HR for Small Business: 9 HR Basics to Manage

9 HR basics for small businesses

It can be difficult to find time to develop comprehensive HR policies, but even if you have only a couple of employees, fulfilling core human resources responsibilities is essential. The nine HR basics for small businesses are:

1. Legal compliance
2. Workers’ compensation
3. Employee handbook
4. Recruiting and onboarding
5. Employee compensation and benefits
6. Payroll
7. Performance management
8. Terminations
9. HR reporting

1. Legal compliance

First and foremost, you must know federal and state labor laws concerning wages, hours worked, overtime, recordkeeping and required postings. Some of the most common HR compliance challenges involve:

• Employee recruitment 
• Workplace harassment and discrimination
• Worker classification and compensation
• Payroll and timekeeping
• Medical coverage requirements

These challenges are because of the confusing nature of federal, state and local laws, and the fact that regulations vary not just based on location but also company size. Understanding which requirements apply to your organization is crucial for maintaining compliance. Federal thresholds include:

• 15+ employees: Must comply with Title VII of the Civil Rights Act, Equal Employment Opportunity Commission (EEOC) requirements and Americans with Disabilities Act provisions
• 50+ employees: Subject to Family and Medical Leave Act (FMLA) requirements and Affordable Care Act employer mandate
• 100+ employees: Must file EEO-1 reports annually with the EEOC

The Department of Labor’s Wage and Hour Division provides comprehensive guidance for small businesses on federal labor law compliance, including requirements for proper wage payment, recordkeeping and employee rights notifications. State and local jurisdictions may have different employee count requirements and can be more restrictive. While you may not currently be required to comply with laws that larger employers are subject to, it’s a best practice to embed legal compliance into your business from the start. 

Equally important is staying up to date on legal changes. Notably, in 2024, the Department of Labor finalized new overtime rules increasing the salary threshold for exempt employees, but the rule was vacated by a federal court in November 2024, reverting thresholds to 2019 levels while appeals are pending. Additionally, the EEOC enhanced enforcement of existing anti-discrimination laws through strategic litigation and new enforcement priorities, though the landscape shifted significantly in early 2025 with new federal guidance limiting certain diversity practices.

>> Learn More: Do All Businesses Have to Allow FMLA Regardless of Size?

2. Workers’ compensation insurance

Most states require employers to provide workers’ compensation insurance for their employees. The compensation rate is based on each team member’s occupation and pay rate. Requirements vary significantly by state, with each jurisdiction setting its own coverage thresholds, benefit levels and exemption categories. Some states, like Texas, make workers’ compensation optional for private employers. 

Certain employee classifications may be exempt from workers’ comp coverage requirements, such as independent contractors, seasonal agricultural workers or employees of very small businesses, depending on state law. Employers typically purchase coverage through private insurance carriers or state-operated funds, or may qualify for self-insurance if they meet specific financial requirements. Failure to maintain required workers’ compensation coverage can result in substantial penalties, including fines, criminal charges and personal liability for workplace injuries.

3. Employee handbook

A well-written employee handbook is essential for communicating:

• The at-will employment relationship
• Equal opportunity policy
• Discrimination policy
• Harassment policy
• Benefits information
• Paid time off (PTO) policy

If you have a remote workforce, your handbook should also detail:

• Data security measures
• Acceptable use of company equipment
• Communication protocols
• Performance expectations

The handbook is an important tool in preventing employee disputes or claims before they start. Drafting one can seem daunting, but there are tons of online resources, such as the Society for Human Resource Management (SHRM), that allow you to download a sample handbook to serve as the template for building your company’s version. Having a legal advisor review your handbook before distributing it to employees is always recommended. When you do share it, obtain a signed acknowledgment from employees after they’ve had time to review the document. Continually update and redistribute the handbook as necessary.

4. Recruiting and onboarding

Recruiting can be a full-time job in itself. The best way to keep a constant stream of qualified candidates in your pipeline is through networking and involvement in your industry’s local community. You can also set up an employee referral program and reward employees for any hired candidate. Business-to-business social media sites like LinkedIn are also valuable tools to help recruit candidates in multiple industries.

According to Bureau of Labor Statistics (BLS) data, small businesses were responsible for 55 percent of net job creation from 2013 to 2023, demonstrating their critical role in the U.S. economy. Recruitment typically costs several thousand dollars per employee for small businesses, depending on the role and hiring complexity. The cost of a bad hire is exponentially greater, underscoring the importance of a thorough hiring process. Be sure always to follow equal employment opportunity practices when hiring new staff.

5. Employee compensation and benefits

Comprehensive employee compensation plans can be great recruiting and retention tools. Use strategic salary benchmarking to create fair and competitive compensation packages for each position in your organization. Be sure to review these wages annually to adjust for inflation or raises. Payscale’s 2024 “Salary Budget Survey” found that employers are commonly budgeting for increases of 3.5 percent. 

Employee benefits management is also critical for attracting and retaining employees. The most popular employee benefits fall into five categories: 

1. Health and wellness
2. Financial well-being
3. Work-life balance
4. Professional development
5. Diversity, equity and inclusion

While there is no legal mandate to provide paid time off to employees, there are some regulations around policies if you do offer this benefit. Because PTO is considered earned wages, be sure to familiarize yourself with your state’s PTO regulations.

6. Payroll

Processing payroll is one of the most critical HR tasks, and it can be a complex process. Many complicated tax deductions and withholdings must be executed precisely each time. We recommend using a highly rated payroll processing service to ensure accuracy and legal compliance.

A stress-free payroll experience begins with error-free personnel records that account for the different types of staffers you employ, such as full-time team members or gig workers. Misclassifying employees as independent contractors can result in significant penalties and back-payment obligations for wages, overtime and benefits.

7. Performance management

Performance management is another key component of HR. When you track employee performance, you can easily identify how each team member is progressing in their role. You should use this data to reward top performers and assist those struggling to meet their goals. Offering professional development opportunities and clear career paths can also be beneficial.

8. Terminations

Terminations are never a fun part of any employment relationship, but they are inevitable. Whether the termination is a voluntary resignation or with cause, there are some steps you need to take to ensure legal compliance and avoid wrongful termination claims. For example, in most states, there are regulations on how soon you must pay a terminated employee their final wages. However, a best practice is to give the worker their final paycheck on their last day of work. This final check should include any unused PTO, unless you have a policy that states employees are not compensated for unused paid time off.

9. HR reporting

HR data and analytics — measurable information about your workforce — are valuable assets when compiled into digestible HR reports and used to optimize human resources operations. Common report types include:

• Recruiting reports
• Performance management reports
• HR administrative reports 
• Compensation reports 

Most HR software on the market today comes with built-in technology for tracking various HR metrics. As the business owner, it’s up to you to capitalize on the information. HR reporting is useful for strategy development, data transparency and accountability. 

Defining HR management

Before you can master these HR functions for your small business, it’s important to understand what HR management actually entails and why it matters.

HR management is the strategic practice of managing your most valuable business asset: your people. It involves recruiting, developing and supporting employees in ways that boost both their performance and their work overall experience. Think of it as creating an environment where your team can thrive while driving your company forward.

Every organization with employees — full-time or part-time staff members or contractors — needs some form of HR management. For small businesses, effective HR practices can be the difference between a motivated, productive team and costly turnover, legal issues or workplace conflicts.

Successful HR management serves a dual purpose: It helps employees feel valued, supported and engaged while ensuring your business runs smoothly and complies with employment laws. When done right, good HR practices create a win-win situation where employees want to stay and perform their best, and your business benefits from reduced absenteeism, higher productivity and a positive workplace culture. These HR functions build the foundation for your people and business to succeed together.

How to manage HR for small businesses

Small businesses face unique HR challenges but can achieve compliance and efficiency through strategic planning and the right resources. Paychex research shows that “34 percent of business leaders spend more than 10 hours a week on HR administration,” so investing in proper HR systems and processes from the very beginning can pay significant dividends.

There are multiple solutions for managing HR at your small business. You can keep HR management in-house or outsource it to a third-party HR service provider.

In-house HR management

Many businesses find hiring internal human resources staff to manage their HR functions valuable. With this staffing arrangement, you can hire one HR professional or an entire internal HR department. In-house HR professionals often rely on top HR software solutions to digitally manage HR functions, maintain compliance and streamline processes. Popular options include BambooHR, Gusto and Paycor.

Keeping human resources responsibilities within your organization gives you more control over your employee data and operations. However, depending on your company’s size, hiring enough HR team members to perform these functions can be costly.

Outsource to an HRO

If you want to outsource your HR management, you can choose from high-quality HR outsourcing (HRO) services. Since HRO providers like ADP tend to offer à la carte HR services, you can choose to rely on them for one or many of your HR functions. While this can be more cost-effective for small organizations, it may limit your control.

Even when outsourcing, you may still want to hire an in-house HR professional to handle critical in-person activities, like fostering and managing company culture. Either way, having a plan in place to cover your HR basics is crucial so you’re assured you’ve set up fair, consistent and legal employment practices that protect you and your business.

Outsource to a PEO

Another outsourcing option is to outsource all your HR functions to a highly rated PEO, such as Rippling. A professional employer organization is similar to an HRO vendor, although PEOs tend to be more all-inclusive in their HR offering and require a co-employment agreement. This is a great option for small businesses that don’t have the time or resources to manage their HR functions on their own and are comfortable giving virtually all of the responsibilities to a third party.

Skye Schooley contributed to this article.