Do Small Businesses Need an HR Department?

Human Resources (HR) is an integral part of successful business operations. However, small companies rarely have the funds to support a full-size HR department. The costs of hiring, onboarding, and retaining a dedicated HR employee can be too high to handle.

Building an internal HR team is highly beneficial for a company of any size. However, substantial expenses make the ROI of this decision less than perfect. Meanwhile, functioning without an HR team can lead to significant difficulties.

As the company grows, the risks of working without dedicated HR experts become higher. Is there a way out?  

What are the risks of not having an HR department? 

Some small companies try to operate without an HR department. They delegate key HR functions to other team members. As a result, they don’t just reduce employee satisfaction but also face serious risks. 

High Turnover 

With Baby Boomers slowly leaving the scene and younger generations having high demands, turnover rates are spiking. In 2022, companies will be facing increasing employee power and a historically tight labor market.

Since the Great Resignation is in full swing, it’s imperative to focus on retaining top talent. Without an HR department, your company doesn’t have time, resources, and tools to maintain proper employee satisfaction, improve company culture, or implement workplace risk management.

As a result, you could see your existing talent leaving while losing the opportunity to position your company as an employer of choice. 

Compliance Failures  

HR laws tend to change quickly. It can be easy to miss something important from minimum wage updates to tax compliance. Companies with large HR teams have several experts monitoring compliance issues, adjusting to changes in federal, state, and local laws, and running compliance audits.

When you don’t have an HR department, your existing employees could be struggling to stay up to date with the latest changes. A seemingly innocent mistake could result in substantial penalties and reputation issues.

In the United States, there are 180 labor laws. Monitoring all of them without a dedicated HR specialist is just not feasible in the long run.

Lost Productivity 

If you don’t have an HR department, you still need someone to handle HR functions. Some business owners delegate core HR tasks to employees from other departments. As a result, these employees have to juggle numerous responsibilities.

Eventually, such delegation could lead to unfortunate errors, low employee satisfaction, and lost productivity. In the best case, the staff begins working overtime to handle all tasks. In the worst case, they lose the opportunity to focus on essential responsibilities. Both options can harm the company’s bottom line.

Meanwhile, the company doesn’t have time to monitor and optimize job satisfaction and engagement without a dedicated HR department. Unhappy and disengaged employees can’t show top productivity. 

Excess Costs for Employee Benefits 

High-quality benefits are one of the pillars of a successful employee retention strategy. If you don’t have a dedicated HR expert choosing benefits and designing effective benefits packages, keeping employee satisfaction rates high can be tricky.

Today, about 45% of American adults are underinsured. Underinsurance doesn’t just dip employee morale, it may lead to health issues. This, in turn, could result in more sick days and lower productivity.  Underinsurance also leads to high turnover as other companies offer competitive benefits.

With a poor approach to benefits structure, you could end up over-insuring your team and paying more money for benefits than necessary.

Employee Lawsuits  

In the United States, SMBs (Small and Mid-Size Businesses) have approximately a 12% chance of facing an employee lawsuit. To minimize this figure, it’s essential to implement proper risk management practices and teach your employees safety and legal compliance in the workplace.

It’s also important to document and record employee interactions and hiring practices. This is necessary to prove the absence of discrimination and bias.

If your team doesn’t have time to implement proper practices and investigate employee complaints, the chances of being slapped with a lawsuit increase exponentially. Without an HR department, keeping all the nuances under control can be tough. 

At what size does a company need an HR department? 

Many small business owners think they don’t need an HR department because they have a limited number of employees. While there isn’t a legal requirement to hire dedicated HR employees, the compliance burden increases drastically as your staff grows.

In many states, workers’ compensation insurance is required for companies that employ as few as five people. As you grow to:

• 15 employees - Title VII of the Civil Rights Act applies  

• 50 employees - Family and Medical Leave Act applies 

• 50 FTE (full-time equivalent) employees – Affordable Care Act applies

While you don’t have to have an HR department, juggling compliance issues requires substantial attention. The more your company grows, the more HR functions it requires. HR duties become more complex and too complicated to delegate to employees without HR experience.

How can small businesses affordably scale HR? 

Hiring an HR generalist can reduce the risk of not having an HR department. However, as the company grows, this specialist will not have sufficient time to handle the growing HR needs.

When this happens, you will need to decide whether to hire more HR employees or outsource HR functions. By choosing to outsource HR, you reduce the administrative burden of your in-house HR experts, receive access to multiple HR specialists, and gain an opportunity to scale the business without looking back at the HR complexity.

Without an HR department, it’s easy to make compliance mistakes, lose the retention battle, and hinder your company’s growth. By leveraging an outsourcing solution, it’s possible to have an HR department without incurring the costs of hiring new employees.