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how to set up an HR department

Small business owners: here's how to set up your first HR department

As a small employer just starting, you may quickly realize that you're wearing many hats and handling tasks that are typically managed by a dedicated HR department. At some point, you'll need to hire an HR professional to help with the myriad of HR tasks so you can focus on growing your business. Here's how to set up your first HR department in three simple steps. 

If you're like many small business owners, it's common practice to juggle many responsibilities and wear many hats. One of those happens to be HR. While you might not have any formal HR training, functions like recruitment, retention, training and onboarding, payroll, and more land on the business owner's desk. This takes the owner's attention off of running and growing the business. 

At a certain point, it will come time to hire your first HR manager to alleviate the pressure and help move things off your plate. 

Recognizing the Need for a Dedicated HR Department

As your business evolves, so does the complexity of managing your most valuable asset—your people. There comes a pivotal moment in every growing company's journey when the need for a dedicated Human Resources (HR) department transitions from a future consideration to an immediate necessity. Identifying this moment before it becomes a pain point is crucial for maintaining your business's operational efficiency and nurturing a positive workplace culture. This realization often arrives in the form of clear growth signals, coupled with industry benchmarks that guide the timing of this strategic move.

Growth Signals

The first sign that your business may require a dedicated HR team is often found in the strain of balancing day-to-day operations with the increasing demands of managing your workforce. Once manageable tasks, such as hiring, onboarding, and managing employee relations, require disproportionately more time and expertise. Additionally, as your team expands, the complexities of labor laws, benefits administration, and employee development plans become more pronounced and demanding.

A key growth signal includes reaching a point where HR tasks increasingly consume leadership roles, detracting from strategic business development and operational efficiencies. Another indicator is when employee inquiries and administrative tasks overwhelm current capacities, leading to delays and potential dissatisfaction.

Industry Benchmark

A practical benchmark for many businesses is the size of their workforce. According to industry insights, including recommendations from human resource experts and organizations like Indeed, the threshold of 10 employees often serves as a critical point for considering the establishment of a full-time HR professional or department. This benchmark stems from recognizing that the complexities and legal obligations of managing a workforce become significantly more challenging as a business grows beyond this size.

The transition to establishing a dedicated HR department is not just about managing workload or adhering to legal requirements; it's about investing in your company's future. A specialized HR team brings many benefits, including strategic workforce planning, professional development programs, and a structured approach to building a strong organizational culture. These elements are vital for attracting and retaining top talent, complying with employment laws, and, ultimately, supporting your business's continued growth and success.

As your business approaches this critical juncture, understanding these growth signals and industry benchmarks will prepare you for the timely establishment of an HR department. This strategic move is not merely an administrative step but a significant investment in your company's future, laying the groundwork for sustainable growth, employee satisfaction, and long-term success.

Setting Up Your HR department

Establishing your HR department is a decisive step toward structuring your growing business for continued success. This foundational phase involves two critical actions: hiring your first HR professional and clearly defining the department's functions and responsibilities. Here's how to approach these tasks effectively.

According to Indeed, once you have 10 employees, you need to bring on a full time HR professional to help. 

Hiring Your First HR Professional

  1. Identify the Need: Assess your business's immediate and future HR needs. Consider the size of your workforce, the complexity of your operations, and any specific HR challenges you face. This assessment will help you determine the level of expertise required for your first HR hire.
  2. Define the Role: Create a detailed job description that outlines the responsibilities, necessary qualifications, and desired experience for the role. Consider including tasks such as recruitment, employee relations, compliance, payroll management, and benefits administration.
  3. Search Strategically: Look for candidates through various channels, including professional HR networks, job boards, and industry-specific forums. Utilize your business networks and consider asking for referrals from trusted professionals in your industry.
  4. Evaluate Competencies and Fit: During the interview process, assess candidates for their HR technical skills and ability to align with your company culture and values. The right HR professional should be someone who can navigate the nuances of employee relations while supporting your business objectives.
  5. Plan for Growth: Select a candidate who fits your current needs and has the potential to grow with the company. Consider their ability to manage a future HR team and strategize for scaling HR operations.

Defining HR Functions and Responsibilities

Once you have your HR professional in place, the next step is to clearly define the functions and responsibilities of the HR department in alignment with your business objectives. This clarity is essential for setting expectations and ensuring that HR efforts are strategically aligned with the company’s growth goals.

  1. Recruitment and Staffing: Developing a strategic approach to attracting and hiring the right talent, including creating job descriptions, managing postings, and overseeing the interview and selection process.
  2. Employee Onboarding and Development: Design programs to effectively integrate new hires into the company and provide ongoing development opportunities for all employees to enhance their skills and career progression.
  3. Performance Management involves implementing systems for evaluating employee performance, setting goals, and providing feedback. This includes addressing performance issues and facilitating professional growth.
  4. Compensation and Benefits: Creating competitive compensation structures and packages that attract and retain top talent while complying with legal standards.
  5. Legal Compliance and Policy Development: Ensuring the company adheres to all employment laws and regulations. Developing and updating HR policies and procedures to reflect best practices and legal requirements.
  6. Employee Relations and Engagement: Fostering a positive work environment through effective communication, handling employee grievances, and developing engagement strategies that promote a productive and harmonious workplace.
  7. Diversity and Inclusion: Championing initiatives that promote diversity, equity, and inclusion within the workplace, ensuring that all employees feel valued and respected.

By methodically setting up your HR department and delineating its functions, you lay the groundwork for a department that manages administrative tasks and contributes strategically to the organization’s success. This initial step is fundamental in building a strong HR foundation that supports your company's objectives and fosters a thriving workplace culture.

Cultivating a Positive Company Culture

A vibrant company culture is not just an asset; it's a necessity for attracting, retaining, and nurturing talent that drives business success. This step is all about intentionally shaping the atmosphere in which your team operates—a culture that reflects your core values engages your workforce, and evolves as your company grows. Here's how to cultivate this environment.

Defining Core Values

  1. Identify What Matters Most: Discuss with leadership teams to pinpoint the values that truly represent your organization's essence. What beliefs drive your decisions and actions? What principles are non-negotiable?
  2. Make Them Actionable: Values should be more than lofty ideals; they must be integrated into daily operations. Define each value with actionable behaviors that employees can incorporate into their work and interactions.
  3. Communicate Clearly: Once established, communicate these values clearly and consistently across all levels of the organization. From onboarding materials to daily communications, ensure everyone understands these values.

Leadership and Employee Involvement

  1. Lead by Example: Leaders at every level must embody your defined core values and behaviors. Their actions set the tone for the rest of the organization and demonstrate what is truly valued.
  2. Foster Ownership: Involve employees in culture-building initiatives and decisions. Employees who feel a sense of ownership over the culture are more likely to contribute positively and uphold the values.
  3. Create Channels for Feedback: Establish mechanisms for employees to give feedback on how well the company is living up to its values. This could be through surveys, suggestion boxes, or regular check-ins.

Continuous Culture Development

  1. Regularly Assess Cultural Health: Evaluate how well your company's culture aligns with the defined values. Use employee feedback, turnover rates, and engagement surveys as indicators.
  2. Be Prepared to Pivot: The culture will naturally evolve as your company grows. Be open to adjusting your values and practices to reflect the current state of your organization and its future direction.
  3. Celebrate and Reinforce: Recognize and celebrate behaviors and achievements that exemplify your core values. Public recognition, rewards, and even simple acknowledgments can reinforce the desired culture.
  4. Integrate Culture into All Aspects: Ensure your company culture is reflected in every part of the organization, from HR practices and policies to daily operations and customer interactions. This holistic approach ensures that your culture is not just a set of guidelines but a lived experience.

Cultivating a positive company culture is a dynamic, ongoing process that requires commitment from all levels of the organization. By defining clear values, engaging leadership and employees in culture-building, and continuously nurturing and adapting your culture, you lay the foundation for a thriving workplace where everyone is aligned with the company's mission and motivated to contribute to its success.

Organizing Essential Employee Documents

Effective document management ensures compliance, supports HR operations, and protects the organization and its employees. A well-organized system for managing employee documents meets legal requirements and streamlines HR processes. Here's how to manage key document categories and best practices for secure and efficient file management.

Key Document Categories

  1. I-9 Forms: These forms are essential for verifying the legal work status of employees in the United States. Employees must have a completed I-9 form on file, retained separately from their personnel files, to ensure privacy and compliance during inspections.
  2. Personnel Files: These comprehensive files include resumes, job applications, employment contracts, performance reviews, and disciplinary actions. Personnel files track an employee's history with the company and are fundamental for HR management.
  3. Medical Files: Medical files may contain sensitive information such as health insurance forms, doctor's notes, and disability accommodations. Due to their confidential nature, these documents must be stored separately from other HR files to comply with privacy laws like HIPAA.

Best Practices for File Management

  1. Maintain Confidentiality: Always prioritize confidentiality by restricting access to sensitive documents. Only designated HR personnel should have access to personnel and medical files, ensuring privacy and data protection.
  2. Organize Electronically: Whenever possible, use an electronic document management system (DMS) to organize files. Electronic storage simplifies retrieval, reduces physical storage space, and can offer enhanced security features such as encryption and access logs.
  3. Regular Audits: Conduct audits of your HR files to ensure completeness, accuracy, and compliance. Audits can help identify missing documents, outdated information, or compliance gaps.
  4. Secure Storage: Whether stored physically or electronically, ensure that all documents are secure. Physical files should be in locked filing cabinets in a restricted area, while electronic files should be protected with strong passwords and backup systems.
  5. Retention Policies: Adhere to legal requirements for document retention. Different documents are subject to various federal and state laws dictating how long they must be kept. Implement a retention schedule that complies with these laws and regularly purges documents no longer legally required to be retained.
  6. Access Control: Implement strict access control policies. Ensure that only authorized personnel can access sensitive documents and maintain logs of who accesses electronic files and when.
  7. Plan for Emergencies: Have a contingency plan for document recovery in an emergency, such as a natural disaster or cyberattack. Regular backups and secure, off-site storage of electronic files are essential components of a robust emergency plan.

Organizing and managing employee documents with care and precision is a fundamental responsibility of any HR department. By adhering to these best practices, you'll ensure your organization's HR operations are efficient, compliant, and prepared to support the needs of your workforce securely and effectively.

Implementing Competitive Employee Benefits

Offering competitive employee benefits is essential for attracting and retaining top talent. Understanding the nuances of different benefits options and leveraging innovative strategies will be key as your HR department develops. This includes comparing traditional group health insurance plans with Health Reimbursement Arrangements (HRAs) and exploring new HRA options tailored for small businesses.

Group Health Insurance vs. HRA

Group Health Insurance: Traditional group health insurance plans are common for health benefits businesses. Under these plans, the employer selects and purchases health insurance to cover eligible employees and, often, their dependents. While group plans are valued for their comprehensiveness and familiarity among employees, they can be expensive and less flexible, with premium costs typically shared between the employer and employees.

Health Reimbursement Arrangements (HRAs): HRAs offer an alternative by allowing employers to reimburse employees tax-free for qualified medical expenses, including individual health insurance premiums. This approach provides several advantages, including cost control for the employer and more choice for employees regarding their health care providers and plans.

Innovative Benefits Strategies

Recent years have seen the introduction of new HRA options designed to provide greater flexibility and affordability for small businesses:

  1. Qualified Small Employer HRA (QSEHRA): Specifically designed for employers with fewer than 50 employees, QSEHRAs allow small businesses to reimburse employees for health care expenses, including premiums for individual health insurance policies, up to a set maximum each year. This option offers simplicity and flexibility for small businesses without the need to manage a traditional group health plan.
  2. Individual Coverage HRA (ICHRA): ICHRAs can be offered by businesses of any size and allow employees to be reimbursed for individual health insurance premiums and other medical expenses. With an ICHRA, employers can set their budgets by offering different allowances based on employee classes, providing a customizable approach to meet diverse employee needs.

These innovative HRA options enable small businesses to offer competitive health benefits with greater control over costs. Employers can tailor their benefits offerings to suit their financial capabilities and employees' needs, making HRAs an attractive option for small businesses looking to compete for talent in a challenging marketplace.

By understanding the pros and cons of traditional group health insurance and the flexibility of HRAs, your HR department can implement a benefits strategy that attracts and retains top talent and aligns with your business's financial health and growth goals. Keeping abreast of innovative benefits strategies and regulatory changes will ensure your benefits offerings remain competitive and compliant, supporting your workforce's health and satisfaction.

Top Employee Benefits to Enhance Your HR Strategy

In today's competitive job market, a comprehensive benefits package is more than just a perk—it's necessary. Beyond the basics of health insurance, employers are finding value in offering a wide range of benefits to meet the diverse needs of their workforce. These benefits include:

  • Health Insurance: Still the cornerstone of any benefits package, offering medical, dental, and vision insurance.
  • Flexible Work Arrangements: Allowing employees flexible hours, telecommuting options, or compressed workweeks.
  • Professional Development: Investing in employees' growth through training programs, courses, and conferences.
  • Retirement Plans: Including 401(k) plans or pensions with employer match contributions to support employees' future.
  • Wellness Programs: Promoting health and wellness through gym memberships, wellness challenges, or mental health support.
  • Paid Time Off (PTO): Offering generous vacation, sick leave, and personal days to support work-life balance.
  • Family Leave: Providing maternity, paternity, and adoption leave to support families.
  • Employee Assistance Programs (EAP): Offering support for personal or work-related issues.
  • Life and Disability Insurance: Providing financial protection and peace of mind for employees and their families.

Adapting Benefits to Your Business Needs

Customizing your benefits package is key to aligning with your company's values and meeting your employees' needs. Start by understanding the demographics and preferences of your workforce. Are they more interested in work-life balance or professional development opportunities? Next, consider your company's values and how your benefits package can reflect those values. For example, if innovation is a core value, professional development, and continuous learning opportunities could be emphasized in your benefits offerings.

Launching and Growing Your HR Department

Establishing an HR department is a significant milestone in your company's growth. Begin by setting clear objectives for your HR function, focusing on both immediate needs and long-term goals. Hiring the right HR professional as your first step will lay the groundwork for a successful department. Remember, the role of HR is not just administrative; it's strategic. Your HR department should be a partner in achieving business objectives through effective people management.

Future-Proofing Your HR Strategy

As your company evolves, so too should your HR strategy. This means staying adaptable, continuously assessing and improving your HR practices, and proactively addressing future workforce needs. Keep abreast of changes in employment law, workforce trends, and new tools and technologies that can enhance your HR operations. Encourage feedback from your employees—they are your best resource for understanding the effectiveness of your HR strategy.

By implementing these steps and maintaining a focus on adaptability and continuous improvement, your HR department will support your current workforce needs and drive your company's success in the future.

Providing employee benefits can boost job satisfaction, enhance the overall employee experience, and result in decreased turnover rates, ultimately cultivating a more positive and productive workplace environment.

How to create an employee handbook

The final task on your HR department's checklist is crafting an engaging and informative employee handbook. While handbooks may not be the most riveting read, new employees must absorb this essential information thoroughly. Your HR team's mission is to create a handbook that is easy to digest and memorable, ensuring that new hires grasp the vital knowledge needed for success in the workplace.

If you're uncertain about what to incorporate into your handbook, here are a few suggestions to guide you in the right direction.

  • Your company's mission, vision, core values, and history
  • Onboarding processes and cadence
  • Procedures and resources for new hires
  • Overview of tools used in your organization
  • Payroll information
  • Dress code
  • Vacation and leave policies
  • Benefits overview, including health, vision, dental, 401(k)

You've got this

Establishing an HR department from the ground up may take time, but the rewards for your business are well worth the effort. Once you've implemented the four steps outlined above, your HR team will be equipped to efficiently manage your organization's operations, freeing you from handling every HR task yourself.

By investing in the development of a robust HR department, you'll ensure that your organization has the necessary HR expertise to attract, retain, and comply with regulations.

If you're considering offering employee benefits, Let Take Command assist you! Our HRA administration software solutions are designed to streamline benefits management for organizations like yours, making the process quick and easy.

Check out our employee benefits guide for more helpful tips!


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