A human resources (HR) department can fulfill many business needs: labor law compliance, employee recruitment, employee engagement and development, and compensation and benefits management. At large enterprises, HR is often the backbone of the organization, defining the company culture and investing in the long-term success of its employees.
HR plays a vital function, but for some merchants, it’s not always feasible to create a separate human resources team to serve a small number of employees. If you’re not sure whether you need an HR department—or if you can outsource your HR—here are some things to consider.
[Read more: Outsourcing HR: Is a PEO or ASO Right for You?]
Why do small businesses need HR?
In evaluating whether or not your company needs an HR manager, partner, or full team, it’s important to understand the role that HR serves. Human resources is in charge of:
- Ensuring the company is compliant with local, state, and federal employment laws.
- Hiring and retaining new employees.
- Training employees and supporting their professional development.
- Managing compensation and benefits.
- Handling performance reviews.
- Creating an inclusive company culture.
- Writing and maintaining employee handbooks.
Many small business owners take on tasks such as payroll, benefits management, hiring, and training instead of hiring a human resources generalist or bringing on a partner. However, this can limit the business's ability to hire and foster great employees who help it grow. At some point, it makes more sense for the business owner to delegate these tasks.
When should a business owner delegate HR?
There’s no “rule” stating that a small business must have an HR team or manager in charge of human resources activities. But, most experts recommend bringing on a full-time human resource staff member when there are at least 10 employees within the company.
Some business owners decide to hire an HR partner sooner rather than later. This decision takes into account how you value your time. Determine what your time is worth as a business owner. “These unrelated tasks can add up and take valuable time away from the actual productivity and profitability of your business,” wrote Concordia St. Paul University. “If you start to see a notable dip in your productivity level or other employees aren’t able to keep up with the extra demands on time because of HR duties, it is probably time to consider hiring a human resource generalist.”
It’s not just about valuing your time, however. Creating a separate HR team can help increase employee engagement and foster an open, inclusive company culture.
What are the benefits of creating a separate HR team?
HR plays a key role in employee engagement and retention. Half of Americans say a lack of a human resources department contributes to a toxic workplace. Moreover, nearly 50% of small business owners say their company's HR structure is unprofessional. Having someone other than the business owner listen to and address employee needs can help keep everyone working together professionally.
[Read more: How to Create Loyal Employees (and Why It Matters)]
Delegating recruitment efforts can also help a small business save money. Some studies predict that replacing a salaried employee costs six to nine months of their average salary, including lost productivity, time, and the expense of hiring and training a replacement. Empowering an HR specialist to oversee the recruitment, hiring, and onboarding process can help reduce this risk.
Most experts recommend bringing on a full-time human resource staff member when there are at least 10 employees within the company.
How much does it cost to set up and run an HR department?
Paychex estimates that HR administration can cost nearly $350,000 annually for a company with 50 to 99 employees. Their 2025 Business Leader Priorities survey found that one-third of companies spend at least 11 hours a week on HR administration—that’s more than a quarter of the workweek dedicated to time-consuming tasks like payroll, training, hiring, and onboarding. As your company grows, so will the time commitment.
There are additional costs associated with just getting your HR department off the ground. HR software, including applicant tracking systems, performance management software, and payroll software, makes HR management easier—but at a cost. Capterra’s research shows that small businesses using HR software plan to spend between $1,000 and $10,000 annually.
Your HR costs will depend on your organization's size, hiring needs, employee compensation plan, and associated overhead costs.
Should you outsource your HR function?
If you decide to delegate your HR role, the next step is to determine whether to hire an HR specialist or outsource HR to a third party. Professional employer organizations (PEOs) and administrative services organizations (ASOs) can help you address pressing operational needs without sacrificing the time you spend making your business successful. HR software can also help you manage specific HR-related tasks, such as payroll software, hiring platforms, and onboarding tools.
[Read more: A Complete Guide to Outsourcing Human Resources]
Tools and software for managing HR without hiring a full department
If you decide you’re not ready to hire an HR team or outsource to a third party, there are plenty of tools well-suited for small businesses. Software can take over many of the time-intensive manual processes and free up your time for other tasks. Some of the most essential tools to consider include:
- Payroll and compensation management software that handles employee payments, payroll tax, and compliance. Vendors include Gusto, QuickBooks Payroll, and ADP.
- Time and attendance tracking tools monitor employee work hours, manage schedules, and streamline time-off requests. These tasks can be managed in Excel or with tools like When I Work.
- Recruitment software that tracks applications, manages job postings, and helps streamline hiring. Vendors include Workable, Zoho Recruit, and Greenhouse.
- Employee onboarding platforms that simplify getting a new hire up to speed and ready to work. BambooHR, Bob, and Sage HR are all vendors in this category.
- Performance management tools set and track employee goals and facilitate career development for employees. Vendors include Culture Amp and Leapsome.
Many small businesses opt for all-in-one HR software solutions that combine these features into a single platform, providing a comprehensive and scalable approach to HR management. This integrated approach can be more cost-effective and easier to manage if you have limited resources.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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