The Best HR Practices for Small Businesses


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The Small Business Administration defines a small business by industry based on employees and total annual revenue. The range is from a maximum of 100 to 1,500 employees and $750,000 to $38.5 million in revenue. Of course, these are maximums, so a small business can have just one employee, making human resources (HR) support somewhat superfluous.

However, for small businesses with a few more people, proper HR practices can make a big difference in the efficiency and effectiveness of running it. As a small business owner, you want to set up an HR solution to ensure you keep your people happy. After all, people are a company’s most valuable assets.

Key Takeaways:

  • Small businesses need effective HR management as much as big companies
  • Business owners should delegate HR tasks so that they can concentrate on core tasks
  • HR software solutions make it easier for small business owners to manage their workforce
  • Best HR practices for small businesses ensure effective recruitment, employee engagement, and legal protections
  • An employee handbook is an essential tool for employee administration

What Can HR Do for Small Businesses?

Managing human resources for small businesses isn’t very much different from big companies. Mistakes can lead to serious trouble with the government and costly errors in employee recruitment and retention.

The only difference is small businesses have less capacity to absorb the consequences of these mistakes. The resource limitation makes it even more important to have a qualified HR professional using HR software solutions to help business owners with human resource management. While some focus on payroll, others focus on employee engagement. But at the end of the day, they all have basic HR features you can use.

Leave schedules graphic with three available leave options and a small calendar preview.

In general, an HR professional takes on the following responsibilities:

  • Recruitment and hiring
  • Benefits and payroll
  • Effective engagement and retention
  • Employee training and development
  • Communication
  • Performance reviews and management
  • Safety and wellness

While small business owners often wear many hats and can certainly take on these tasks, the question is can they afford to do so? HR management is a critical aspect of any business, but it isn’t typically a core business task. Taking on HR responsibilities will eat into a lot of time that business owners could utilize to develop the business.

For example, as a tech company owner selling SaaS solutions, your core tasks are software development and sales. Taking time away from these tasks to recruit employees and handle payroll means less productivity and fewer sales.

What Are Some HR Best Practices?

Whether you wear the HR hat or invest in an HR professional to do the work for you, there are a set of guidelines to follow for effective HR management for your business. Here are some HR best practices you should implement.

Streamline the Hiring Process

The best people for any job tend to be in high demand. If you want to get the right people on board for your business, you shouldn’t take too much time with your hiring process. The same principle applies when recruiting an HR professional to handle all this for you in the future.

Once you identify the best candidates from the pool of applicants, arrange for initial, second, and final interviews in quick succession. Don’t spread it out over several days and then take a week or more to decide. Likely, the most promising applicants are also fielding offers from other companies, so a delay could cost you a great hire.

Your best move is to interview all candidates on the same day so you can compare your impressions of them while they’re fresh in your mind. Unless circumstances dictate a longer process, such as technical interviews for software developers, you can usually decide on a candidate after that and make an offer.

Put an Employee Evaluation Plan in Place

Small business owners tend to rely on their gut instincts in many situations, including hiring and firing employees. Avoid making decisions on a whim when firing people because you might regret it. Not only could it land you in hot water legally, such as firing without just cause or discrimination, but you could also lose an asset because you made an emotional decision.

An employee evaluation plan can help you deal with employees fairly and objectively. If you need to correct behavior or performance, documenting issues and incidents can help you choose the right course of action.

Avoid having to rely on your gut feeling by having an employee evaluation plan in place. The document is your proof of just cause when you fire an employee because of poor performance or problematic behavior in the workplace.

Have a lawyer review the plan to ensure everything is legal or have an HR professional make it for you.

Create an Employee Handbook

Most small businesses don’t bother to create an employee handbook, relying on informal means to communicate workplace rules, regulations, and policies. That is a bad idea. You need a handbook to set employee expectations and to establish a reference for resolving any disputes or issues that might arise.

For example, if your employees work remotely, your handbook will specify if you require them to use time monitoring software. Many employees will balk at this, but you can enforce its use if it’s in the handbook and they agree to abide by the provisions.

Screenshot of ActivTrak dashboard.

Your employee handbook doesn’t have to be very complicated, but it should include some of the following elements as suggested by the Small Business Administration:

General Employment Information

Specify policies and procedures that you want employees to follow apart from legal requirements. These could include your policies on employee evaluations, promotions, termination, referrals, and so on. Clearly define these policies, so there’s no room for ambiguity and uncertainty.

Compensation and Benefits

Enumerate the benefits your employees can expect, including those unique to your business and not required by law. Specify how they’ll receive these benefits and what they must do to get them. Provide an outline for compensation or salary levels and how they can get there.

Work Schedules, Vacation, and Leave

List the regular schedules of work in general and for each department and policies for tardiness and absenteeism. You should also include the rules for filing paid and unpaid leave for vacations, sick days, and special requests.

Standards of Conduct

In these days of remote work, dress code and acceptable behavior in the workplace might not seem necessary, but you should still include it in your handbook. You can also specify rules for online, computer, and mobile device use during a shift. Include the consequences of breaking these standards of conduct in case issues arise.

Anti-Discrimination Policies

Small businesses in the US must comply with the Americans With Disabilities Act and other employment discrimination laws. Your policies should reflect how to achieve compliance in your hiring and firing practices and establish your workplace environment.

Safety and Security

Whether your business comes under OSHA or not, your policies for keeping employees safe and secure in the workplace are an essential part of your handbook. Establish policies for dealing with emergencies, inclement weather, and video surveillance.

Nondisclosure Agreements

If you have trade secrets you want to protect, you may need your employees to sign nondisclosure agreements. However, this isn’t necessary for all small businesses.

Provide your employees with a physical or digital copy of the handbook so they can read and understand its contents. Most employees won’t read it cover to cover. Still, it’s vital to have them acknowledge that they have it in writing by affixing their signature on a physical or digital document.

Provide Employee Feedback

Acknowledging the work of your employees helps keep them engaged and enthusiastic. Feedback doesn’t have to be in writing, but it would be nice to have, especially when it recognizes exceptional performance. You can also set goals for employees and give rewards when they reach them with tokens of appreciation such as a gift card or a company party.

Use Software

Many small businesses still rely on attendance cards and other paper-based systems to do HR tasks. Managing your workforce is much easier using digital tools that help recruit employees, track attendance, monitor productivity, and manage projects. You can also generate custom reports for payroll, leaves, and other tasks quickly and efficiently. Many HR software solutions cover all the bases when it comes to effective employee management.

HR Software People Dashboard with a profile for a Kellie Turner shown.

Stay Legal

Small businesses are subject to various federal, state, and local laws and regulations, and it can be tough to stay on top of all of them. Retain a business lawyer in your area to ensure compliance with the laws, especially regarding employee management.

For example, some business owners try to get around paying payroll taxes and workers’ compensation insurance by classifying employees as independent contractors. If the classification doesn’t fit, the business owner will have to pay back taxes and insurance premiums anyway and be subject to hefty civil penalties.

What To Do Next?

Failing to invest in a proper HR system may lead to costly mistakes that can ultimately bring your business down. Small businesses need to understand that the best HR tools and practices can help them succeed in their goals.

Effective management of employees can help business owners hire, engage, and retain productive workers. Generally, that requires dedicated HR professionals who know what they’re doing, comprehensive HR software solutions, and best practices for small businesses.

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