A business enters the world of HR as soon as it hires its first employee. From recruiting and payroll to health benefits and terminations, almost every step of running a business involves some aspect of the HR function.
The entire range of employment laws and regulations quickly becomes a key part of your business calculus. And the rules differ from state to state, industry to industry and even city to city, which requires an expertise beyond the skills of many business owners. Dealing with compliance is typically the reason a company hires its first HR professional.
"Most people think about federal laws, but states and cities often have measures in place that are more generous to employees," explained Heather Breen, SHRM-CP, human resources manager for B&R Auto Wrecking in Albany, Ore. All it takes is one lawsuit to shock business leaders into a better understanding of HR's role, she says.
In fact, not knowing about a particular regulation is never a defense against violating it, say employment attorneys. Yet many small companies still don't give HR the priority it deserves. According to ADP—a global provider of cloud-based human capital management solutions—HR responsibilities at more than two-thirds of U.S. small businesses fall to the company's owner or a designated non-HR employee. These "ad-hoc" HR managers, as ADP calls them, don't particularly like dealing with employment issues, and few of them have any HR training.
That kind of situation "is a real peril," said David J. Baker, SHRM-SCP, managing director and chief executive of Human Capital Advisors, an HR consulting firm in Pittsburgh.
"Most people roll the dice until they get into some situation where serious problems become apparent or there's an incident," he said.
The reason business owners often fail to address even basic HR issues is simple, Baker said: They don't want to spend the money. Yet by neglecting their employment practices, they're putting themselves at great financial risk. On the other hand, employees are becoming more sophisticated about workplace rights—and filing a complaint with agencies like the Equal Employment Opportunity Commission (EEOC) is free, he noted.
"You have to weigh cost versus risk."
Baker tells of one company that faced a $180,000 penalty from the EEOC after an employee filed a complaint over a senior manager's "demeaning behavior" toward her.
"They said they weren't even given a chance to resolve the issue internally," he recalled. An employment attorney was able to negotiate a lower "but still significant" settlement, but the end result remained: The business paid dearly for letting one manager's pattern of bad behavior go unaddressed. HR was handled by the company's office manager, who "didn't know what to do," Baker said.
"She and everyone else thought the manager was just a jerk because he behaved that way all the time."
If you're joining a small business as its first HR professional, or if you're a business owner who is ready to recognize the importance of HR, here are the key issues you need to address first.
Know That You Don't Know It All
Where do you begin? Although there isn't a consensus among experts about what a company's first step into HR should be, the general theme is "compliance and documentation."
Breen said hiring compliance is the first issue to examine: Be sure forms such as the I-9 (which verifies an employee's eligibility to work in the U.S.) and W-4 (which records the information needed to calculate an employee's federal tax withholdings) are properly handled, and confirm drug-testing and other onboarding steps are in sync with applicable regulations.
Mike Ciavolino, president of Shore Creative Group, a recruitment marketing agency in Long Branch, N.J., believes creating a well-organized file for each employee is the way to start. The file should contain the individual's resume and payroll information, and grow to include basic employment data such as performance reviews and raises, he said.
Also, you must document policies and procedures and make sure your employees understand them. "If you don't write policies down, you're setting yourself up for trouble," Breen said. Without documentation, any disputes boil down to your word against the employee's, "and you'll almost always lose." Although you should ultimately create a full employee handbook, a letter to each employee containing his or her job description, manager's name and basic expectations affords some short-term protection.
Focusing on employee salaries exclusively is a common mistake. Compensation costs were uppermost in M.J. Shoer's mind when he took on his first staffer at Jenaly Technology Group, a managed services provider in Portsmouth, N.H. However, he knew—from observing the hiring processes at companies he'd previously worked for—that he should consult with his accountant and attorney before making any job offer to better understand what a complete compensation package should look like.
His advice to small business owners about HR: "You have to make sure you understand what you're required to do, such as including full medical and dental coverage, paid vacations, tuition reimbursement and other key aspects of a competitive compensation plan.
Create a Thorough HR Function
Whether you handle it yourself or delegate the responsibility to others, you must ensure the company includes the following "must have" components in your HR function, according to veteran HR practitioners, business owners and consultants:
- Recruiting and hiring.
- Management of the company's benefits, including the 401(k) if there is one.
- Time tracking for vacations, other days off and billing.
- Oversight of firings, layoffs and resignations.
These tasks can be outsourced, but even if you hire an HR vendor or a consulting firm to handle these functions, you still need someone within the company to manage that relationship. Ultimately, your business bears responsibility for dotting the i's and crossing the t's.
Most experts believe farming out payroll is a no-brainer, along with health insurance and benefits. However, the dynamics of your industry also play a part in deciding what to outsource. For example, Breen finds it cost-effective to have a vendor handle the Occupational Safety and Health Act (OSH Act) compliance management.
Very often, "it's easier to hire someone than to train someone," she said, especially when the work involved isn't among your organization's core competencies. Maintaining a compliant workplace is different from managing compliance, and "there are a lot of ways to hire the expert rather than be the expert or have one in-house," she said.
The research firm Gartner reports that about 80 percent of all companies outsource at least one HR activity. That's not surprising when you consider the growing body of laws and regulations affecting HR and the time it takes to address them. According to ADP, the average ad-hoc HR person spends about 20 percent of each workweek on employment issues, which equates to nearly 700 hours a year.
For these reasons, many business owners who say they're too small to add a full-time HR professional agree that hiring an HR consultant makes sense. Even if you don't engage in a long-term relationship, occasional discussions "will give you some things to think about," Shoer said.
"If you stay small, at some point you're going to work with one," he said."
How much do HR consultants charge? The range varies based on a number of factors, such as the scope of work and region. But generally an hourly retainer will cost between $175 and $300, whereas a monthly retainer will run between $1,000 and $2,500, Baker said.
Candida Pangaldi, vice president of human resources and operations for Digital Brand Expressions, a Princeton, N.J., digital marketing agency with a full-time staff of six, relies on an HR consultant to ensure her company's HR is managed in the best way possible.
"The first thing to do is get a resource who can provide advice and solutions," she said. Although you may not know all of the HR intricacies, HR consultants do, "so they can manage a lot of the [mandated] paperwork and make sure, for example, you're hiring and firing properly."
Shoer, who built his company to 12 employees by the time he sold it in late 2015, oversaw most of Jenaly's employment matters himself. Some tasks, such as managing benefits, he delegated to his office administrator.
At one point, he hired a consultant to run HR, but "it wasn't a good match" in terms of employee experience, he recalls. Although another firm might have provided a better solution, he listened to his staff's concerns about losing access to him and decided "outsourcing wasn't worth it." Looking back, however, he believes he should have found a different consultant because of the demands on his time.
HR Is an Ongoing Process
Because employment law is always changing, one of your greatest challenges will be simply keeping up.
Although consultants and HR vendors can help here, too, business owners and small-company HR professionals need to keep abreast of core information. Both trade and local business groups can be good resources to help you execute HR in the appropriate business or regional context. Pangaldi tracks developments through the benefits and insurance firm she works with, whereas Ciavolino regularly reads HR websites such as www.shrm.org. Breen joins government listservs, which she says most agencies maintain, and contacts officials directly when she has questions.
"I'll call an agency 20 or 30 times a year, and they're always helpful," she said.
Bear in mind that monitoring regulatory changes is as much about planning as it is about keeping current. In many cases, regulations are phased in, and employers are required to take certain actions before a law goes into effect, Breen notes.
"You have to think about tracking things to make sure people are getting what they're supposed to be getting," she said.
For all this talk about processes and regulations, business owners say prioritizing HR is important for reasons that go beyond protecting the company. Many echo Pangaldi's belief: "Employees are an important component of a successful business, and it's important for them to know they're getting the benefits of a solid approach to HR."
Mark Feffer is a freelance business writer based in Philadelphia.
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