Human resources (HR) is a necessary component of any successful small business. When you’re just starting your business, all the HR responsibilities fall on you. At a certain point, you’ll be able to shed those obligations and set up your own HR department.
By following the steps outlined below—which cover everything from staffing, budgeting, and tools to personnel files, policies, and company handbooks—you’ll be able to establish a high-performing department that enables your business to stay compliant and attract high-quality employees.
Step 1: Create Your HR Staffing Plan & Budget
Depending on the size of your organization, you may only hire one HR employee, which means you may need someone more generalized.
Consider the following when looking for your first HR department hire:
- Whether you have all policies written or if you need an HR team member to write some or all
- Whether you have an existing handbook or if you need an HR employee to compile one
- Whether your company is offering and administering your own benefits
- What states you have employees working in
Hire an HR generalist first. This is a person who can help you set up policies, create a handbook, and ensure other HR staff have time to focus on more specific areas like benefits and payroll. We recommend an employee to HR staff ratio of about 100:3.4. As a small business, this allows you the ability to hire a generalist to launch your HR department, and then add more specialized positions as needed. To help you budget accordingly, the average HR generalist makes between $50,000 and $60,000 per year, depending on your location and the employee’s skill level.
As you develop your HR department and your company grows, you’ll increase the number of HR employees but reduce the ratio. A generalist may be the first hire but you may need to add a benefits administrator ($55,000 per year) and compliance specialist ($60,000 per year) as your company grows.
Your HR budgeting should consider at least the following items:
- Number of hires for the upcoming year
- Salary for those hires
- Merit and annual increases for existing HR staff
- Recruitment costs
- Benefits increases
- Payroll costs and increases
- Incentive compensation and bonuses
- HR software
- Intranet design and maintenance
Tip: As you begin hiring HR staff, it’s a good idea to improve your hiring process. Check out our guide on how to hire an employee for guidance.
Step 2: Determine Tools & Technology
The tools your HR team needs to do their work effectively will depend on how your business operates, your goals, and the number of HR employees on staff. One of the best tools you can invest in is a time clock. There are free options and economical options available which will track your employees hours, making payroll easier and more accurate.
You should also consider an intranet to hold your company documentation. Using a free online platform like Google Drive, Dropbox, or Mega stores your policies in an easy-to-access location. Although these free options may lack some security features, making it a challenge to store confidential information, your company handbook and policies can easily live here, letting your employees access general information quickly and without bothering you or your HR team.
HR technology can help streamline your processes and make you and your team more efficient. A human resource information system (HRIS) is software specifically created to handle all of your HR needs. Selecting the right system will take time and research, making this another great project for a new HR team member to tackle.
Instead of using many vendors and different software, an HRIS combines everything you need into one easy-to-use system. Look for an HRIS with:
- Personnel file management
- Payroll and paystubs
- Benefits tools
- Compliance tools
A good HRIS will require a substantial investment, so that may come later in your company’s development. Depending on the size of your company and the features you’re looking for, you could spend from a few thousand dollars to over $20,000 per year.
For a list of software to consider, check out our top recommended HRIS systems.
Step 3: Organize Your Personnel Files
If you’re ready to set up an HR department, you probably already have at least a few employees. You should have personnel files on each of them. Make sure those are in order and properly separated, and you establish a process for your new HR department to follow when you hire more employees. For each employee, you should have three separate files.
Included in an employee’s personnel file, retained by your HR department, should be:
- Interview notes
- Offer letter
- Employment agreement
- Payroll information
- Emergency contact information
- Performance reviews
- Verbal and written warnings
- Other disciplinary action documentation
- Resignation letter
- Termination documentation
- Exit interview notes
A general personnel file will not contain legally sensitive information, but you should still keep it in a secure location where only HR has access. Limiting the number of employees with access to personnel files will protect everyone’s information and ensure that only those who need it have access.
As an employer in the US, you are required to verify that every person you hire is eligible to work in the US–your hiring manager will need to own this process. To do that, they must complete an I-9 Form (and have the employee complete their portion in a timely manner) and keep the original for a specified time period. It’s also best practice to keep this form separate from every other employee document. You can keep all employee I-9 forms together in one binder—just don’t put any other documents in the same place. Keep them in a locked cabinet with nothing else in the cabinet and in a locked room.
Normally, businesses are not privy to employee’s medical records. However, you may sometimes come into contact with confidential medical information through your normal course of employing people:
- Insurance applications
- Disability related information
- Doctor’s note excusing employee from work
- Medical exam records following a workplace injury
All of this documentation is protected health information. This means that the information contained in the files is subject to the Health Insurance Portability and Accountability Act (HIPAA). This law requires covered entities, like your small business, to keep medical information private and confidential. It’s best practice to keep medical records in a separate file and in a locked cabinet. Be mindful that the HR employees you hire for your department are trustworthy.
Step 4: Review, Organize & Document Your HR Policies & Processes
HR policies give your small business a comprehensive foundation of consistency, efficiency, and compliance. When you have well-developed policies, it shows you care about the core foundation of your business. There are many policies a strong HR department should maintain, some you’ve likely already created and others you should consider. We list the most important below.
Recruiting & Onboarding
Recruiting employees takes diligence and structure. From posting your job ad to conducting interviews, having a clear recruiting process will keep your HR team from reinventing the wheel each time they need to hire a new employee. Even if your business is small and you don’t plan to hire many people at once, you still need to consider how to make hiring decisions. Consider the following:
Where are you going to post job ads?
Your HR team member who’s responsible for recruiting can post on free or paid job boards, general or niche. Regardless of which job posting site your company uses, you can maximize your exposure by including keywords that will help applicants find your job ad quickly.
Will you take referrals?
An employee referral program encourages your existing employees to refer friends or former colleagues who they think would be a good fit for your open positions. This can cut down on your recruiting costs and increase your retention rate as referrals are much more likely to be a good cultural fit for your company.
How will you verify employment history?
While you want to trust every applicant on the accuracy of their resume, you need to do your due diligence. Employment verification can either be done manually by you or your HR team calling each previous employer or you can include it as part of your background check process.
How will you run background checks?
Running a background check isn’t necessary for every position—use your best judgment but be sure to run one if the employee will have access to confidential or sensitive information. Having a background check policy ensures your HR department follows a consistent and compliant process for checking your job candidates’ background; it also gives employees notice of your company’s intentions.
How will you conduct interviews?
HR may initially screen candidates but then managers may want to conduct a more thorough interview with applicants. Using a structured interview process ensures you treat applicants fairly and evaluate them on the same questions.
How should you onboard?
Your onboarding process must be set, and your HR manager should do regular check-ins with new employees and managers to ensure everything is going according to plan. If onboarding haphazardly, new hires will be afraid that’s how you operate your business, and they won’t have any direction, feeling lost and unsupported. If you have a clear onboarding process, you give your employees direction from day one, leaving no ambiguity about your expectations.
Performance Management Process
Your employees need clear direction on the work you need them to do. To achieve that goal, have a set process for managing your team’s performance and helping them get better if they fall below your expectations. A great performance management process ensures you keep thorough employee records, making reviews effective and corrective action targeted and helpful.
Documenting everything is key to HR compliance. Your HR department should review for any issues, check in with managers to provide support, and ensure employees stay on the right track. Defining your performance management process will ensure that everyone is treated fairly, avoiding the appearance of favoritism or discrimination.
Your performance management process should include clear documentation of at least the following information:
Training & Development Programs
Training new employees is crucial to ensuring your new hires understand your business, how their role fits into the organization, and how to do their daily work–your HR team should have a solid training plan in place that they can easily implement at scale as new employees come onboard.
When you’re first starting your business, training employees isn’t your top priority—you need them to get work done. But training is extremely important because it shows the employee what’s expected of them and gives you the ability to take corrective action if the employee fails to meet your expectations.
Training doesn’t stop after someone’s first week or month, however. Training and development continues for the entire time an employee works for you. Employees want to grow in their roles and in your company. Giving them the opportunity to and showing them the way is key to keeping top-talent.
Paid Time Off & Other Leave Benefits
There is no federal law requiring paid time off (PTO), but if you do offer it, your HR or payroll team will need a good way to track it—how much they’ve earned vs used. If your company offers PTO, some states require that you pay out accrued and unused PTO when an employee leaves your company.
You may also want to consider including additional leave benefits as part of your employee benefits program:
- Leave of absence
- Paid holidays
- Family and Medical Leave Act (FMLA)
- Parental leave
Please note that some states require you to provide family or parental leave. Check your state guidelines to see if you’re required to offer these additional leave options.
Anti-harassment & Non-discrimination
Part of attracting and retaining top talent is ensuring a safe workplace for everyone. Having an anti-discrimination policy, including sexual harassment, will provide clear direction for how employees should act with one another. It will include information about disciplinary action for employees who violate the policy. You should also have a simple way for employees to anonymously report violations. Your HR manager should stay abreast of any complaints and address them as soon as possible.
Prohibiting discrimination in the workplace will also keep your company safe and equitable for all employees, and ensure compliance with Equal Employment Opportunity guidelines. From the hiring and interview process to promotions and general workplace conduct, ensuring that your HR department has what it needs to maintain a discrimination-free environment helps all employees thrive.
Timekeeping & Attendance
To pay employees accurately, your HR department must have a simple way of tracking how many hours employees work. Whether they use paper time sheets or a software to record employee punches, your timekeeping policy should provide clear instructions for how employees should record their time. Even if you have salaried employees who are also exempt from overtime, it’s still a good idea to record hours because you can track attendance and punctuality.
Your attendance policy should state your work hours, what you consider tardiness, and procedures for calling out sick or for a late arrival. Describe why punctuality is important and how being late places extra burden on other employees. Include disciplinary actions for violations of the policy.
Running payroll isn’t as simple as just making a bank transfer. You need to register your business, record employee hours, ensure accurate tax and benefits withholdings, among many other items. Depending on the number of employees you have, you may need an employee devoted entirely to payroll—it can be a full-time job. Also, keep in mind that not all HR professionals have payroll expertise, and not all payroll professionals have a ton of general HR experience. This means, at minimum, you may need to start with at least two people in your HR department.
Regardless of whether you hire someone with payroll experience or promote an internal employee without it, you’ll need to ensure they have opportunities to stay up-to-date on compliance training, software, etc.; they’ll also need to know some specifics on payroll processes that are unique to your business. Payroll training may include:
- How you pay employees: paper paycheck or direct deposit
- Frequency of payroll
- Procedure for running payroll if pay date falls on a weekend or holiday
Classify your employees correctly. Many companies get into trouble when they don’t pay overtime to employees who are eligible. Be sure your hiring manager knows the difference between exempt and nonexempt employees.
Health & Safety Policy
Depending on the industry in which your small business operates, you may be subject to Occupational Safety and Health Administration (OSHA) regulations. If you are subject to OSHA, make sure you have specific safety regulations in place to keep your employees safe on the job. Some companies even have an in-house safety manager who is OSHA-certified. Typically, this would be those strongly subject to safety regulations, like manufacturing companies, businesses dealing with hazardous materials, construction companies, etc.
Even if your small business is not subject to OSHA, it’s a good idea to have safety procedures in place. If an employee suffers an injury, what steps should a supervisor take? They’ll need to record the injury and report it to your workers’ compensation insurance provider. They may also need to prepare for the employee to be out of work. Detail each step that both the injured employee and their manager should take following a workplace injury.
Meals & Break Policy
Federal law does not require employers to provide breaks or rest periods to employees. However, breaks lasting less than 20 minutes should be paid—be sure your payroll and HR team are aware of this. You should also pay your employees for their lunch break if they cannot leave their desks and are able to be called back to work while on their break. Other breaks can be unpaid. Your policy should describe with detail the types of breaks you offer and whether they’re paid.
Some states and cities have more restrictive rules. Review our ultimate guide on rest and break laws to make sure your small business stays compliant with your local and state laws.
Step 5: Create Your Company Handbook, Distribute & Update
Every policy you’ve written should be included in your company handbook. Because handbooks tend to be dry, you could save this project for your new HR department. Make it their goal to create an engaging handbook that employees actually read.
Besides the above policies, and any other policies you want to include, make sure your handbook also speaks about:
- Your company history
- Your company’s future goals and aspirations
- Step-by-step guides for each tool and software your team uses
- Company incentive programs
Make sure your employees have regular access to your company handbook. Upon hire, I recommend emailing the most up-to-date version for the employee to review and ask questions on their first day.
Your handbook should also note that it is subject to change. Anytime you make a substantial update to the handbook or a policy included in it, provide employees with an updated version. This is where having an intranet or shared internal file can be helpful.
Finally, include an employee acknowledgement form at the end of your handbook. This form will have employees attest to the fact that they have read, understood, and agree to be bound by the terms of the handbook. Keep the signed original employee acknowledgement in each employee’s personnel file.
At-Will Employment Statement: At-will employment is the predominant standard in the US for employment status, and you need to make sure your employees understand their employment is not permanent or guaranteed. Here’s a sample statement:
“Your employment at [Company Name] is at-will. Your employment is for an indefinite period of time and subject to termination by you or the company, with or without cause, with or without notice, at any time.”
If you don’t make this statement in your handbook and take some action that could be interpreted as guaranteeing a job, you could change the at-will status of your employees, making it more difficult to make personnel changes.
Creating a human resources department for your small business may not be your first priority, but it is a major step forward. Make sure you hit all the necessary policies and start off right by making a good first hire for your new HR department.