How to set up an HR department for small to medium businesses
SETTING up a Human Resources (HR) department is a foundational step for small to medium-sized businesses (SMBs) aiming for long-term growth.
HR plays a crucial role in managing employees, ensuring legal compliance and building a positive workplace culture. In any SMB, the HR department might start off with a few core activities, such as recruitment and payroll, but as the business grows, so will the demand on HR to drive strategic goals, improve retention and enhance employee development.
This guide provides a step-by-step approach to establishing an HR department tailored to SMB needs, ensuring efficiency and scalability as the business evolves.
Defining HR’s role in a small business
HR in an SMB should start with a clear understanding of its role and the immediate needs it must address. Unlike those in larger corporations with highly specialized HR functions, HR in smaller businesses tends to be more generalist, encompassing a broad array of responsibilities.
• Strategic purpose
: Align HR goals with the business’s overall objectives. For instance, if the company aims to expand in a year, HR should prioritize recruitment, onboarding and training to prepare for the influx of new employees.
• Operational scope
: In an SMB, HR typically manages recruitment, payroll, compliance, and employee relations. HR also helps shape the company’s culture by supporting leadership in establishing core values and maintaining a positive work environment.
• Building from scratch
: For many SMBs, establishing HR from scratch may mean choosing between hiring an in-house HR professional or outsourcing to an HR service provider. Both approaches have benefits; in-house HR can be more adaptable, while outsourcing offers access to expertise and scalability without the overhead.
Setting up core HR functions Recruitment and staffing
Recruitment is one of the most immediate needs for any business, especially a growing SMB. At this stage, HR should focus on creating a streamlined process that ensures quality hires while staying cost-effective.
• Define job roles and responsibilities
: Every role should align with business goals. For instance, if the company plans to expand its online presence, hiring a digital marketing specialist could be a priority.
• Develop a hiring strategy
: Establish a recruitment process that includes advertising on job boards’ social media platforms, as well as encouraging employee referrals. Employee referrals can be particularly effective in SMBs as employees often know others with similar values and work ethics.
• Conducting effective interviews
: In small businesses, hiring decisions impact the team significantly. Interviews should assess not only technical skills but also the cultural fit, as this helps build a cohesive team.
Onboarding and training
Onboarding in a small business can be more personalized, which can help new hires adapt quickly and feel valued from the start.
• Standardize the onboarding process
: Create a checklist covering essential tasks, such as paperwork, orientation and introductory meetings with key team members. A well-structured onboarding process helps new hires integrate more smoothly.
• Provide initial training
: SMBs may not have elaborate training programs, but providing job-specific training is essential. This could include shadowing a more experienced team member or participating in online courses related to their role.
Employee records and payroll
Managing payroll and maintaining employee records accurately and consistently is crucial for compliance and employee satisfaction.
• Implement a record-keeping system
: Maintain accurate records for each employee, including contracts, tax information and performance evaluations. Digital record-keeping tools can simplify this process.
• Setting up payroll
: Payroll should be processed consistently and accurately, as delays or errors can quickly undermine employee trust. Research payroll software or consider outsourcing this function if it becomes too complex.
3. Ensuring Legal Compliance
Compliance with employment laws is essential for SMBs to avoid penalties and protect both the business and its employees.
• Understanding labor laws
: Familiarize yourself with local labor laws, such as those related to minimum wage, overtime pay, working hours, and employee rights. Government websites often provide guidelines for small businesses.
• Drafting employee contracts
: Employee contracts should clearly outline job responsibilities, pay, benefits and grounds for termination. Consider consulting a legal expert to ensure all terms are compliant with labor laws.
• Data protection compliance
: Implement policies to protect employee data, including personal and financial information.
4. Establishing company culture and policies
A positive company culture can make your business an attractive place to work, helping retain employees and fostering loyalty.
• Creating a positive culture
: Culture begins with leadership. Promote transparency, encourage open communication and recognize achievements to establish a respectful, engaged workplace.
• Defining workplace policies
: Develop an employee handbook that covers attendance, code of conduct, dress code and communication policies. This ensures consistency and sets clear expectations.
• Diversity and inclusion
: Strive for a diverse and inclusive workplace from the outset. This can enhance innovation and make the company attractive to a wider range of talent.
5. Performance management and employee development
Performance management in SMBs should be straightforward, focused on clear communication and aligned with business objectives.
• Setting up performance reviews
: Design a performance review process that encourages open feedback. This could be as simple as biannual evaluations where employees discuss goals, achievement, and areas for improvement with their managers.
• Providing learning opportunities
: Employees in SMBs often take on multiple roles, making learning and development essential for building their skills. Consider offering online courses or workshops, even if on a small budget, to help them grow professionally.
Here’s a breakdown of the types of employees or professionals typically needed to set up an HR department in SMB, along with their roles and responsibilities in establishing the core HR functions:
1. HR manager or generalist
2. Recruitment specialist
3. Payroll and benefits administrator
4. Training and development specialist
5. Employee relations specialist
6. HR assistant or coordinator
If hiring a full HR team is not feasible initially:
1. Prioritize key roles
: Start with an HR generalist who can cover multiple functions, such as recruitment, payroll and compliance.
2. Leverage technology
: Use HR software to automate tasks such as record-keeping, payroll and performance tracking.
3. Outsource strategically
: Outsource specialized tasks (e.g., payroll or compliance audits) to save time and resources while maintaining quality.
Building an HR function in a small to medium-sized business is more than just managing paperwork and compliance. It’s about supporting employees, fostering a culture that aligns with the company’s values, and setting up systems that will grow with the business. By prioritizing HR fundamentals like recruitment, onboarding, compliance and employee development, SMBs can lay the groundwork for a resilient and motivated workforce. This HR foundation enhances operational efficiency and plays a key role in achieving long-term success.
Author’s profile:
Amelita Buendia-Aguila, or Lita, as she is fondly called by her colleagues, is a certified business and management consultant with over 25 years of solid experience in human resource management. She guides and supports business leaders in achieving organizational goals through effective talent management, organization development and policymaking. She creates instructional designs and delivers training to various companies and government agencies. She has gained expertise in solving complex HR issues and challenges, advising clients in a way that improves performance and delights their customers. Ms. Lita may be reached at: 0927-586-7074; lita_aguila@yahoo.com
