Running a small business HR team is no small feat. You’re wearing multiple hats, making key decisions, and juggling priorities while growing your team. But, managing people effectively isn’t just about payroll and paperwork—it’s about creating a workplace where they feel valued, motivated, and ready to drive success.
That’s where human resources (HR) comes in. HR isn’t just a back-office function for small businesses—it’s the foundation of a thriving, people-first culture. Whether hiring your first team member or scaling, understanding HR fundamentals can make all the difference.
In this guide, we’ll cover everything you need to know about HR for small businesses—from core functions like recruitment, compliance, and payroll to building an engaged and high-performing team. Let’s explore how you can streamline your HR processes, support your people, and set your business up for long-term success.
Why do small businesses need HR?
No matter the size of your business, human resources help organizations manage their people effectively. They address team needs, ensure compliance with labor laws, and foster a positive company culture that helps drive engagement, productivity, and retention. For small businesses, in particular, HR ensures that essential processes—like hiring, onboarding, and performance management—run smoothly, freeing up time and resources to focus on growth.
While your team’s HR processes and strategies may look different in a small business compared to a larger organization, they serve the same purpose: helping your company reach its business, talent, and culture goals. By implementing effective HR practices early, small businesses can build a strong framework to attract top talent, maintain compliance, and create an environment where people thrive—setting the stage for long-term success.
HR functions in small businesses
Let’s review some of the core HR functions for your small business and how your human resources team will help manage them.
Monitoring compliance
Your HR team is your resident expert on compliance, making sure all workplace practices align with applicable laws in hiring, management, benefits administration, and more. They’ll handle regular audits, alert you of any issues, and help you avoid labor law violations.
This protects your business from potential legal mishaps and makes sure you’re treating your people fairly—which goes a long way toward building a positive and safe workplace culture.
<<Download this free HR compliance checklist.>>
Overseeing hiring and recruitment
As your business grows, you’ll bring on more team members who can help you scale while maintaining your values and culture. HR teams excel at finding people who align with your mission, bring the right skills and experience, and fit seamlessly into your team. They’ll write clear job descriptions, create recruitment plans, filter and assess resumes, organize interviews, handle background checks, and manage offers—all while ensuring the hiring process is efficient, equitable, and compliant with labor laws.
Handling onboarding processes
During the employee onboarding process, HR teams welcome new joiners and help them navigate the day-to-day processes of their roles, organizational policies, and company culture. They may even use onboarding software to automate the tasks involved in welcoming new hires, ensuring they have a smooth transition into their roles.
Effective onboarding establishes a strong first impression that significantly influences employee performance, retention, and engagement. By setting clear expectations, providing helpful tools and resources, and fostering a sense of belonging, HR ensures that new people feel supported and prepared to contribute from day one.
Managing payroll and benefits
A strong compensation strategy helps boost engagement, improves employee productivity, and reduces attrition–and you can thank your HR team for that. HR teams handle compensation management, oversee benefits administration, and ensure payroll is accurate and timely. They create competitive compensation packages with the right pay, incentives, and benefits to attract and retain top talent while aligning with the organization’s financial goals.
Supervising training and development
Companies can improve team member retention and motivation and elevate work performance with established employee development processes. HR teams help businesses plan and implement these offerings, which can include mentorship programs, training courses, individual development plans (IDPs), and more.
Organizations benefit from enhancing their people’s skills: Integrating learning and development into the work routine is more efficient and cost-effective than hiring external candidates.
Supporting performance management
Regular performance reviews give people the opportunity to reflect on their achievements, identify growth areas, and set goals for future success. HR leaders can implement performance management strategies to help team members improve productivity, develop new skills, and take an active part in promoting organizational goals.
HR uses tools like performance management templates and performance management software to streamline the review process and ensure fairness for all involved.
Building a positive company culture
HR professionals are your work culture champions. They set the tone for how your people communicate, collaborate, and resolve conflicts, ensuring a foundation of respect, inclusion, and teamwork.
HR establishes policies and initiatives to tackle inefficient processes, support team member engagement and wellbeing, enhance work performance, and reduce absenteeism. From organizing team-building activities and recognition programs to promoting diversity and inclusion, HR plays a key role in creating a culture that inspires loyalty, drives innovation, and aligns with your company’s mission and values.
How is HR different for large and small businesses?
While HR provides similar services across organizations, the way these services are delivered can differ significantly between small and large businesses. These differences often include:
- Workload size: A smaller human resources team may have a lot on its plate, making it difficult to develop new policies and invest time in strategic initiatives. Small businesses can embrace creative solutions and leverage HR tech to streamline workflows and prioritize what matters most.
- Formality and depth of processes: Large businesses typically have more structured and detailed HR processes, backed by ample time and resources for strategy development. Small businesses may foster a more informal and flexible culture, which can appeal to team members seeking a more relaxed work environment.
- HR department size and specialization: Large organizations benefit from larger HR teams with specialized roles in areas like recruitment, compliance, or training. Small HR teams, by necessity, handle a broader range of tasks, enabling them to develop diverse skills.
- Decision-making processes: In large organizations, decision-making often involves multiple stakeholders and layers of approval, which can slow down the implementation of new initiatives. Small businesses, on the other hand, can adapt quickly, with HR teams working closely with leadership to make faster, agile decisions.
- Employee relations: In small businesses, HR has the opportunity to build closer, more personal relationships with people, creating a highly engaged and connected workforce. In large organizations, maintaining a personal touch may be more challenging, requiring HR to find scalable ways to create meaningful interactions.
No matter the size of your organization, HR strategies can strengthen company culture and build loyalty by giving team members autonomy supported by clear processes. HR software, including AI-powered tools, streamlines workflows and frees up time for tasks that require a personal touch.
Best practices for HR teams at a small business
Whether you’re an HR team of one or five, try these strategies to meet and exceed your small business’ HR goals.
1. Determine your HR needs
The first step for small business owners and their HR professionals is to determine what the organization needs from its human resources department. Meet with stakeholders to determine what kinds of compensation and benefits you can provide, which regulations you need to meet, and how fast you want to grow your team.
Another important conversation to have early on is about the company culture you want to build. Defining this vision from the start helps shape HR policies, guide decision-making, and set the tone for how your team will work together. Discuss core values, leadership styles, communication expectations, DEI&B (diversity, equity, inclusion, and belonging) initiatives, innovation goals, and the company’s relationship with the community.
A clear cultural framework ensures consistency as you grow, attracts talent aligned with your vision, and creates a sense of purpose among your team members.
2. Establish procedures for recruitment and onboarding
HR teams can create specific recruitment and onboarding processes to find and attract the right people for your organization. Consider how you’ll:
- Advertise and fill vacant positions
- Ensure compliance with legal and regulatory requirements during the hiring process
- Collect and organize hiring documentation to increase efficiency
- Create an engaging and inclusive onboarding experience that aligns with your values
- Help new joiners adjust to company culture
- Gather feedback from new hires to improve the onboarding process continuously
- Define clear expectations and set measurable goals for new hires from day one
When you hire people who can support your company culture and business goals, you’ll set yourself up for increased productivity and a positive work environment.
3. Classify team members correctly
Correct team member classification enables accurate payroll and benefits distribution, building trust and helping you avoid financial penalties. Determine whether each person is full-time, part-time, seasonal, temporary, contractual, or statutory to learn their roles’ specific traits and expectations. Review regulations like the Fair Labor Standards Act (FLSA) and local labor laws in your jurisdiction, and work with your team to establish clear guidelines for classification and ensure compliance.
Additionally, collaborate with legal or HR consultants to confirm you’re following up-to-date laws regarding exemptions, overtime eligibility, and benefits requirements. Regularly review job roles and compensation to ensure you’re still in line with legal regulations.
4. Learn about relevant employment laws and compliance
Ensure you’re compliant with relevant employment laws to maintain a safe and healthy work environment while avoiding violation penalties. For example, in the US, the Occupational Safety and Health Act (OSHA) regulates workplace standards related to your team’s physical safety. If you need support determining which regulations govern your industry, reach out to local branches of regulatory organizations (like OSHA) with questions or hire an HR specialist for guidance as you get started.
5. Develop clear policies and procedures
No one wants to expect issues, but creating clear policies and procedures will prepare you for handling anything quickly and effectively. Employee handbooks are a great way to set expectations and outline company processes, from attendance policies to pay schedules. While businesses don’t need handbooks, they’re an effective way to distribute crucial information—and communicate your company’s unique personality.
Review the handbook during onboarding and make sure everyone can access it at any time.
6. Create a compensation strategy
It’s important to balance your own budgetary needs with offering competitive salaries and benefits to attract top talent. Discuss your budget, restrictions, and talent needs with your team and stakeholders to design a comprehensive compensation strategy. Include details on salary, bonuses, equity, pensions, and professional and lifestyle benefits.
7. Set up payroll procedures
Once you determine your compensation strategy, you can set up payroll processes. For a small team, payroll software offers major time-saving benefits. Test out software options to find one that works well with your existing tech stack and automates payroll so your people are always paid on time.
8. Practice consistent documentation
Make it simple for your team to access the information they need. Document processes and incidents consistently, and make sure everyone has access to the details they need. Create knowledge databases, team directories, tailored communication channels, and internal newsletters so your team can work effectively and save time on rote tasks.
9. Find an HR tech solution that works for you
The right HR tech solution is particularly helpful for small businesses, where team members often handle a diverse range of tasks. HR tech helps automate and streamline processes from payroll to attendance tracking to workforce planning.
<<Use this checklist to choose the best HR software for your small businesses.>>
Support your people with a strong HR department at your small business
Setting up clear systems and offering great resources will help you ensure your HR team has the support they need to work effectively. Invest in your HR processes, prioritize your people, and watch your small business grow into a well-respected workplace where success and innovation go hand in hand.
Learn more about HR for small businesses
What is the best HR software for small businesses?
The best HR systems for small businesses depend on your company’s needs. Comprehensive platforms like a human resources information system (HRIS) or human capital management (HCM) software offer wide-ranging functionality that supports various HR processes.
If your team needs support with specific tasks, you might consider point solutions like payroll software, onboarding software, or a learning management system.
When should a small business owner delegate HR tasks?
There’s no specific formula for determining when to delegate HR tasks, but you may consider building out an HR team when you have at least ten employees.
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How much does HR cost for a small business?
HR costs vary depending on whether you have a dedicated HR team, how large your team is, what software you use, and whether or not you outsource some HR services. For an internal HR team, your HR cost would be their salaries plus the cost of the tools you provide. Tech solution costs vary, but many small businesses spend about $3-10 per team member per month for HR management software.
If you choose external HR support, many startups spend about $750-3,000 per month to outsource HR services.
Can a small business not have an HR department?
Legally, your small business can operate without an HR department. Consider your people’s needs and your workload to determine whether or not your small business can operate effectively without a dedicated HR team.
