How to set your first HR department up for success

When you're just getting started as a small employer, you might find yourself taking on new responsibilities and administrative tasks that traditionally fall under a human resources (HR) department. If so, you're not alone.

ADP's Ad Hoc Human Resource Management Study¹ 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 business owners themselves.

While having an aHRM, or even taking on an HR role yourself, may save money upfront, handling all of the recruiting, screening, onboarding, and performance management responsibilities in addition to your other job roles isn't realistic long term.

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

When your business growth is faster than you can handle on your own, 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 determine how to set up an HR team, understand which tasks to accomplish first, and learn which tools your newly assembled department needs to succeed.

Takeaways from this blog post:

• Vital functions of an HR department include managing talent, addressing employee concerns, and ensuring smooth communication between management and staff.
• Employers need to consider company culture and values before creating an HR department.
• HR departments are responsible for establishing employee benefits and perks that can help recruit and retain top talent.

What does an HR team do?

Your human resources department is responsible for managing initiatives related to your organization's employees.

Your HR team may be responsible for the following:

• Keeping current employee records
• Talent acquisition, such as developing a recruiting process, drafting job descriptions, establishing an onboarding process, and participating in the hiring process altogether
• Job performance management
• Payroll management
• Disciplinary actions
• Updating company rules and employment policies
• Creating emergency action plans
• Supporting employee morale and well-being
• Creating employee training programs
• Maintaining legal compliance

As you can see, an HR department is for more than just talent management. It's also a resource for building employee trust, addressing employee concerns, responding to the needs of an individual employee, and ensuring that everything runs smoothly between upper management and your staff. An HR department should care about the well-being of its employees and the company's culture.

Define your organization's culture

Before you build an HR department from scratch, you need to consider the company culture and core values you want your organization to embody.

A study by Built In² found that 47% of job-seekers cite being part of a company's culture as one of the driving reasons they're looking for new employment.

The positive culture you establish from the beginning will become how 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 company culture you create will determine which kind of employees are suitable for your organization. It also gives your HR department the direction it needs to make the right company goals for recruiting and retention.

Your HR department will play an important role in shaping company culture and promoting employee engagement. It's important to create initiatives that promote a positive work environment, such as employee recognition programs, wellness initiatives, and diversity and inclusion efforts.

Organize important employee documents

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 distinct 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

Form I-9 is an employment eligibility verification file. It simply helps you verify the identity and employment authorization of anyone you hire to work for an organization in the United States.

The federal government requires you to have new employees complete this form. You must also keep a completed I-9 on file for each employee—including citizens and non-citizens.

Employers must keep all of their employees' I-9 forms for a designated period and make them 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 ensure your HR department creates and maintains a separate personnel file for each employee. That way, if they leave your organization, you'll have all of their information in one place.

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

• Résumé and employment applications (you should keep these files, even for candidates you don’t select, for at least one to three years)
• Offer letters, employment agreements, or contracts
• Employee compensation, such as annual salary or hourly wages
• Basic employment data (including W-4s)
• Information about participation in benefit programs
• Awards, recognition, or disciplinary documents
• Employee performance records
• Termination documentation and exit interview information

Medical files

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

These files include any information related to health or medical issues, such as:

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

It's important to maintain confidentiality for all employee files, with particular emphasis on medical information, since many of these documents are classified as protected health information (PHI).

The HIPAA Privacy Rule provides federal protections for personal health information covered entities, such as employers, hold. It establishes strict guidelines for the disclosure of this information.

Implement competitive employee benefits

Once you've got all of your essential employee files in order, your HR department is ready to start establishing employee benefits and perks.

To attract and retain top talent in your industry, you'll need competitive benefits. Our 2022 Employee Benefits Survey Report found that 82% of employees say that the benefits package an employer offers is an important factor in whether or not they accept a job.

Let's go over some of the top employee benefits options in the following sections.

Group health insurance

Group health insurance is one of the most popular options for employer-provided health benefits. With a traditional group health plan, the employer offers insurance 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 typically split between the employer and the employee.

However, the downsides are group health policies can be expensive, the risk is only spread amongst the organization and its employees, and the premium rate typically increases every year. This can make it challenging for small businesses and nonprofits to offer a group plan.

Health reimbursement arrangement (HRA)

A health reimbursement arrangement (HRA) is a tax-free health benefit option that allows you to provide a healthcare reimbursement allowance that employees can spend on qualifying medical expenses, including individual health insurance premiums.

Three of the most popular types of HRAs available are the:

• Qualified small employer HRA (QSEHRA)
• Individual coverage HRA (ICHRA)
• Group coverage HRA (GCHRA), also called an integrated HRA

With a QSEHRA or an ICHRA, employees can purchase an individual health plan that fits their needs, while a GCHRA allows you to supplement your existing group health plan. With an HRA, employers have complete cost predictability.

Employee stipends

If you want to give your employees a flexible benefit that they can use for a variety of perks, you should consider an employee stipend. Employee stipends enable you to provide a monthly expense allowance or reimburse your employees for various lifestyle expenses of your choosing.

Stipends can be used to reimburse employees for common lifestyle perks including health, wellness, transportation, professional development, and remote work.

A taxable health stipend works similarly to an HRA but with fewer regulations on what expenses are eligible for reimbursement. They're also an excellent option for organizations that employ 1099 contractors or international workers. If you have any employees who receive advance premium tax credits (APTC), a health stipend allows them to receive a health benefit without affecting their APTC eligibility.

However, because of health stipends' taxability and their inability to satisfy the Affordable Care Act’s employer mandate, many organizations prefer HRAs when considering a health benefit.

Other employee benefits ideas

There's no shortage of employee benefits and perks that you can offer your employees.

Other employee benefits ideas include:

• Life insurance
• Disability insurance
• Unemployment insurance
• Retirement benefits
• Education assistance

Providing employee benefits will help increase employee satisfaction and your employee experience, reducing employee turnover and promoting a more positive and productive work environment.

Create an employee handbook

The last item on your HR department's to-do list is to create a comprehensive 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
• Code of conduct
• Social media policy
• Drug and alcohol policy
• Anti-discrimination policy
• Time-off policy
• Safety policy

Conclusion

Building an HR department from scratch takes time, but it comes with a great payoff for your business. Once you've completed the four steps listed above, your dedicated HR team will be able to keep your organization running smoothly—without requiring you to manage every HR detail yourself. Investing your resources into building an effective HR department will equip your organization with the essential HR expertise you need to recruit, retain, and stay compliant.

If you're interested in offering benefits to your employees, PeopleKeep can help! Our HRA software helps organizations like yours launch and manage employee health benefits in minutes.

This blog article was originally published on January 6, 2015. It was last updated on April 23, 2024.

1. https://images.adpinfo.com/Web/ADPEmployerServices/%7b8e6d7bf2-960a-4ad5-9896-b35e2205dfb2%7d_AHRM_Infographic_190482.pdf?elqTrackId=d4392f597b2b41e4990a107b3e25a235&elqaid=7145&elqat=2
2. https://builtin.com/company-culture/company-culture-statistics