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How to Set Up a Small Business HR Department

Written by: PeopleKeep Team
January 6, 2015 at 3:00 PM

Your small business’s HR department is much more important than you might think - it encompasses recruiting, screening, employee relations, training, and more. It doesn’t matter if your company consists of two or twenty-five employees, HR is an essential component of your small business. Knowing this, here are four steps to take to successfully set up your small business's HR department.

Step 1 - CultureHow to Set Up a Small Business HR Department

Think about the culture you want your small business to embody. As you learn how to set up your small business’s HR department, you will see that culture is a big key to success.

Choose your culture wisely - the culture you establish now will become the way employees and even customers view your company. Do you want to have a company culture that is fun, educated, and hard-working? You’ll need to think about these things before you establish your HR department and make goals, along with an action plan, accordingly.

Step 2 - Employee Files

Establish employee files. In general, there are three separate types of employee files to create and maintain: an I-9 File, Personnel Files, and Medical Files. It's best to assume all this information is confidential, so keep these files in a secure location. Only people with a compelling business reason should have access to these files.

Form I-9 Employment Eligibility Verification File: The law requires that you have a completed I-9 on file for each of your employees. Keep all I-9s in a single file for easy access and reference.

Personnel Files: Create and maintain a separate personnel file for each of your employees. This file is where you keep employment information, such as:

  • Resumes and employment applications

  • Offer letters, employment agreements or contracts

  • Payroll information

  • Basic employment data including W-4s

  • Information about participation in benefit programs

  • Awards, recognition or disciplinary documents

  • Performance evaluations

  • Termination documentation and exit interview information

Medical Files: Create and maintain a separate medical file for each of your employees. This file is where you keep any information related to health or medical issues, such as applications for insurance, notes from a doctor excusing a person from work, medical examination information, and information related to disability.

Step 3 - Healthcare Benefits

Establish outstanding healthcare benefits your employees will love. In order to recruit and retain top-talent  in your industry, you’ll need healthcare benefits that are both affordable and competitive. There are two common options for you to choose from for your small business:

Group health insurance: Group health insurance is purchased by the employer and offered to eligible employees and their dependents. The premium cost is split between the employer and employee. Employers must contribute a minimum percentage rate toward the employee’s premium. The risk is spread over the company and the number of employees, and the premium rate typically goes up every year.

Individual health insurance: Individual health insurance is a policy that employees purchase for themselves. These plans are required to cover employees regardless of health and the risk is spread over a large group of people--just like car insurance. Individual health insurance premiums are typically 20% to 60% less expensive than group health insurance premiums. Many employers give employees a monthly dollar amount to use toward their healthcare premiums as their healthcare benefit, rather than offer group health insurance.

Bonus: Couple individual health insurance with premium reimbursement. This option allows employers to choose a healthcare allowance that employees can spend on their individual health insurance premiums. Employees purchase the plan that fits their health needs best and employers have complete cost predictability without minimum or maximum contributions.

Step 4 - Handbooks

Create handbooks that are engaging and memorable. Handbooks aren’t always the most exciting thing to read and it’s not uncommon for new employees to skim over them without understanding them. Make it right the first time and don’t just make a handbook because you have to. Instead, look at your handbook as a means to train employees effectively so you do not have to re-train them in the future. Make handbooks fun, easy to read, and memorable.


Now that you have the tools, you can make an HR department for your small business that will keep your small business running smoothly. Remember these key points:

  • Choose the culture you want your small business to have

  • Get organized and prioritize your employees’ important files

  • Provide healthcare benefits for your employees to help recruit and retain

  • Make handbooks that are worth reading

What other important steps would you include for those wondering how to set up a small business HR department? Comment below.

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Topics: Human Resources