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 all aspects of staff 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," Doug Coffey, HR expert and assistant teaching professor at the Rutgers School of Management and Labor Relations, told business.com. "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 terminating employees, an HR department is responsible for performing administrative tasks, creating a company culture, writing an 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 an HR 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 HR department will know your workforce on a personal level, your staff is likely to feel more comfortable bringing up any workplace issues they are experiencing. An HR team member can then address and resolve those issues, 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, head of human resources at 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 reasons 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."
4. You can implement and enforce your own personnel policies and procedures.
With an internal HR department, you have full control over your HR functions. This means you can create and enforce policies that match your organization. You also have the luxury of speed: Since an internal HR department is often onsite, you can quickly modify policies as needed and relay them to the entire company.
5. It helps maintain legal compliance.
Although the organizational structure of your HR team may vary, it often includes a knowledgeable team of experts. These HR professionals can help you comply with labor and employment laws and evolve your business's practices as those laws change. This can be incredibly difficult for a business owner or a single HR professional to do on their own.
6. They know what types of employees to hire.
Recruiting and hiring employees can be a difficult and time-consuming task. If it's done improperly, you are left with bad hires and high employee turnover. However, an HR department can dedicate time to strategically staffing your organization with top talent. They understand how to recruit and onboard employees, and they know what to look for when determining culture fit.
Cons of having an in-house human resources department
Managing HR responsibilities is a lot of work, and sometimes an internal HR staff is not enough to fulfill your needs. There are a few challenges to hiring an internal HR specialist, primarily concerning 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 the pay rate for an experienced HR manager isn'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 more 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," Coffey said. "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 be 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
As your business gets bigger, your HR functions may become too much for one person to handle. An HR department may be necessary when your business reaches a tipping point and matters need to be handled internally. Once an organization reaches a certain size – more than 50 employees – it's often necessary to hire an HR department.
Growing businesses that simply want to hold on to their company culture may also want to consider hiring an HR professional or HR department. The in-house HR staff can steer the culture in the desired direction and keep it on track.
How to hire an HR department
The strategy you use for creating your department can vary. You can hire a person or team to handle all your functions in-house, or you can create a hybrid model by pairing your HR department with a top PEO service or a highly rated HR outsourcing (HRO) service.
- In-house HR: In this situation, you keep all of your HR functions in-house. You can start by hiring an HR professional as a point person for functions like recruiting, onboarding, training, performance management and rewards distribution. As your business grows, you can bring on other HR professionals to build your department.
- Hybrid HR: If you want to hire an internal HR department but aren't sure if they can handle all your HR needs, consider a hybrid model. For example, you could hire internal HR staff to help with cultural development, talent acquisition, and team growth, and then partner with an outside organization for traditional HR activities like payroll processing and benefits administration. Common options for outsourcing HR include PEOs and HRO services. The main difference between the two is that a PEO uses a co-employment model.
You can hire an HR department gradually or all at once, 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.
Try to hire HR professionals who understand your company's 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," Coffey said. "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."
Some source interviews were conducted for a previous version of this article.