Defined as those with 500 or fewer employees, small businesses are powerful engines of innovation and economic growth in the U.S. According to the Small Business Administration. These organizations account for over 99 percent of all businesses in the country and employ approximately 48 percent of the American workforce. Unfortunately, however, many small businesses do not survive past their first few years in operation, as they encounter unforeseen costs, fierce competition, and other obstacles. Human Resources issues, such as workforce management and compliance with ever-changing labor and employment laws, present a particularly common—and costly—challenge for small businesses. The consequences of not properly addressing HR issues may include problems with attracting and retaining qualified employees, poor workforce morale, a heightened risk of lawsuits, and hefty fines.

Are HR problems posing a threat to the success of your small business? Here are seven common HR pitfalls—and how to avoid them:


  1. An ineffective or inefficient hiring process. Hiring the right people is the cornerstone of a successful workforce. For any business, the first step in attracting and hiring strong candidates is to have a clear concept of the skills, qualities, and experience that the ideal person will have for each open position. In formulating these criteria, consider your organization’s culture as well as the duties of the role—“cultural fit” tends to be particularly important in the close-knit workforces of small businesses.After defining the traits of an ideal candidate, craft clear job descriptions that accurately reflect the duties of the position in question and develop a consistent and reliable interviewing, screening, and hiring process. While it is important to be thorough when making hiring decisions, strive to act quickly in extending job offers to candidates who meet your criteria. While small businesses may not always be able to offer high salaries and enticing benefits packages like their larger counterparts, they typically have less bureaucracy to contend with when it comes to making HR decisions. Therefore, small businesses should use efficiency to their advantage, as they face stiff competition for talent.


  1. Not documenting feedback given to employees. Providing employees with frequent and honest feedback on their performance is an important way to keep them engaged and help them improve. However, it can also serve as a critical defense in the event that a poor-performing employee is terminated or subjected to another adverse employment action. Many small businesses take a more casual approach to talent management, providing employees with only informal, verbal feedback. To minimize liability, managers should take the time to document any critiques offered to employees. If an employee ever files a lawsuit, the organization will then have a “paper trail” demonstrating that the adverse decision was based on poor performance—of which the employee had been warned—rather than discrimination or other nefarious reasons.


  1. Eschewing the employee handbook. As with documentation procedures for employee feedback, small businesses are less likely than large corporations to put workplace policies in writing. However, this may leave them susceptible to lawsuits and workforce management problems. An employee handbook articulating information like disciplinary procedures, nondiscrimination policies, and expectations regarding workplace conduct serves as an essential legal safeguard and reference material for employees. The employee handbook should be clearly written in plain English, applied consistently, updated as needed, and reviewed by an HR expert. In addition, employees should be required to sign acknowledgment forms stating that they have read and understand the handbook.


  1. Ignoring the latest state, local, and federal laws and regulations affecting employers. HR laws are constantly changing, placing new demands on employers. This has been particularly true in recent years, as sweeping employee rights movements encourage cities and states to implement higher minimum wage rates, requirements for paid sick leave, and other protections. While some laws only apply to organizations with 50 or more employees, others affect employers of all sizes—so small businesses must avoid making the common but erroneous assumption that they do not need to worry about HR compliance matters. Employers that fail to abide by applicable laws may face stiff penalties and the threat of lawsuits, posing a substantial risk to their bottom lines.


  1. Not investing sufficiently in employee training and development opportunities. Equipping employees with the training they need to grow and thrive—beginning when they are newly hired and continuing throughout their careers—yields numerous benefits for employers and employees alike. Training boosts engagement by showing employees that you are committed to their success and sharpens employees’ skill sets to help them become more productive members of the workforce. Even small businesses contending with limited budgets should strive to offer all employees training and development opportunities at least annually.


  1. Improperly classifying employees as independent contractors. Small businesses may be more likely to classify workers as independent contractors in order to avoid having to cover them under workers’ comp insurance, provide benefits, or withhold payroll taxes. As a result, the IRS has been known to target smaller businesses when identifying and penalizing improper classifications. While the independent contractor designation may be appropriate in some circumstances, businesses that inaccurately treat employees as contractors may face costly penalties and have to pay back payroll taxes. While it is essential to consult an attorney or HR expert when making these classifications, the following guidelines may help you determine if someone is an independent contractor:
  • Employers do not have the right to control how independent contractors perform their job duties.
  • Employers do not control financial factors such as how independent contractors are paid, who provides work materials, and whether expenses are reimbursed.
  • Independent contractors generally do not receive employee benefits.

While the IRS focuses on an employer’s right to control how the worker in question performs his or her job duties, many states rely on other criteria, so it is essential to understand how this determination is made in your state.

  1. Not consulting an HR professional. Many small businesses do not have an in-house HR department, so it is crucial that they rely on expertise from outside sources. For example, consider partnering with the provider of HR Outsourcing services like Creative Business Resources. CBR works with small and medium-sized businesses in a wide variety of industries, offering HR services such as employee benefits administration, talent management, HR compliance, recruitment assistance, and much more. We stay up to date on the latest legal changes affecting employers and will ensure that your organization is taking all necessary steps to avoid fines and lawsuits while cultivating a workforce that will power your success.


Need assistance with helping your small business avoid costly HR pitfalls? Contact CBR today at (602) 200-8500 or to discuss your needs with one of our HR experts!