Starting an HR Department from the Ground Up

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ScopeThis article provides an overview of issues an organization should consider when creating a new human resource (HR) department. This article addresses starting an HR department from scratch in both new/expansion companies and existing organizations. It is intended for use by small-business owners, HR consultants, HR practitioners or other professionals facing the task of creating an HR department from the ground up. This article may also be helpful to HR practitioners who come into a new organization as the sole HR professional. The article does not address global issues, labor relations or industry-specific concerns.

Overview

The process an organization takes when creating a human resource department differs based on whether the organization is brand new or if the organization has been in operation for some time and is just now adding an HR department. In addition, the issues and concerns of starting the HR department are affected by the current size and expected growth of the organization, the amount of support and infrastructure already in place, the industry, and the organizational vision and culture. This article provides a general overview of areas and issues an employer should consider when building an HR department from the ground up, including the following:

  • HR staffing plan.
  • HR budget.
  • Tax obligations.
  • Payroll system/administration.
  • Companywide staffing plan.
  • Job descriptions.
  • Pay structure.
  • Benefits plans.
  • Employee handbook.
  • Safety procedures.
  • Employment posters.
  • Hiring procedures.
  • Personnel files.
  • Performance evaluation process.

For an existing organization, the steps to implementing an HR department may overlap with creating the function from scratch, depending on compliance concerns, existing HR policies and what is driving the need to establish a formal HR department. The first step in forming an HR department in an existing organization is an assessment of the current state of the HR-related activities. This assessment, or HR audit, helps determine an appropriate prioritization and action plan. See Conducting Human Resource Audits.

Setting up an HR department in an existing organization is discussed later in this article.

Creating an HR Department in a Startup or New Facility

Many small organizations start out with the owner or a non-HR executive handling employment issues. Someone must oversee administrative duties and policies concerning pay and benefits, unemployment compensation, withholding taxes and administering workers' compensation, if applicable. As organizations grow, department managers may handle general employee issues, while accounting or finance handles payroll. Or organizations may use outside consultants to address temporary needs.

The strategy of spreading HR duties among various managers and departments, or hiring HR help on an as-needed basis, may be satisfactory up to a point. However, when additional federal laws kick in—some at the threshold of 15 employees—maintaining a focus on myriad compliance laws while growing the business can become difficult. Having an HR professional onsite is more efficient to address issues such as hiring, firing, leave management, training, discipline, policy development and enforcement, and benefits. At this point, a small organization may want to think about establishing a dedicated HR department. See Federal Labor Laws by Number of Employees.

HR professionals serve many roles within an organization: compliance advisor, employee relations counselor, benefits administrator, recruiter and safety coordinator, to name a few. Where to start depends on where the organization is in its evolution. For example, if the employer were in a high-growth phase, then establishing benefits and determining the most appropriate recruiting practices would be high priorities. HR would determine what to prioritize next based on organizational strategy, direction and compliance requirements. There is no one best way to implement an HR department, but establishing a plan that best meets the organization's goals while maintaining legal compliance is necessary.

HR staffing plan

Hiring a qualified and experienced HR professional is not an easy task for a startup, and some employers may turn to an external recruiter, HR consultant or outsourced HR organization to help staff the HR department. Most often a one-person HR department, or solo practitioner, would be staffed with an HR generalist or HR manager. When screening candidates, organizations should consider the following attributes:

  • Number of years of HR experience and the level of responsibility in those years of experience (i.e., was the candidate a generalist, a manager or a specialist?).
  • Experience working with startups or organizations of similar industry or size.
  • Education level and HR-related certifications.
  • Knowledge of employment laws and other compliance issues.
  • Ability to conduct research, access resources, prioritize and juggle multiple projects, adjust to the quickly changing needs of a startup, and communicate directly with upper management.

See Staffing the Human Resource Function and Meet the People Behind Your HR Outsourcing.

As the HR department is being developed—including the development of forms, policies and HR practices—consultation with an attorney who is familiar with relevant state and federal employment laws can help avoid errors. Establishing this relationship early and using legal counsel upfront help reduce the potential for lawsuits as the organization grows.

HR budget

The human resource practitioner's responsibility is to align the HR department's budget with the organization's strategic goals while following organizational guidelines and procedures. Budgeting involves the systematic collection of information and data so that the monetary resources needed to support an organization's objectives can be projected. New organizations have no prior budget to use for comparison; therefore, projecting and estimating are required for the initial HR budget. From a human resource perspective, the data needed to create a new budget include the following:

  • Number of employees projected for the year.
  • Benefits cost projections.
  • Projected turnover rate.
  • Costs already incurred in the current year.
  • New benefits or programs planned.
  • Anticipated legal expenses.
  • Recurring or new training needs.
  • Other policies, business strategies, laws or regulations that may affect costs.

Projections may be simple or complicated and will heavily depend on the nature of the expenses and the data available. HR managers preparing a budget for the first time will need to gather every source of available data to make educated projections. See What Is Involved in Developing an HR Budget? and The Language of Business.

Tax obligations  

New organizations must be registered with the Internal Revenue Service (IRS). HR will need to check that the organization has a federal employer identification number (EIN) and is registered with state and local revenue agencies for payroll tax purposes. Depending on the size and structure of the organization, these functions may be handled by the accounting or finance departments.

See:

Apply for an EIN online (IRS)

Determine your state tax obligations (Small Business Administration)

Old Age Survivor and Disability Insurance (OASDI) (Social Security Administration)

Payroll system and administration

Setting up a payroll system is a high priority. HR professionals may wish to work with a payroll vendor to help reduce administrative burden and to assist with payroll compliance. Outsourcing to third-party administrators for payroll and related tax duties helps busy employers meet filing deadlines and deposit requirements.

Once a payroll system is established, payroll must be administered regularly. The organization needs to determine if payroll administration will fall under human resources or finance. The payroll administrator must understand federal and state wage and hour laws, including minimum wage, overtime pay and eligibility, meal and rest break laws, record-keeping, and how to determine hours worked.

See:

Complying with U.S. Wage and Hour and Wage Payment Laws

Fair Labor Standards Act Advisor

Companywide staffing plan

HR should work with management to gain an understanding of the short- and long-term staffing needs and budget. A staffing plan will determine the composition and content of the workforce required to position the organization for current and future business objectives. Working with the owners, founders or management, HR creates a three- to six-month staffing plan and budget to determine how much time and activity need to be expended on properly staffing the organization. Longer-term staffing plans may influence HR department staffing needs as well.

See:

How do we develop a staffing plan?

Practicing the Discipline of Workforce Planning

How does the use of trend analysis fit into the overall workplace planning process?

If HR does not have an accurate list of open positions, the first step is to compile one. With the open position list in hand, HR works with hiring managers to lay out a recruiting plan. This is a good time to raise concerns about the assignment, such as an insufficient budget allocation. The recruiting plan should include skill sets required, HR employees involved in the interviewing process and responsible for hiring decisions, sources to be used (such as media, agencies, colleges or the Internet), realistic timelines, and resources required (budget, staff time and training).

Next, HR should determine the best sourcing activities for meeting the organization's staffing needs. Available sources may include networking, organization website job postings, job boards, recruiting firms, social networking sites, employee referrals, job or career fairs, and college recruiting.

See:

Introduction to the Human Resources Discipline of Staffing Management

Recruiting Internally and Externally

Staffing in Special Markets: College Students

Staffing in Special Markets: Technology Professionals

Prioritize Your Recruiting Based on Job Impact

Job descriptions

A job description is a useful, plain-language tool that explains the tasks, duties, function and responsibilities of a position. It details who performs a specific type of work, how that work is to be completed, and the frequency and the purpose of the work as it relates to the organization's mission and goals. Job descriptions are used for a variety of reasons, such as determining salary levels, conducting performance reviews, clarifying missions, establishing titles and pay grades, and creating reasonable accommodation controls, and as a tool for recruiting. Job descriptions are useful in career planning, offering training exercises and establishing legal requirements for compliance purposes. A job description gives an employee a clear and concise resource to be used as a guide for job performance. Likewise, a supervisor can use a job description as a measuring tool to ensure that the employee is meeting job expectations

See:

How to Develop a Job Description

Sample Job Descriptions

Pay structure

Developing a fair and competitive pay structure is one major aspect in attracting and retaining talent. Building a market-based pay structure from scratch encompasses several steps:

  • Gathering the background information needed for project success.
  • Determining your sources of external market data and getting the data ready.
  • Conducting the market data analysis.
  • Developing the pay structures.
  • Calculating the costs of the pay structures.
  • Implementing and evaluating the new pay structures.

See:

Building a Market-Based Pay Structure from Scratch

How to Establish Salary Ranges

Managing Pay Equity

Introduction to the Human Resources Discipline of Compensation

Benefit plans

The organization needs to determine what benefits are mandatory and what voluntary benefits it wants to provide employees. Does it want to offer any paid holidays or other paid time off (PTO) such as vacation, sick, personal days or a PTO bank that combines all leave?

Other valuable benefits include group health benefits (including medical, dental and vision insurance), disability insurance (short- or long-term disability), life insurance, flexible spending accounts, employee assistance programs, and pension and retirement plan options (e.g., 401(k) and individual retirement accounts, or IRAs).

Mandatory benefits include workers' compensation insurance and unemployment insurance under state laws. In addition, some states mandate paid disability insurance and/or paid sick leave for employees. Employers should check their states' laws for more information on required benefits.

See:

State Workers' Compensation Officials

State Unemployment Insurance Benefits

Small organizations may start off providing only a few benefits and then offer more benefits as they grow. Other small employers may want to offer a comprehensive benefits package to help attract and retain talent. See 2018 Employee Benefits Research Report and One-Third of Companies Increase Employee Benefits in War for Talent, SHRM Survey Finds.

Organizations often enlist the help of a benefits broker to obtain benefits quotes from providers in the area and to compare benefits offerings against the budget. See What should my company consider when selecting a benefits broker?

Employee handbook

Human resource professionals recognize the employee handbook as an essential tool for communicating workplace culture, benefits and employment policy information to employees. An employee handbook typically describes information about the employer's employment practices, benefits, equal opportunity commitments, attendance guidelines, pay practices, leave-of-absence procedures, safety issues, labor relations matters and consequences for misconduct. See How to Develop an Employee Handbook and Sample Employee Handbook

Safety procedures

Employees have the right to work in a safe and healthy work environment. The Occupational Safety and Health Act of 1970 (OSH Act) legislation ushered in a significant body of regulations designed to protect the health and safety of every U.S. worker and placed the primary responsibility for health and safety on the employer. See OSHA: Employer Responsibilities.

The OSH Act's general duty clause requires every employer to "furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees." This means that employers are obligated to identify hazards within their own workplaces and take actions to eliminate these hazards even when there is no specific OSHA standard requiring such.

Knowing the relevant state laws related to safety is helpful as well. Whereas many states follow OSHA regulations, other states have passed more stringent or specific safety regulations.

Employment posters

Employers are required to post relevant federal and state employment law posters in each facility where employees can readily see them. See What posters do I need, and how do I comply with these requirements? and SHRMStore Labor Law Posters

Hiring procedures

The hiring process includes multiple steps and various practices, including the use of application forms, interviews and pre-employment testing. Whether to use a written employment contract and the terms of an employment offer also come into play at this stage. Finally, HR must oversee the process of organizational entry, referred to as "onboarding" or "orientation."

See:

Managing the Employee Onboarding and Assimilation Process

New Employee Onboarding Guide

Designing and Implementing an Effective Onboarding Strategy

Guidelines on Interview and Employment Application Questions

How to Create an Offer Letter Without Contractual Implications

Conducting Background Investigations and Reference Checks

All employees of a new business need to complete a Form I-9 verifying eligibility to work in the United States and federal and state tax withholding forms. Employers are also required to submit new-hire reports to state agencies.

Personnel files

Human resource records are the repository of personal, organizational and legal data and documents concerning individual employees and their relationship with the employer. Many liability issues can result from improperly maintaining employment records. See What should, and should not, be included in the personnel file? and Complying with Employment Record Requirements

Performance evaluation process

The performance review process includes both continuous informal feedback and periodic—usually annual—formal feedback. An organization's HR department is typically the linchpin of the effective and efficient administration of the performance management system. Having an educated HR team that is well-prepared to train the organization's managers in the system and to assist them when they have issues or questions is critical to the smooth functioning of the process. See Managing Employee Performance and How to Establish a Performance Improvement Plan.

Starting an HR Department in an Existing Organization

Being charged with establishing a human resource department in an existing organization can appear overwhelming. Often HR professionals are just not sure where to start. The key to success, as with most things, is to begin by listening, observing and learning about the organization. Finding out what the expectations are for the new job and the human resource department is essential. HR professionals can start by asking questions such as the following:

  • What was the purpose for creating this new department?
  • Who made the decision to create the position, and who understands the inner workings of the organization and knows the key decision-makers?
  • How were human resource activities handled in the past and by whom?
  • What is the culture of the workplace?

Answers to these questions can best be gathered by conducting a needs assessment through informal interviews with key staff members and management, along with the HR manager's own assessment of the human resource policies currently in place. This type of assessment, or HR audit, helps determine an action plan for HR activities and staffing.

HR assessment or audit

Even in an organization without a formal HR department, HR-related policies have been created, and tasks are being performed. Instead of starting from scratch, HR professionals can take stock of what HR activities are currently being done in the organization and evaluate them. HR audits can help evaluate the effectiveness and performance of HR programs and services and expose opportunities to enhance, change or remove programs and processes. Before conducting an audit, HR managers should determine where to start. The overall HR health of the organization can be evaluated, followed by a more in-depth consideration of each functional area, as well as each program and service offered, so that the HR manager can make sure the organization is in compliance, is administered efficiently and cost-effectively, and is meeting employee and management needs.

See Conducting Human Resource Audits

Certain areas of HR oversight may make organizations particularly vulnerable to fines and other sanctions. Most lawsuits can be traced to issues related to hiring, performance management, discipline or termination. Some additional risk areas to carefully review include misclassification of exempt and nonexempt jobs, inadequate HR files, inaccurate time records, and insufficient documentation. Below are some sample questions to start an HR assessment. As stated above, an in-depth review may be needed in certain areas.

  • Organizational strategy. What is the organizational vision and mission? What are the current strategic objectives of the organization? See Practicing Strategic Human Resources.
  • Payroll. Is there an effective human resource information system (HRIS) or payroll system? How are hours worked tracked?
  • Policies. Does the organization have an employee handbook or written policies? When were they last reviewed?
  • Salary administration. Is there a formal salary structure? How recently was it updated? Are managers and employees happy with the current structure?
  • Benefits. What benefits are offered? Do the benefits fit employee and organizational needs? Why or why not?
  • Recruitment. What is the hiring process? Where do departments find good candidates? How many positions are currently open? Does the organization have up-to-date job descriptions for each position in the organization?
  • Orientation. Does the organization have a formal or informal new-hire orientation process? Who is responsible for orientation and new-hire training?
  • Performance. Are performance reviews conducted regularly? How often? Do they have an established format? Are managers and employees happy with the current process?
  • Files. Are employee files maintained securely? Are medical records and other protected information kept separately from employee files? Are Forms I-9 completed correctly for all employees?
  • Safety. Does the organization have a safety plan? Where is it maintained? Is there a safety committee?
  • Posters. Are employment posters up-to-date? Where are they posted?
  • Training. Has the organization conducted supervisor or employee training? See Developing Employees and Developing Management.
  • Employee relations. Does the organization have unresolved grievances or open investigations? What is the frequency of investigations, and is there a pattern to the issues?

See:

How to Conduct an I-9 Audit

Employment Recordkeeping Audit Checklist 

Personnel File Audit Checklist

Create an action plan

Next, HR professionals should create a plan and share it with senior management to gain input and, most important, buy-in. The next step is to summarize overall impressions and prioritize specific action items based on the assessment results, keeping in mind budget implications for each item.

HR managers should classify these projects and actions as high, medium and low priority, according to legal compliance and benefit to the organization. Next, they should develop a timeline for action on the highest-priority items that can be accomplished in the next three to six months; included would be cost projections, why the tasks need to be done and the anticipated end results. When presenting a plan to senior management, HR professionals should be prepared, brief and direct, and anticipate what questions might be asked. They should also discuss how these actions will affect the bottom line—demonstrating how a human resource department benefits the organization's operations in terms of profit, productivity, increased business, reduced liability and employee satisfaction.

See Benchmarking Human Capital Metrics

Determining HR staff structure

There is no one best way to structure a human resource department. Of course, the size of an organization affects the number of staff in HR. Other factors include employer growth, culture, organizational structure, strategy, industry and client needs.

When an organization determines that more than one HR staff member is necessary, it must decide what level of HR positions is needed. Many employers have a two-person HR department: an HR manager or senior generalist position and an HR generalist or HR administrator. An administrative position can be helpful for organizations that have a heavy administrative workload (such as filing, benefits administration and payroll). Other organizations may decide to hire an HR generalist to assist with recruiting and general employee and benefits issues, freeing the manager to concentrate on more complex employee relations issues and strategic HR and business issues. As an organization's needs grow and the HR department expands, the employer may choose to transition from hiring HR generalists to hiring HR specialists for recruiting, benefits, compensation and other tasks to provide more in-depth support to the various HR areas of responsibility. Organizations may also investigate whether outsourcing one or more HR activities would be cost-effective. See Staffing the Human Resource Function

Templates and Tools

SHRM Vendor Directory

SHRMStore

Samples

Sample Job Descriptions

Sample Policies

Sample Forms

Sample Interview Questions

Sample Training Presentations

How-To Guides

Toolkits

Agencies and organizations

Equal Employment Opportunity Commission

U.S. Department of Labor

U.S. Department of Labor, Office of Small and Disadvantaged Business Utilization: Small Business Resource Center

U.S. Department of Labor, Office of Small and Disadvantaged Business Utilization: State Compliance Assistance

U.S. Department of Labor: Employee Benefits Security Administration (EBSA)

National Labor Relations Board

OSHA's Small Business Page

U.S. Small Business Administration

 

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