- A human resources department is great for gaining insight and control over internal practices, cultivating company culture, and resolving onsite problems.
- It can be expensive to hire an internal HR department, and it may be difficult to find the right HR specialist for your business.
- There are several alternatives to having an internal HR department, such as a professional employer organization (PEO), a human resources outsourcing (HRO) firm and an administrative services organization (ASO).
As your startup or small business grows and hires more employees, you may need help managing your team and navigating labor laws. When that time comes, should you simply use a co-employment model like a professional employer organization (PEO), or would your company benefit more from an internal human resources department? Both options have advantages and drawbacks, so we spoke with human resources experts to learn the primary pros and cons of having an in-house HR department.
What is a human resources department?
A human resources department is the part of an organization that manages and organizes aspects relating to employees and human capital. It is responsible for administrative tasks, operational functions, employee growth and culture, and legal compliance with federal, state and industry regulations. Although very small businesses might forgo an HR department, a general rule of thumb is to hire roughly 1.4 HR employees for every 100 workers.
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What does an HR department do?
An HR department has a lot of responsibilities, with the primary goal of helping employees accomplish companywide and individual objectives.
"The HR department sources, recruits, onboards, trains, promotes, deploys and rewards the talent needed to reach the organization's objectives," said Doug Coffey, HR expert and assistant teaching professor at the Rutgers School of Management and Labor Relations. "And HR staff can't do it single-handedly. HR must partner with the organization's leadership team and other staff to make it happen."
In addition to hiring, training and firing employees, an HR department is responsible for performing administrative tasks, creating a company culture and employee handbook, facilitating employee benefits, managing payroll and taxes, and maintaining legal risk and compliance measures with federal, state and industry regulations.
Pros of having an in-house human resources department
We consulted HR experts to learn the biggest benefits of having a human resources department. Here are the top three advantages they cited.
1. You can cultivate company culture.
An internal HR department can create rapport and improve employee engagement through face-to-face conversations. Since your human resources department will know your workforce on a personal level, your staff is likely to feel more comfortable about bringing up any workplace issues they are experiencing. An HR team member can then address and resolve the issue, boosting employee satisfaction and morale.
"[An internal HR department] generally helps employees to resolve their issues, especially when it's related to work, teammates or managers," said Shradha Kumari, HR manager with SurveySensum.
An internal HR department can also nurture company culture by hosting effective team discussions and engaging events based on team members' personal needs and interests.
2. You gain insight and maintain control over internal practices.
When you have an internal HR department, you are keeping your intellectual property and organization practices internal as well. This can help you to secure confidential information, monitor your employees' productivity, control your organization and reduce unethical practices within the organization. Additionally, Kumari said that an internal team can help you to understand the reason behind attrition and retain your best talent.
3. You have access to reliable, onsite assistance.
When you have an in-house HR department, you and your team have access to reliable, in-person assistance. Because they know and understand your business, they can quickly help resolve internal issues and keep your organization on track. Kumari said that an HR department can lighten a tense situation between employees and support them throughout the process of resolving their issues.
"An internal HR department helps to ensure continuity of HR staff and consistency of service and policy administration," Coffey added. "For most line managers, having an HR professional who knows you and your business's needs is the basis of proactive, successful collaboration before problems blossom."
Cons of having an in-house human resources department
Managing HR responsibilities is a lot of work, and sometimes an internal staff member is not enough to fulfill your needs. There are a few challenges to hiring an internal human resources specialist, primarily regarding cost and effectiveness.
1. It can be expensive.
An in-house HR department can be more expensive than outsourcing because you will be hiring at least one full-time employee, and appropriate wages for an experienced HR manager aren't cheap. Also, when you have an HR team member onsite, employees may feel more comfortable making requests that can cost your company money.
2. It can be hard to find the right fit.
Another challenge of hiring an in-house HR department is finding someone who is the right fit for your organization and can fulfill all of your HR needs. If you do not have the right department members in place, your company will suffer – but finding someone who is the right fit and can subsequently hire additional right fits can be difficult. It is not uncommon for an internal HR department to have limits on their time as well as expertise.
"As an HR professional, I often felt the need to reach out to external sources who were subject-matter experts in areas where I was lacking or where I wanted fresh advice," said Coffey. "Sometimes an internal HR department devotes so much attention to the day-to-day activities needed to keep the organization running that cutting-edge skills development suffers. These skills are what HR professionals need to add the most value."
3. Internal relationships may cause bias.
Since an internal HR department is onsite, they will engage with organization members daily, which is both good and bad. While it can facilitate a positive company culture, it may also become difficult for them to remain unbiased in their duties if your HR staff becomes too submissive or friendly with colleagues or management.
When to hire an HR department
An HR department may be necessary when your business growth reaches a tipping point and matters need to be handled internally. Once an organization reaches a certain size – more than 50 employees, according to Sophie Summers, HR manager at ProPrivacy – it's often necessary to hire an HR department.
"When a company is growing, professionals need to handle the employee-related things that might become complicated over time if not taken care of at the right times," said Summers. "If the company feels that the business is growing and recognizes issues are getting out of hand, there is an equal chance that an HR professional is needed to handle company policies, uncertain conditions, sensitive issues and complicated conflicts."
Growing organizations that simply want to hold on to their company culture may also want to consider hiring an HR professional. The in-house HR staff member can steer the culture in the desired direction and help it avoid getting off track.
How to hire an HR department
The human resource strategy you use for creating your department can vary. Coffey said small businesses can start by hiring an HR generalist as a point person for functions like recruiting, onboarding, training, performance management and rewards distribution. As the business grows, the HR generalist can then bring in internal or external resources to meet the business's HR needs.
If you want to hire an internal HR department but aren't sure if a single employee can handle all of your HR needs, consider a hybrid model. For example, Coffey said you can hire an internal HR manager to help with cultural development, talent acquisition and team growth, and then partner with a PEO or an HRO for traditional HR activities like payroll processing, employee recordkeeping and benefits administration.
Hiring an HR department can be a gradual process or an all-at-once decision, depending on your budget and needs. Consider your options and determine which one will be most cost-effective and valuable for your organization. If the need for an internal HR department is not clear, consider an interim solution, like contracting staff or outsourcing HR services, until a permanent in-house HR department is necessary.
Only hire HR professionals who understand your company vision and mission, as they will largely steer your company culture.
"Although decisions may be reversible, a small business owner needs to carefully evaluate when it makes sense to invest in building an HR department," said Coffey. "Most of this investment consists of committed fixed costs or long-term costs that are hard to undo if the need is no longer there."