you identify needs and provides a framework for building an HR team. Look at the key functions of HR outlined at the start of this article and reflect on whether your organization currently performs them. If it does, how well does it do it? If not, is it an area you need to address?
Collecting feedback from other employees or departments about their HR needs can also help with this step. At the end of this process, you will have identified your organization’s HR needs and priorities.
Structure your HR team
Once you’ve identified your organization’s HR needs, you can structure a team to cater to them.
You may find you only need one dedicated HR person to start with, such as an HR generalist. Larger businesses or ones that are expanding quickly may need a larger HR team. This might include a combination of an HR manager, hiring manager, HR coordinator, and HR assistants.
Even with a small HR team, it’s important to clearly define roles and responsibilities to ensure you’re addressing organizational needs.
Recruit to fill skill gaps
Once you know what positions you need to fill, you can look for talented individuals to fill them. When recruiting externally for an HR role, keep an eye out for essential skills such as emotional intelligence, strong communication, conflict resolution, problem-solving, and time management.
Don’t forget about your existing employees—you can always promote them internally if someone has the necessary skills.
Another way to build your HR team is by identifying current employees with potential and investing in their training and development for a later move into an HR role.
Select a software
Using software to automate daily tasks and streamline HR processes is essential to creating an effective HR team.
A large part of HR is record keeping. Various HR documents need to be kept for compliance and audit purposes, such as payroll information, training records, recruitment documents, employment eligibility forms, disciplinary action, and termination records. Using an HR software solution with a mobile app allows your employees and HR team to update and access these records from anywhere, at any time.
You can also use an employee management app to automate a range of HR-related tasks, including time tracking for payroll, onboarding, employee surveys, training, and even rewards and recognition.
Define HR KPIs
Key performance indicators (KPIs) are essential to measuring the effectiveness of your HR team. HR KPIs include employee turnover, satisfaction, training costs, productivity, absenteeism, and internal promotion rates.
Setting these goals now helps you later review the performance of your HR person or team and their contribution to your overall business strategy. In the meantime, they also guide HR decision-making.
Specify your HR budget
HR decision-making is also guided by your budget. Allocating financial resources to your HR team now helps them prioritize spending and ensure HR runs efficiently.
To do this, review your organization’s previous HR spend and forecast your expected HR needs. Keep in mind your HR budget needs to cover essential functions such as salaries, benefits, DEI, and employee safety and well-being, as well as recruitment, HR technology, and training and development.
An HR budget needs to come from the leadership level so that it works alongside an organization’s broader budgeting and business goals.
Continue to review
Once your HR team is in place, they can get to work addressing your organization’s HR. This involves developing an HR strategy, as well as supporting policies and procedures.
While delegating HR functions takes them off your daily to-do list, you will still need to oversee the HR team. You should continue to review your business’s HR needs as part of your broader business strategy, especially as your small company continues to grow. Over time, you may find you need to add or adjust roles or redefine HR priorities to reflect the changing needs of your business.
Further HR Resources for Small Businesses
When deciding whether to delegate HR responsibilities, you want to be as informed as possible.
Here are some further resources on HR for small businesses:
The Society For Human Resource Management (SHRM) has a range of helpful articles
US-based small businesses can refer to the Department of Labor’s website—especially for questions about compliance issues—or the U.S. Chamber of Commerce’s HR blog
The Academy to Innovate HR (AIHR) offers several free online HR resources including blogs, a podcast, guides, and case studies
Our Connecteam blog has a range of articles on various small business HR topics
Time to Delegate HR in Your Small Business?
As a small business owner, you’ve no doubt spent a lot of time managing the day-to-day HR functions of your business. But this approach can quickly become unmanageable, especially as your business and number of employees grows.
Delegating the HR for your small business to a dedicated HR person or team frees up your time and usually saves your business money in the long run. It ensures your organization complies with any relevant labor laws and regulations. At the same time, it builds an in-house team that knows the ins and outs of your organization’s HR needs.
The takeaway? If you’re still managing the HR needs of the business you own or run, it may be time to consider delegating those responsibilities. It’s a change that you, your business, and your employees can all benefit from.
Stacey, Kate. “The Complete Guide to HR for Small Businesses in 2023.” Guides, 31 Oct. 2022, Connecteam,