Does Your Small Business Need an HR Department?

A human resources (HR) department can fulfill many business needs: labor law compliance, employee recruitment, employee engagement and development, and compensation and benefits management. At large enterprises, HR is often the backbone of the organization, defining the company culture and investing in the long-term success of its employees.

HR plays a vital function, but for some business owners, it’s not always feasible to create a separate HR team for a small number of employees. If you’re not sure whether you need an HR department — or if you can outsource your HR — here are some things to consider.

[Read more: Outsourcing HR: Is a PEO or ASO Right for You?]

Why do small businesses need HR?

In evaluating whether or not your company needs an HR manager, partner, or full team, it’s important to understand the role that HR serves. Human resources is in charge of:

• Ensuring the company complies with local, state, and federal employment laws.
• Hiring and retaining new employees.
• Training employees and supporting their professional development.
• Managing compensation and benefits.
• Handling performance reviews.
• Creating an inclusive company culture.
• Writing and maintaining employee handbooks.

Many small business owners take on tasks such as payroll, benefits management, hiring, and training instead of hiring an HR generalist or bringing on a partner. However, this can limit the business's ability to hire and foster great employees who help it grow. At some point, it makes more sense for the business owner to delegate these tasks.

When should a business owner delegate HR?

There’s no “rule” that a small business must have a team or manager in charge of HR activities. But, most experts recommend bringing on a full-time HR staff member when there are at least 10 employees in the company.

Some business owners decide to hire an HR partner sooner rather than later. This decision takes into account how you value your time. Determine what your time is worth as a business owner.

“These unrelated tasks can add up and take valuable time away from the actual productivity and profitability of your business,” wrote Concordia St. Paul University. “If you start to see a notable dip in your productivity level or other employees aren’t able to keep up with the extra demands on time because of HR duties, it is probably time to consider hiring a human resource generalist.”

It’s not just about valuing your time, however. Creating a separate HR team can help increase employee engagement and foster an open, inclusive company culture.

What are the benefits of creating a separate HR team?

HR plays a key role in employee engagement and retention. Half of small business employees say the lack of an HR department contributes to a toxic workplace. Moreover, nearly 50% of small business owners say their company's HR structure is unprofessional. Having someone other than the business owner listen to and address employee needs can help ensure strong, high-performing teams.

[Read more: How to Create Loyal Employees (and Why It Matters)]

Delegating recruitment efforts can also help a small business save money. Some studies predict that replacing a salaried employee costs between 50% and 200% of their annual salary, including lost productivity, time, and the expense of hiring and training a replacement. Empowering an HR specialist to oversee the recruiting, hiring, and onboarding process can help reduce this risk.

How much does it cost to set up and run an HR department?

Paychex estimates that HR administration can cost nearly $350,000 annually for a company with 50 to 99 employees. Their 2025 Business Leader Priorities survey found that one-third of companies spend at least 11 hours a week on HR administration — that’s more than a quarter of the workweek spent on time-consuming tasks like payroll, training, hiring, and onboarding. As your company grows, so does the time commitment.

There are additional costs associated with getting your HR department off the ground. HR software can also help you manage specific HR-related tasks, such as payroll, hiring, and onboarding. However, this software, which may include applicant tracking systems, performance management software, and payroll software, comes at a cost. In general, expect HR software for a small businesses to cost $2 to $8 per user per month. Your HR costs will depend on your organization's size, hiring needs, employee compensation plan, and associated overhead costs.

Should you outsource your HR function?

If you decide to delegate your HR role, the next step is to determine whether to hire an HR specialist or outsource HR to a third party. Professional employer organizations (PEOs) and administrative services organizations (ASOs) can help you address pressing operational needs without sacrificing the time you spend making your business successful.

[Read more: A Complete Guide to Outsourcing Human Resources]

Tools and software for managing HR without hiring a full department

If you decide you’re not ready to hire an HR team or outsource to a third party, there are plenty of tools well suited for small businesses. Software can take over many of the time-intensive manual processes and free up your time for other tasks. Some of the most essential tools to consider include:

1. Payroll and compensation management software that handles employee payments, payroll tax, and compliance. Vendors include Gusto, QuickBooks Payroll, and ADP.
2. Time and attendance tracking tools monitor employee work hours, manage schedules, and streamline time-off requests. These tasks can be managed in Excel or with tools like When I Work.
3. Recruitment software that tracks applications, manages job postings, and helps streamline hiring. Vendors include Workable, Zoho Recruit, and Greenhouse.
4. Employee onboarding platforms that simplify getting a new hire up to speed and ready to work. BambooHR, Bob, and Sage HR are all vendors in this category.
5. Performance management tools set and track employee goals and facilitate career development for employees. Vendors include Culture Amp and Leapsome.

Many small businesses opt for all-in-one HR software solutions that combine these features into a single platform, providing a comprehensive and scalable approach to HR management. This integrated approach can be more cost-effective and easier to manage if you have limited resources.

Small business HR compliance checklist

HR compliance varies dramatically depending on a few factors.

Size thresholds matter a lot. Several federal obligations kick in once you reach certain head counts — the Family and Medical Leave Act (FMLA) at 50 employees, the Americans with Disabilities Act (ADA) at 15, posting the U.S. Equal Employment Opportunity (EEO) Commission’s “Know Your Rights” poster at 15, and Title VII of the Civil Rights Act also at 15 employees. Track your head count carefully as you grow.

State and local laws frequently exceed federal law. Minimum wage, paid sick leave, pay frequency, and family leave are the four areas where state law diverges most. For instance, if you operate in California, New York, Washington, Colorado, or any major city, assume your state rules are stricter.

Recordkeeping is your legal backstop. The most common and costly HR mistakes in audits and litigation aren't substantive policy failures — they're missing documentation. Err on the side of keeping records longer than the minimum.

In general, here are a few checklist items that broadly apply to most small businesses. 

• Form I-9, the federal form that verifies employment eligibility.
• W-4 — both the state and federal — tax withholding form.
• Make sure your employment agreement clarifies employees’ at-will status, compensation, and start date. Classify the worker as an employee or independent contractor.
• Post the FLSA (Fair Labor Standards Act), FMLA, EEO, OSHA (U.S. Occupational Safety and Health Administration), and other required notices as required by your industry, state.
• Comply with ADA reasonable accommodation obligations.
• Document all leave requests and maintain records for three years.

There are many, many more HR compliance rules that you should know. As your business grows, consult with experts who can help ensure you aren’t missing anything. 

PEO vs. in-house HR vs. outsourcing: Which model fits your head count and risk level?

There’s no single best model for all small businesses, but two factors can guide your decision: the number of employees and the level of compliance risk you’re comfortable with.

Most experts recommend a PEO for organizations with five to 150 employees that want a strong HR infrastructure without the cost of building it in-house.

“PEO benefits include efficiency, cost savings, and access to top-tier benefits, while an in-house team gives you more control, customization, and cultural alignment,” wrote BambooHR. “If you have less than 50 employees, a PEO can make more financial sense. Many companies save money on HR costs, health benefits, unemployment insurance, etc.”

When the head count reaches around 100 employees, it may be time to consider bringing HR functions in-house. A dedicated team can help you build a company culture and handle recruiting, performance management, and employee relations with the institutional knowledge that no outside provider can replicate.

For companies that aren't ready for either commitment, HR outsourcing (HRO) offers an à la carte model. Choose the services you need and do the rest in-house. It comes with some risk, however. If there’s a communication breakdown, or if you don’t have the in-house expertise to check the work of the HRO contract, you could end up with compliance issues down the road.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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