- HR employees handle staffing, compensation, development, health and safety, and labor and employee relations. These roles are consistent whether you hire in-house HR employees or outsource your HR.
- It's time to hire HR if your business roles are becoming specialized, your company is growing, or your time would be better spent on revenue than HR tasks.
- Outsourcing HR can give you access to a broader range of expertise. Keeping HR in-house can lead to better employee relationships with the department and help you retain control.
- This article is for small business owners determining whether to hire in-house HR staff or outsource their HR.
Managing employees, and navigating the labyrinthian regulations that come with the task, is time-consuming and difficult. Hiring new employees, managing payroll, fielding complaints and ensuring legal compliance are essential human resources roles. Each of those tasks is a challenge to balance. What's a business owner to do when they are already focused on growing the business and running day-to-day operations?
For young or very small businesses, you can always handle HR yourself or outsource those tasks to a third-party company. However, at what point does it become necessary to hire a full-time, in-house staff member for human resources?
We'll explore HR functions, when to bring in dedicated HR staff, and how to tell if in-house or outsourced HR is right for your company.
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What is HR?
Human resources (HR) is the process of overseeing and shaping all employee matters. The term "human resources" can describe either this work or your company's entire workforce.
What is an HR employee, and what do they do?
An HR employee carries out the functions involved with overseeing and shaping employee matters. Small business owners might handle these functions themselves at first, since they own the company and must ensure all the gears are turning.
Eventually, however, you may want to hire an HR employee or team. You can either hire HR in-house or outsource HR.
No matter which choice you make, HR employees will handle five main HR functions.
- Staffing: Your HR team will use specific recruitment strategies to attract prospective employees. It will assemble a workforce of employees in various capacities, including part-time, full-time and freelance. Administering benefits typically goes hand in hand with this HR function.
- Development: Your HR team's involvement doesn't end with successfully hiring employees. Your team must also develop new-hire training programs, sometimes from a foundation of industrial-organizational psychology.
- Compensation: HR employees administer your payroll. They may also play a role in shaping your pay scale and the salary ranges you offer. They must clearly detail your business's pay structure to stakeholders and employees.
- Safety and health: Your HR team should educate your employees on best workplace safety practices. This HR function is especially important if your team works with potentially dangerous equipment, but it always matters. After all, something as ordinary as an extension cord running across the floor could cause someone to trip and injure themselves.
- Employee and labor relations: All disputes between employees fall to your HR team to solve. Your HR team can also represent you if your employees unionize, strike or otherwise seek changes to their working conditions. If employee discipline is necessary, your HR team will enforce the disciplinary action policy it helped create.
The importance of human resources
A human resource specialist's typical tasks include managing the recruitment and hiring processes, training personnel, staying up-to-date on business labor law compliance, and ensuring the workplace is running efficiently. HR specialists also generally deal with employee pay, benefits packages, and working conditions. Of course, they also deal with employee complaints or disciplinary situations. The central theme that connects these tasks is that the HR specialist acts as a link between the employer and the employee, and as a mediator who prevents or resolves workplace issues.
"It's really hard as a business owner to put ourselves in the employees' shoes," said Steve Kurniawan, content specialist and growth strategist at Nine Peaks Media. "We mainly think from the perspective of how to grow the business – increasing revenue [and] winning markets – while the employees think about their promotions, their personal struggles. HR managers, on the other hand, will think as an employee and can better relate to the employees' requests and needs."
The benefits an HR manager offers a small business are clear, but at what point in the business's life cycle could you justify the added cost of bringing on an HR manager?
The right time to hire a human resources manager
There's no single answer as to when a business should hire an HR manager. The window can shift depending on a business's industry, growth rate, strategic planning and workload. Instead, look to these indicators to help you decide when the time is right to bring a dedicated HR specialist on board.
When business roles start to become specialized
Your business's general organization is one indicator of when you might need a dedicated HR manager. As businesses grow, their staff often shifts from general roles focused on necessary tasks into more specialized roles and, eventually, narrowly focused departments. As that shift occurs, it makes sense to develop an HR department.
"When a business is small, it is normal for everyone to be in 'all hands on deck' mode all the time," said Jordan Brannon, president and COO of Coalition Technologies. "However, with any successful business, there is a point to be reached when you're no longer so tight on cash and [staffing] that you cannot afford for your employees to specialize in their departments. At that point, it is time to hire a human resources person."
When the business grows to a certain number of employees
Business owners could also judge their need for an HR manager by reaching a milestone number of employees, such as 50 or 100. However, according to Doug Coffey, HR expert and assistant teaching professor at the Rutgers School of Management and Labor Relations, specialization remains the real differentiator.
"Having an HR manager will probably be a necessity when the company approaches 100 or more employees, but the telltale sign is when the business starts to specialize into functions such as IT, sales and operations," Coffey said. "If you need a dedicated manager in those areas, you probably need the specialized knowledge of a human resources manager as well."
When a focus on revenue over HR tasks would boost the bottom line
Another method to determine whether you could benefit from a full-time HR specialist is to track your time spent on HR tasks and ask yourself, "Would my time be better spent growing the business?"
Once HR tasks begin demanding an inordinate amount of a business owner's attention, it might be time to bring a dedicated HR manager to the team. If an owner's efforts to grow revenue could cover the cost of a new salary and then some, the choice is clear.
"Business owners should track the time they're spending on employee-related issues," said Sharon DeLay, owner and president of GO-HR. "They should then consider what the impact to revenue growth would be if they spent that time instead in growing revenue. If the revenue growth activities would far outweigh – or would soon outweigh – the cost of HR resources, whether outsourced or hired, then it's time to look at HR solutions."
In-house HR vs. HR outsourcing
When you're ready to offload HR work to someone new, you can either hire new employees or enlist a third-party firm. Both entities will have the knowledge and skills to handle HR in ways that might be more difficult for you. Consider the following factors before you make your decision.
- Cost: In 2019, the median salary for an HR specialist was $61,920. The equivalent number for an HR manager was about twice that. Hiring another employee will also affect what you pay for benefits and payroll administration. So, ask yourself: Is the total cost of an employee ultimately less expensive than outsourcing?
- Control: HR employees operate directly under your oversight. Outsourced HR firms must keep you happy to retain you as a client, but they may follow their own internal protocols. If you need control over and complete transparency with your HR functions, you might fare better hiring HR in-house.
- Expertise: HR job titles are more diverse than just "specialist" or "manager." Some HR employees are experts in specific HR segments – say, compensation or labor relations specialists. If you want an expert in each of these areas, you might fare better hiring an HR firm. These firms typically have experts in every part of the field, whereas one or two in-house employees may lack this specialization.
- Employee relationships: Employees who work in office settings see each other daily, and remote teams likely communicate daily in some way or other. This notion extends to in-house HR employees, who will build actual relationships with your other employees. Such connections are tougher to cultivate if you outsource to an HR firm.
The risks of operating without an HR specialist
Business owners might feel they can go it alone, and perhaps they can, but failing to hire an HR manager comes with risks that could develop into serious consequences, both organizationally and legally. Before deciding not to hire an HR manager as your business scales, you should be aware of the potential problems to which you are exposing your business.
Confusion and dissatisfaction
Not having a knowledgeable HR professional can lead to confusion and disorder.
"A human resource manager helps to establish fairness and consistency throughout the organization," Coffey said. "Employees come to know what to expect with policy development in hiring, performance management, reward allocation [and] leave policies. By not hiring HR managers, businesses may add to employee turnover, one of the highest HR-related costs. This happens when dissatisfied employees leave due to inconsistent, time-wasting, unfair policies."
Legal and operational consequences
Beyond creating confusion or dissatisfaction amongst employees, the consequences for mismanaging logistics regarding HR-related tasks are steep. If a business owner is overwhelmed by the responsibilities of running the business and managing HR, they could find themselves in a record-keeping nightmare.
"When a business does not hire an HR manager, things will be missed," Brannon said. "Important paperwork, completed photo releases that could lead to lawsuits, updating out-of-date paperwork, optimizing incorrect forms, and keeping employee tax information up to date are all essential points that could be missed by a business owner running their own HR department."
Those documentation issues can quickly balloon into legal problems, potentially resulting in fines or lawsuits. While late paperwork might not seem to be a significant threat at first, it can be a slippery slope that creates extra work at best and a legal disaster at worst.
The necessity of HR in business
There is no escaping the need for HR. The issue is how to maximize efficiency and the return on your investment. Many business owners try to handle everything on their own until doing so is no longer feasible. However, when handling something as sensitive and critical as human resources, it's crucial to establish a planned transition away from the startup phase, in which owners and staff all wear many hats, to a more specialized organization with dedicated department managers.
Thinking about HR early on – and at what point you should let go of specific responsibilities – will make it much easier to shift control to a dedicated HR manager down the line before things get messy.
Max Freedman contributed to the writing and research in this article. Source interviews were conducted for a previous version of this article.