Companies are not legally required to have an HR department or human resources manager. However, many human resources (HR) functions, including legal compliance, must be handled by someone to avoid significant consequences. HR tasks may be done by the founder of a small business, employees in other departments such as accounting, employment attorneys, and outsourcing companies.
An HR department is not always feasible for startups and small businesses. Once you grow to a certain size, the recommendation is to have a full-time human resources generalist or use a full-service HR outsourcing company. Your HR department may initially have only one employee, an HR generalist or manager, and then expand to include multiple HR specialists handling specific areas, such as payroll and recruiting.
What Does Human Resources Do?
A human resources department is responsible for many areas, including labor law compliance, recruitment, retention, onboarding, training, growth and development, employee relations, employee engagement, conflict resolution, compensation, and benefits. HR professionals file legal reports, write job descriptions and employee handbooks, conduct exit interviews, and handle performance reviews and promotions. They can also oversee diversity, equity and inclusion (DEI) initiatives, company culture and internal communications.
The role and responsibilities of HR professionals depend on the job title. Some may handle specific administrative functions, like staffing, employee development, or compensation, while HR generalists and managers handle widespread functions and strategic initiatives. Knowledge of HR laws is essential, but the degree of legal expertise will vary significantly depending on the job title and prior experience in the industry.
What Size Company Needs an HR Department?
According to the U.S. Chamber of Commerce, “Most experts recommend bringing on a full-time human resource staff member when there are at least 10 employees within the company.” A Reddit discussion shows how much debate exists on the topic, with common responses recommending an HR employee or outsourcing when you have 50 or 100 employees.
As reported by BambooHR, “The average business has 1.7 HR staff members for every 100 employees. However, expert recommendations on that ratio can vary from 1.5 to 4.5 per 100 employees.” While 35% of startups do not have an HR department, 25% of Fortune 100 companies do not have a chief human resources officer.
Paychex’s 2025 Priorities for Business Leaders reports that small companies spend $171,997 annually on HR tasks, while larger companies with 100 to 499 employees spend $413,804 annually.
In addition to the current size of your company, anticipate how quickly your company will grow and what resources you will need to support that growth, including a recruiter to focus on hiring new staff. Other factors to consider include deciding how you value time, seasonal variations in the workforce, and complexity if you operate in multiple states with different laws.
When deciding if you need an HR department, it is better to be proactive than reactive. Starting your department earlier will enable you to get ahead of the issues instead of having to react to them later, which can be risky. Waiting too long to start an HR department will overwhelm HR staff as they struggle to play catch-up with many administrative tasks and compliance issues, leaving little time for strategic initiatives.
HR Legal Issues
HR professionals are responsible for ensuring compliance with federal, state and local laws. As they make instant decisions every day, they need to use critical thinking skills combined with a strong working knowledge of current laws. From ensuring you only hire workers eligible to work in the U.S. to workplace safety and preventing harassment, legal issues impact every part of human resources.
Northeastern University explains the five legal categories that every HR professional should know: workplace discrimination laws, wage and hour laws, employee benefits laws, immigration laws, and workplace safety. For example, many employers are required to submit workforce demographic data by filing an annual EEO-1 Report. This report helps to ensure compliance with equal employment opportunities and prevent discrimination.
HR Department Benefits
Having an HR department has many benefits. Employing on-site human resources professionals can improve company culture, employee engagement, retention and compliance.
Legal expertise: HR professionals will ensure compliance with current laws and stay updated on any changes. This aids in making safe decisions and implementing best practices for your company and workforce.
Quick, informed decisions: When daily human resources decisions are made by knowledgeable HR professionals, the company benefits from the ability to make quick, informed decisions while minimizing risks.
Improved hiring and retention: With an employee dedicated to recruiting, hiring new staff will be more efficient, and you will be more likely to attract top talent while avoiding bad hires. With ongoing retention efforts, the company will experience less employee turnover, saving you money in the long run.
Professional appearance: When you have an HR department implementing effective HR policies and practices, internal and external communication is more professional and organized.
Positive company culture: Human resources will help to foster a positive company culture and effective communication, which will boost employee engagement and morale.
Clarity: When employees have a well-written employee handbook and know who to contact for human resources, they will have the necessary clarity and ease to resolve their issues.
Protect employee confidentiality: Having an internal HR department with strict protocols makes it easier to protect employee privacy and maintain confidentiality.
Dangers of Not Having HR
If employers lack proper guidelines or are unaware of legal requirements, it can result in disastrous consequences. Without HR professionals ensuring legal compliance, costly violations can happen in many areas, from overtime to wrongful termination.
Litigation: Employees may file lawsuits related to various issues, including discrimination, harassment, overtime, wrongful termination and safety violations. In addition to legal costs and facing fines and penalties, lawsuits damage the employer’s reputation regardless of the outcome.
Non-compliance issues: From non-compliance with federal, state and local laws to Occupational Safety and Health Administration (OSHA) violations, employers will face significant consequences.
Penalties and fines: Non-compliance can result in costly penalties and fines as well as loss of government contracts. Overtime or minimum wage violations result in a $1,000 fine for each violation. OSHA violations can range from $5,000 to $70,000 in civil penalties.
Reputation damage: Claims and lawsuits against an employer damage the company’s external reputation and negatively impact the internal company culture.
Toxic culture: HR professionals are responsible for promoting a healthy company culture. Without the guidance of human resources and effective policies that protect all employees, the chaos can result in a toxic company culture.
Low morale: A toxic company culture and lawsuits will result in low employee morale. Additionally, human resources continually works to boost employee morale and work-life balance through various initiatives, including rewards, growth and development, and employee wellness programs.
High turnover: Employees want to work long-term for companies that value and protect them. In a chaotic environment without the oversight of human resources and strategic employee retention initiatives, turnover will be high. G&A Partners estimates that the “average cost to replace a terminated employee is about 50 percent of that employee’s annual salary.” Plus, the cost can be even higher depending on the position and industry.
HR Outsourcing and Software
In human resources outsourcing, a third-party provider is used to handle part or all of a company’s human resources functions. This can be a cost-effective option to hiring full-time HR professionals, but it may also have additional costs for required software. Carefully weigh HR outsourcing pros and cons to decide if it is a good decision for your company to delegate HR functions.
It can be helpful for small businesses to use HR software for managing some administrative functions. If you have only one employee handling human resources, software will allow the employee to be more efficient. Tasks like recruiting, payroll, time tracking, and employee surveys will be easier and faster when you use all-in-one HR software or single-service software.
Adding a human resources department early in your company’s growth will enable you to be proactive and compliant with laws while minimizing risks. It will lay the foundation for long-term success, including a positive company culture with happier employees.
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