Does a Small Business Need Human Resources?

A small business is not legally required to have a formal human resources department. However, every small business with employees still needs to correctly handle essential HR functions like hiring, payroll, benefits, and compliance to operate lawfully and effectively.

In this guide, I’ll cover:

 ● Why human resources is essential for small businesses

 ● When to introduce HR support

 ● The best options to manage HR functions effectively and affordably. 

HR Isn’t Just for Big Companies

Even the smallest teams benefit from HR, ensuring compliance, reducing turnover, and building a workplace where employees thrive.

Why Human Resources Matters for Small Businesses 

Small businesses should place great importance on human resources. This can help grow the business and make sure it is a success while staying within the law.

Why HR Isn’t Just for Large Companies

There is a myth within business that HR is only necessary for larger corporations. But, in fact, do small businesses need hr comes down to whether a company has any employees. Any size of business with employees would gain from having an HR team.

Even if the business is a smaller size, the practices that HR uses can help to build employee relations. 

One benefit of using HR practices is minimizing risks for your business:

• Lawsuits. If an error was made when it comes to workplace policies or employee law, this could be a costly mistake.

• Payroll errors: There is a risk of incorrect wages and bonuses.

• Toxic culture. Without HR, a small business risks a poor working culture.

Compliance

Another benefit of HR for small businesses is that it helps them to stay compliant with federal law. They must know the most up-to-date state laws.

A hr team will put practices in place that follow wage laws, and will protect employees with the anti-discrimination law. They understand workplace safety laws that will protect staff on the job.

If a business doesn’t stay within the law, there can be costly consequences. There can be fines and lawsuits if action is taken against the business. 

OSHA fines for non-compliance can reach over $165,000 for a violation. With this in mind, HR has a vital role in preventing non-compliance. They can keep your reputation protected and keep employees safe.

According to Spitz Law Firm, a discrimination claim can devastate a company financially. If it’s resolved before the courts, it can cost $75,000 to $125,000. But if the case does go to trial, the figure can be from $175,00 to $250,000.

Hiring 

When a business decides to hire a new employee, there are hiring responsibilities. These would normally be covered under hr requirements for small businesses. This includes a structured job description.

HR would also deliver a fair recruitment process. This would include a fair selection process with no bias and with diverse candidates. 

They would also arrange an onboarding process. They would make key introductions and help with any challenges that the new person faces in the role. This will help reduce turnover.

A report from McKinsey & Company found that two-thirds of businesses hire to fill skill gaps. This shows how important the right talent is to keep small businesses competitive. 

Culture 

Small business hr needs also include culture-building:

• Employee engagement programs are important. They provide that necessary connection between the employee and the employer. This includes team-building activities and development opportunities such as training. 

• Conflict resolution can help resolve disagreements. It’s intended to be fair and encourage a solution that will keep all individuals happy. This can stop an employee from quitting and help to produce a safe and happy environment. 

• Workplace values can give the small business clear values that all employees must follow. 

People will quit with a poor workplace culture, and they are expensive to replace. In fact, due to bad company culture, one in five Americans has quit a job in the past five years.

According to Gallup, it can cost nearly 200% of a leader’s salary, 40% for staff on the frontline and 80% of technical roles. It’s important to focus on retaining staff now to cut bills later. 

Common HR Functions Every Business with Employees Needs

• Payroll: An example of this is an independent retailer with a small number of employees that has a payroll system.

• Hiring: An example of this is a marketing agency that needs to hire a member of staff using a detailed job description and onboarding.

• Benefits: An example of this is a technology company that offers a tech plan for its staff.

• Compliance: An example of this is a maintenance company that maintains its health and safety rules.

• Policies: An example of this would be a cafe who have conflict resolutions in place for employees.

These can be done in-house with an HR team, outsourced or with an automated system.

When Should a Small Business Add HR? 

So when is the right time for a small business to add HR? Small businesses can protect and grow their business by not leaving it too late. 

Size and Growth Milestones That Trigger the Need 

When your business grows to the common threshold of 10+ employees for part-time, laws come into place that businesses must follow. This is 50+ for full-time. Companies will need to follow the FMLA (Family and Medical Law). 

How many HR team members of staff will you need? Most companies have between 1.5 and 4.5 HR staff for every 100 employees. But the average is 1.7 per 100, according to SHRM’s 2022 Human Capital Benchmark Report.

If your company expands into different states, you also need to assess HR needs. Different states will have their own state labor laws.

If you are in specific industries, they might also have their own rules that will mean you need human resources sooner. For instance, medical professions have tighter health and safety regulations. 

Also, high-turnover industries such as food or retail will need human resources in place sooner for payroll and to help with retention. If you have a rapid-hiring period, this is also a signal that it’s time to invest in human resources. 

Signs You’re Spending Too Much Time on HR Tasks 

If an owner is spending time on HR tasks, it’s time to look at implementing human resources. The benefit of the opportunity costs outweighs the cost of outsourcing HR.

There are some common time drains an owner may face when tackling HR on their own. Manual payroll is where the owner calculates the hours and taxes. Errors can also occur.

Benefits administration and sorting health insurance can be time-consuming. If any disputes occur, this can cause workplace conflicts.

When a manager is distracted by these HR tasks, this can cause an opportunity cost. This is time taken from sales, operations or customer service. 

The Risks of Delaying HR Support

If your business does not have human resources within the business, there are potential legal risks. For instance, there are penalties for misclassification of employees as independent contractors.

If missed filing of wages does happen, the small business will face fines.

Another risk of delaying HR support is operational risks. If you delay hiring members of staff, you could cause issues with retaining staff.

With no HR in place, you could also end up with a business with employees with low morale. 

The Wharton School of the University of Pennsylvania did a study on the product manufacturing sector. They found a 0.75% increase in product failures. This was found to be down to a weekly turnover of even 1%.

Options for Managing HR in a Small Business

When the time is right to add HR to your small business, you need to decide on how it will work for you. 

Building an In-House HR Department 

Pros

• Greater control of the HR team

• Get to know the employees

• Embed the company values and maintain the culture

• Respond quickly working in-house

Cons

• You will have to pay a salary 

• Skill gaps if the team isn’t skilled in certain hr areas

The typical wages for HR managers in the United States are an average of $86,139 per year, according to ZipRecruiter. This is valid as of August 7, 2025, and works out at an hourly rate of $41.41.

A lot of employers go for a phased approach where they bring in a part-time professional and then this expands to full-time. 

Using HR Software and Tools to Automate Processes 

You could DIY HR for your company or even start an HR department. Different software programs can help to make this easier:

• Gusto: This program is good for payroll and benefits as well as tax filing. This starts at $49.

• BambooHR: You can store data for employees, and it has useful onboarding software. You contact the program for a quote.

• Workday: This program is good for all sizes of business. It has financial software and a payroll system. 

HR software can range from tens of dollars to thousands of dollars, depending on your needs.

You may consider hiring a consultant to help you with certain parts of HR. Contact us today. 

Outsourcing HR to a PEO, ASO, or HRO 

Another option when it comes to human resources is to outsource your HR. This means hiring a contractor to handle your human resources. 

You could hire a PEO (Professional Employer Organization). This type of company handles HR, payroll, compliance and benefits for your business. They become a co-employer of your staff.

You could also look at hiring an ASO (Administrative Services Organization). This type of company takes on those HR admin tasks. They will handle the payroll and benefits for your employees. With an ASO, you remain the sole employer. 

Another option is an HRO (Human Resources Outsourcing. This is an HR service that is more flexible for your business needs. You can outsource a particular HR function such as recruiting or training your employees. 

If you want a reliable partner to help you manage your HR, contact us today.

Essential HR Functions Small Businesses Can’t Ignore

Are companies required to have hr? There are HR functions you will need or are at least recommended to have.

Recruiting, Hiring, and Onboarding 

Structured hiring is a process to help find the best candidates. This includes posting the job with a clear description. 

This also includes conducting interviews, making sure there is fair criteria. They will also conduct reference checks.

The onboarding process is essential for small businesses and can impact productivity. They will have a smooth transition into their new role. This can help retention of the employee if they feel supported.

When a small business has a structured onboarding process, they have a 50% higher hire retention rate. They also have a 54% greater productivity according to this study. There is also double the engagement compared to a company without this structured onboarding process.

Employee Handbook and Policy Development 

Another HR function is an employee handbook. This helps to protect both the employer and employee legally. It offers clarity for workplace policies and ensures that the business is compliant with labor laws.

The handbook outlines the Equal Employment Opportunity (EEO) principles. This policy outlines the requirements for companies to follow anti-discrimination laws. It also discusses complaint procedures.

An anti-discrimination, anti-harassment and anti-retaliation policy helps to protect employees from discrimination and harassment. There are protected categories and the policy explains how to report issues.

The Disability Accommodation policy explains employees' rights to work in a safe environment. This will outline any modifications you can request.

The Family and Medical Leave Act (FMLA) details the eligibility for up to 12 weeks of unpaid leave. This is usually for specific family or medical reasons.

The handbook also explains benefits which include federally mandated benefits. This can include Social Security and Medicare. The employee can be clear on workers’ compensation in the role. It will also detail unemployment insurance.

As an employer, we suggest you update the handbook at least annually.

Payroll, Taxes, Overtime and Benefits Administration 

There are legal payroll requirements that you need to follow:

• Deduct federal income tax, Medicare and Social Security. 

• Match the share of Medicare and Social Security taxes.

• Pay the state income tax and the unemployment tax for that particular state.

• Submit taxes on time. This needs to be sent to the IRS, semiweekly or monthly.

• File the form 941 every quarter and annually the Form 940.

• Employees are required to receive a W-2 from their employer every year. Employers then need to send the W-3 to the SSA (Social Security Administration).

• Check any local payroll tax requirements. 

Small businesses pay benefits to their employees:

• Workers' compensation insurance is a benefit that is required in most states.

• State Disability Insurance is also essential for employees who are unable to work. This is required in states such as New York, California and Hawaii.

• Health Insurance is essential if you have 50+ full-time employees under the Affordable Care Act (ACA).

• Family and Medical Leave (FMLA) is 12 weeks of unpaid leave and applies to employers of over 50+ employees.

• COBRA is a health insurance for employers with over 20+ employees.

If you don’t pay these effectively, there are penalties for errors. 

Training, Development, and Performance Management 

Training is essential for employees to help them grow with the business. It helps them to develop their skills and helps the business to succeed. 

GoSkills is a free learning management system. This is essential for employee training and a handy tool for HR. Udemy can also help you find courses for training professional employees. 

Performance management is also vital to the retention of your employees. There is a free performance review template from Smartsheet.

Workplace Conduct, Safety, and Leave Policies 

Human resources also handles code of conduct expectations for the business. These are the expectations of the company of behavior. They will also deal with the disciplinary process.

There are types of leave that need to be reported due to federal laws. Human resources manages sick leave, vacation leave and federal leave. This is the FMLA (family and medical leave act). 

Does Your Small Business Need HR? 

HR is not legally required as a department in a small business. But human resources is an essential part of a business if you are going to hire employees. 

We always recommend taking action before you run into problems with your business. These can stop costly errors and prevent the growth of the business.

If you do have HR requirements, please get in touch with us here at Hidden Gem Career Coaching. Contact us today for a free consultation to see how we can help you with your HR needs.