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HR for Small Business: The Ultimate Guide

Matthew Speiser

Matthew is a staff writer at Fundera and the son of a small business owner. His work has appeared in Business Insider, the Fiscal Times, and the World Economic Forum, among others. He's passionate about helping entrepreneurs find ways to succeed.

Human resources means different things to different people.

To job seekers, human resources (HR) is the recruiter and gatekeeper, deciding whether or not their application will progress. To the new hire, HR is an ally and coach, helping them learn their role and understand the organization. Tenured employees view HR as being responsible for their continued development, motivation, safety, and wellness. And for you, a small business owner, HR is necessary to ensure your business can hire and retain top talent while being compliant with the law.

In this guide, we are going to dive deep into the world of human resources for small business to help you understand its importance and show you how you can implement strong HR practices. If you’ve had trouble with employee retention, recruitment, management, or workplace culture (and who hasn’t?), this comprehensive guide is for you.

What Are Human Resources?

First, let’s get our definitions straight. The Small Business Association (SBA) defines human resources in two ways:

  • “The people who work for a company or organization.”
  • “The department of a company that is responsible for managing those resources.”

We are going to focus on the latter definition, which is also known as human resources management (HRM). The SBA puts the following responsibilities under HRM:

  • Recruitment and hiring
  • Training and development
  • Payroll and benefits
  • Employee retention
  • Creating a safe, healthy, and productive environment
  • Communication across the organization

Your HR needs to do all of these things while striking a balance between what best serves the needs of your employees and what serves the market-driven needs of your small business while remaining compliant with the laws and regulations of the states you operate in and the U.S. government.

No small feat.

Let’s take a closer look at each of these human resources responsibilities so you can understand how they can contribute to your broader business goals.

HR for small business

Why Is HR for Small Business Necessary?

If HR is doing its job, employee performance, commitment, and loyalty will increase, which in turn should help your business achieve its objectives and accomplish its mission. There are myriad statistics that support the importance of good HR for small business. Here are just a few:

With these stats in mind, here are some human resources needs for a small business.

Documentation

Human resources are the bookkeepers of your workforce, maintaining all the paperwork that ensures your business is compliant with labor laws and protected in the event of a dispute. In particular, all small businesses should have the following paperwork on every employee:

  • I-9 form: This ensures an employee is eligible to work in the US.
  • Medical file: Including disability information.
  • Employee file: Including a resume, reviews, training verifications, payroll details, W-4 forms, and anything else that documents an employee’s tenure with your business.

Aside from these standard forms, all businesses should have an employee handbook. A  handbook lets employees know what is expected of them while employed by your organization, and establishes protocols for how to deal with issues that may arise in the workplace. Among the things your employee handbook can include are:

  • Organization mission, values, and objectives
  • Code of conduct
  • Anti-discrimination policy
  • Non-disclosure agreement (if needed)
  • Safety and security policies
  • Job descriptions
  • Organizational chart/ hierarchy
  • Compensation and benefits descriptions
  • Schedule, vacation, sick time, and leave policy
  • Recruitment and hiring policy
  • Discipline policy

These documents form the foundation of your business from a workforce perspective and provide HR with a mandate to do its job. Your handbook must be updated to reflect organizational changes as they arise. If you need help starting your employee handbook, the Society for Human Resources Management (SHRM) offers a few templates.

For more tips on HR documentation, Fundera reached out to small business owners for their input:

I have all my employees sign an employee contract and employee handbook. Basically, this allows me to include certain clauses and considerations that employees must abide by. Ultimately, this gives the business more leverage and protection against frivolous litigation and detrimental employee behavior.” — Matt Ross, co-owner, RIZKNOWS.com

“Outsource to an HR consultant. A good HR consultant can create your handbooks, interview questions, code of conducts and keep you in compliance.” —  Herman Parson, owner/operator, SEE HR & Recruiting

Compliance

Documentation goes hand-in-hand with compliance. There are a plethora of labor laws and workplace rules and regulations. If you’re dealing with HR, you should be familiar with the following laws:

  • Anti-discrimination laws: Including Title VII, Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA).
  • Wage and hour laws: Specifically, the Fair Labor Standards Act (FLSA), as well as individual state laws pertaining to minimum wage.
  • Leave laws: Particularly the Family and Medical Leave Act (FMLA), as well as state laws.
  • Immigration laws: Including the Immigration and Nationality Act (INA), Immigration Reform and Control Act (IRCA), and the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA).
  • Benefits laws: There are various required benefits employers must provide, although these vary based on the size of your business and the state you do business in. Common required benefits include social security and workers’ compensation.
  • Safety laws: You will want to make sure your business is compliant with the Occupational Safety and Health Administration (OSHA).
  • Union laws: Even if your business’s workplace isn’t unionized, you should comply with the National Labor Relations Act (NLRA).

In addition, the Department of Labor (DOL) requires that certain labor law posters be posted in the workplace. You can download your workplace posters directly on the DOL website.

We get it, this is a lot to remember. Plus, many of these laws change somewhat frequently. Compliance issues are a common reason businesses outsource their HR to a third-party provider (more on that later). It’s hard enough to run a business without having to worry about labor laws.

Here’s another HR tip from a small business owner:

Beyond worker’s compensation, you should get general liability insurance to protect against claims relating to bodily injury, personal damage and other situations that may arise as apart of conducting business. Furthermore, it may also be a good idea to obtain Employment Practices Liability Insurance, which protects employers against claims relating to wrongful termination, harassment and discrimination against employees.” — Matt Ross, co-owner, RIZKNOWS.com

Recruitment and Hiring

There is a lot that goes in to recruitment and hiring, including writing a compelling job description, sharing it in places where your desired candidates can find it, conducting a thorough interview (while simultaneously selling your business to the candidate), and preparing a competitive offer. There are also regulations you must adhere to during the hiring process, such as Equal Employment Opportunity (EEO) laws.

A CareerBuilder survey found that the average cost of a bad hire is $17,000 annually in lost productivity, time, and cost of hiring and training a replacement. Furthermore, these are the people you are going to have to work with every day, so you want to make sure they are a good culture fit.

With so much at stake, it is important you have a good strategy around hiring and recruitment. Here are some tips from fellow small business owners:

“Focus on company culture. I would much rather hire a hard worker that is a cultural fit than a highly skilled person with no cultural fit. It boils down to being able to work well with others in a team environment. If you’re unable to collaborate, the chance of innovation and new opportunities are diminished.” — Brandon Chopp, hiring manager, iHeartRaves.

“Be ready to hire before you need to hire. Understanding your team’s capacity and the average time it takes to fill a position is important. We’ve made poor hiring decisions in the past when we didn’t have options, and we needed someone fast, so we’re always looking to fill our bench with qualified people so we don’t have to make snap decisions.” — Kyle Varona, general manager, Fahey Pest & Lawn.

HR for Small Business: The Ultimate Guide

Payroll and Benefits

Payroll processing and benefits are another complicated responsibility that fall under the umbrella of HR. Payroll refers specifically to the money that is paid to employees by the company, and is rife with complicated tax deductions and withholdings that have to be executed accurately every time pay is distributed (payroll is another common reason businesses outsource HR).

If you need assistance with processing payroll, here are some top small business payroll software recommendations:

Offering comprehensive benefits that address the needs of your employees is just as important as good payroll management. A Zenefits survey found that 70% of employees agree that fringe benefits are a major consideration in evaluating future job opportunities.

There are two types of benefits: Those that are required by law and those that are not. We already alluded to required benefits, but the full list includes:

  • Social security tax
  • Workers’ compensation
  • Unemployment insurance
  • COBRA insurance
  • Family & medical leave

Note that there are exceptions to providing these benefits based on the size of your business and the state you are based in.

Additional benefits that are not required by law but are fairly common include:

  • Health insurance (businesses with over 50 employees will have to pay a tax penalty for not offering health insurance)
  • Dental and vision insurance
  • Commuter benefits
  • Paid time off
  • Paid holidays
  • Work from home flexibility
  • 401(k) plans
  • Employee discounts
  • Employee assistance programs
  • De minimis benefits (low-value perks such as free coffee)

Employees typically select their benefits during the onboarding process or open enrollment periods. The process of selecting the benefits to offer to your employees can be fairly involved, and is another reason small business owners opt to outsource their human resources.

Here are some tips related to benefits from small business owners:

Match your vacation policy to the needs of your company and your employees, and be creative! For some companies, this can mean any combination of company-wide shutdowns during the holidays or summer Fridays, flexible vacation plans and employee-defined work hours. Also, avoid getting in an arms race for perks and benefits. Instead, figure out what is important to your employees and target hires, and focus there.” — Daniel Meyer, CEO, Pocketdoor.

“Sell the perks that larger companies can’t compete with. I’m talking things like no bureaucracy, work from home options, casual dress code, and six-hour workdays. Use your unique position as leverage for attracting top talent without having to shell out top dollars.” — Elizabeth Bradshaw, owner, Canvas Art Boutique.

Onboarding

A successful onboarding process integrates a new employee into your company and culture, and gives them the tools and information needed to be successful in their role. Although most people think of onboarding as a process that takes place during their first few weeks on the job, a good onboarding process can actually last up to a year, and turns an employee from a trainee into a high-performing member of your organization.

Before that can happen, there are several logistical tasks that must be handled as part of the onboarding process, including:

  • Employee must complete W-4 and I-9 forms.
  • Employee must provide their social security number.
  • Employee must provide bank account information and a voided check (if they desire to get paid via direct deposit).
  • Employee enrolls in company benefits (optional).
  • Employee must provide emergency contact information.
  • Employer must provide employee with equipment needed to do their job (such as a computer or phone).

On an employee’s first day, they should be given a copy of the employee handbook and an explanation of the responsibilities and expectations of their new role. During their first week they might receive comprehensive training from their manager and co-workers, as well as opportunities to get to know the people they are working with through one-on-one meetings.

As they ease into their role over the next few months, continue to provide them with constant feedback and mentorship. The type of onboarding an employee receives might vary by role, but the goal is always to make them feel like a capable member of your team who is invested in your business’s mission.

A successful onboarding strategy is important. Employees who go through a structured onboarding program are 58% more likely to be with that organization after three years, according to the SHRM.

Here are tips from small business owners on making sure your onboarding process goes smoothly:

“Small businesses who can’t invest a lot of resources into onboarding should use an engagement coordinator. This should be one of your best employees who will shepherd the new hire through their first 90 days to ensure their success.” — Doreen A. Lang, author of “How to Drive Employee Retention.”

“Automate your onboarding as much as possible. We use a people management software that automatically assigns training and exams, schedules regular reviews and inspections, and takes a lot of that manual work off our plate so we don’t have to reinvent the wheel every time our team grows. It’s a huge time saver and keeps employees accountable for training and performance.” —  Kyle Varona, general manager, Fahey Pest & Lawn.

Performance, Development, and Maintenance

This is the retention piece of HR, and involves the day-to-day management and maintenance of your workforce. In this capacity, HR takes on many forms, including:

  • Overseeing growth and development of employees
  • Administering performance reviews
  • Resolving workplace disputes
  • Handling discipline and termination
  • Communicating organizational updates
  • Arranging workplace events
  • Ensuring a safe work environment
  • Promoting health and wellness services

All of these tasks are handled based on a set of company-wide policies and procedures that management creates in conjunction with HR, and which are outlined in the employee handbook. These everyday tasks are the one aspect of HR that can’t really be outsourced, as they require human interaction. Small businesses without an HR generalist typically rely on the owner or a senior manager to oversee these responsibilities.

Don’t underestimate the importance of these interpersonal tasks, as they have a strong impact on employee engagement and morale. Here are some techniques to help you keep your workforce happy and productive:

  • Promote positivity by fostering a culture that rewards good ideals, ingenuity, and empowerment.
  • Foster open communication and collaboration throughout your organization using tools like Slack, Google Hangouts, and Trello.
  • Audit your organizational hierarchy to ensure leadership is accessible and receptive to the needs of employees.
  • Reward top-performing employees with more freedom, responsibility, and development opportunities.

Here are some other tips to help you with your day-to-day human resources needs:

An annual performance review should not be the only time an employee hears from you. Frequent employee reviews will help everyone perform more effectively, retain your team members longer (preventing costly turnover), and boost company morale. If you are giving frequent feedback (monthly or quarterly), the employee will know what skills to leverage, what you want them to improve, and what you want them to do differently.” — Susan Katz, certified facilitator, The Alternative Board – Baltimore Washington Corridor

“An owner or manager should schedule 10-15 minutes each day to make rounds to staff. Walk around and get to know your employees, how they really feel, and what issues they see facing the company. When staff see managers and owners going out of the way to check in on them, they learn more about each other and form a bond or connection. People are less likely to quit a job if they feel their boss cares about them.” — Doreen A. Lang, author of “How to Drive Employee Retention.”

HR for small business

How to Implement HR for Small Business

If everything we have just described seems like a lot of work, that’s because it is. Small businesses typically need to use some combination of staff and outsourcing to handle human resources. We’ve alluded to outsourcing already, but to clarify, HR outsourcing means handing over some or all HR responsibilities to an HR firm or using HR software to administer certain tasks.

Let’s look at each approach to HR implementation and evaluate the pros and cons to decide which is the best option for your business:

In-House HR for Small Business

When you first started your business, you probably handled human resources in-house. That is to say, you, as the small business owner, probably served as your company’s HR department. Handling things like payroll and hiring is manageable when you only employ a handful of people, but as your business grows, you will probably want someone else to oversee admin tasks so you can focus on your core competencies.

It is understandable to want to keep HR in-house. This gives you complete control over your workforce, company culture, hiring, and benefits. The problem is HR is such a multifaceted job that it’s hard to find all the required skills in one person. So now you are looking at multiple hires, which your business might not be able to accommodate.

In reality, budget and bandwidth limitations prevent most businesses with under 50 employees from keeping all of their HR in-house. What typically ends up happening is that a business will hire an HR generalist to take care of certain tasks and outsource things that can be automated like payroll, benefits, and compliance. Once your business reaches a point where it can support a full HR team, you may want to consider bringing HR in-house.

HR Software for Small Business

HR software will save you time by automating tasks that you would otherwise have to do yourself, such as payroll, benefits, hiring, time tracking, performance reviews, and certain compliance and onboarding tasks. If these admin tasks are taking up a substantial part of your day, or if your business is growing, HR software can keep you organized and efficient.

Here are some recommendations for HR software for small business:

  • GoCo
  • Gusto
  • Zoho People
  • BambooHR
  • Zenefits
  • Cezanne
  • PeopleSphere

While most of these options come with a monthly fee, the time saved will likely more than justify the expense. To help you select the best HR software for your business, consider performing a time audit to see which tasks are taking up the most time, and picking the software that can streamline those tasks.

This is what one small business owner told Fundera about using HR software at his business:

“We automate our hiring process using software, which has reduced our workload by 20-30 hours per week. Not only are we saving tons of money and time, but we’ve also created a much better process for applicants. They are able to complete the entire application, testing, and initial screening process within one hour instead of the two-three days it used to take to email our HR team back and forth in order to complete the initial screening process.” — Tom Corson-Knowles, CEO, TCK Publishing.

Professional Employer Organization

Professional employer organizations (PEOs) are firms that administer HR on behalf of small and mid-size businesses. PEOs are staffed with HR professionals and provide services via a co-employment agreement. Under a co-employment agreement, the PEO becomes the employer of record for your employees and is legally required to administer HR services like payroll and benefits.

The advantage of a PEO is that it assumes complete control of HR, allowing you and your staff to focus on growing your business. In addition, PEOs group co-employees from all the businesses they contract with, which allows them to secure benefits packages typically reserved for large corporations. Since the PEO is also the employer of record, they share liability in employment-related legal issues, which means they are incentivized to keep your business in compliance with all rules and regulations.

One drawback of working with a PEO is that it takes away some of your independence as a small business owner, since you will need to work with a PEO on tasks related to HR. It is also important to do your research before contracting with a PEO, as some PEOs might not align with your business’s culture or be able to accommodate your business as it grows.

Some PEOs small business owners should consider include:

  • TriNet
  • Paychex
  • ADP TotalSource
  • Oasis Outsourcing

The cost of a PEO varies based on the size of your organization and your HR needs. Most charge per employee on a monthly basis. PEOs have become an increasingly popular option for small and mid-size businesses looking for a comprehensive HR solution. It’s definitely worth considering if working with a PEO is right for your small business’s HR needs.

Human Resources Help for Small Businesses

Although we’ve provided you with a framework of what HR is and how it can help your small business, there is still a lot more information out there. Considering bad HR could stifle growth and potentially even doom your business, it behooves all small business owners to learn as much as they can. Here are some places where you can continue your education:

Small Business Association (SBA)

Society for Human Resource Management: The world’s largest professional HR society, representing over 300,000 members in 165 countries.

HR.com: A website with access to free HR educational tools and resources.

HR360.com: An online guide to the world of human resources.

U.S. Department of Labor Website: A resource for all your HR compliance-related questions.

HR for small business

Setting up HR for Your Small Business

HR is a large and complicated job. But at the end of the day, it is important to remember that you are working with other people. If HR seems complex it is because humans are complex. Always strive to treat your employees with dignity and respect, because that is how you would want to be treated if you were them.

People quit their jobs every day because they don’t like some aspect of their company’s HR, whether it be poor communication, limited growth opportunities, or bad benefits. By instituting good HR practices, you not only bolster your business’s chances of success, but you create a workplace that your employees enjoy coming to every day.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Matthew Speiser

Matthew is a staff writer at Fundera and the son of a small business owner. His work has appeared in Business Insider, the Fiscal Times, and the World Economic Forum, among others. He's passionate about helping entrepreneurs find ways to succeed.

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