How to set up your first HR department in four simple steps

Written by: Gabrielle Smith
Published on April 19, 2021.

When you’re just getting started as a small employer, you might find yourself taking on a lot of responsibilities that traditionally fall under an HR department. If so, you’re not alone.

ADP’s Ad Hoc Human Resource Management Study found that 70% of small employers have ad hoc HR managers (aHRMs) who take on HR responsibilities on top of their day job—and 54% of these aHRMs are the owners themselves.

While having an aHRM, or even taking on an HR role yourself, may save money up front, handling all of the recruiting, screening, and onboarding responsibilities that are outside of your expertise isn’t realistic long-term.

The ADP study also found that only one in five of the small employers serving as aHRMs felt confident in their ability to manage HR responsibilities without making a mistake.

That’s when you know it’s time to set up your first HR department. As you’re getting started, this four-step guide will help you build a successful and compliant HR team right from the start.

Step 1: Define your organization’s culture

Before you can get started building an HR team, you need to think about the culture you want your organization to embody.

Believe it or not, 47% of job-seekers cite being part of a company’s culture as one of the driving reasons they’re looking for new employment, according to a study by Built In.

The culture you establish from the beginning will become the way your employees, and even your customers, view you as an employer. Is your organization young and outdoorsy? Hardworking and data-driven? Professional yet fun?

The kind of culture you create will determine which kind of employees are right for your organization, and in turn, prepare your HR department with the direction they need to make the right goals for recruiting and retention.

Step 2: Organize important employee files

The next step is less exciting, but necessary—you’ll need to establish and organize the employee files your HR team will manage.

In general, there are three separate types of employee files to create and maintain:

  • Employee I-9 forms
  • Personnel files
  • Medical files

Let’s go over each in more detail.

Employee I-9 forms

The I-9 form is an employee eligibility verification file. It simply verifies the identity and employment authorization of anyone hired to work for an organization in the United States.

You’re legally required to have a completed I-9 on file for each of your employees—this includes both citizens and non-citizens.

Employers are also required to keep all of their employees’ I-9 forms for a designated period and make it available for inspection by authorized government officers if needed.

To keep things simple, it’s a good idea to have all of your I-9s in a single file so they’re easy for your new HR team to access and reference later.

Personnel files

You’ll also want to make sure your HR department creates and maintains a separate personnel file for each of your employees. That way if they leave your organization, you’ll have all of their information all in one place.

Here are just a few things you might include in your employees’ files:

  • Résumé 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

Finally, the last type of file you’ll want to have your HR department maintain is a separate medical file for each of your employees.

Included in this file is any information related to health or medical issues, including:

  • Applications for insurance
  • Doctors notes excusing an employee from work
  • Medical examination information
  • Information related to disability

While each of your employees’ files should be kept confidential, this is especially important for medical information. Many of these documents are considered protected health information (PHI).

The HIPAA Privacy Rule provides federal protections for personal health information held by covered entities, like employers, and has very strict rules about when this information should and shouldn’t be disclosed.

Step 3: Implement a competitive health benefit

Once you’ve got all of your essential employee files in order, your HR department is ready to start establishing 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. After all, health benefits have consistently ranked as the top employee benefit in the U.S.

When it comes to healthcare, you’ve got a few options. We’ll go over three of the most common: group health insurance, individual health insurance, and health reimbursement arrangements.

Group health insurance

Group health insurance is one of the most popular options for employer-provided health benefits. With a group health plan, the insurance is purchased by the employer and offered to eligible employees and their dependents.

Employees like group plans because they’re usually already familiar with group health insurance, and the premium cost is split between the employer and employee.

However, the downside is that group health policies can be expensive, the risk is only spread over the organization and its employees, and the premium rate typically goes up every year.

Explore the pros and cons of group health insurance

Individual health insurance

Individual health insurance is a policy that employees purchase for themselves on the individual market.

The good thing about these plans is that they are required to cover employees regardless of their health, and the risk is spread over a large group of people—just like car insurance. Plus, individual health insurance premiums are 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 offering group health insurance. One way to do this is through the individual coverage health reimbursement arrangement (ICHRA).

Get everything you need to know about the ICHRA

Health reimbursement arrangement (HRA)

Finally, there’s the health reimbursement arrangement (HRA). With an HRA, employers choose a healthcare allowance that employees can spend on qualifying medical expenses, including individual health insurance premiums.

Employees can purchase a plan that fits their health needs and employers have complete cost predictability without minimum or maximum participation requirements.

Take our quiz to find out which HRA is right for your organization

Step 4: Create an employee handbook

The last item on your HR department’s to-do list is to create an employee handbook. Handbooks aren’t exactly the most exciting thing to read, so it’s not uncommon for new employees to skim over them without actually understanding them.

It’s your HR team’s job to make your handbook engaging, memorable, and easy to read—that way new employees don’t miss out on essential information they need to be successful at work.

If you’re not sure what to include in your handbook, here are a few ideas:

  • Your organization’s history
  • Onboarding procedures and goals
  • A reference to organization-wide procedures or resources
  • How-to guides on tools the team uses
  • Payroll information
  • Dress code policies


Now that you have the tools, you’re ready to set up your HR department for success and keep your organization running smoothly—without having to manage every HR detail yourself! By investing the time and resources into building an HR team, your organization will be equipped with the essential HR expertise you need to recruit, retain, and stay compliant.

This article was originally published January 6, 2015. It was last updated April 19, 2021.

Topics: Human Resources
Originally published on April 19, 2021. Last updated April 19, 2021.


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