Do you need HR for your small business?

By Athina Iliadis, AugmentHR

HR for small businesses is as essential as any other company. You need it in some form as part of operations. But, the question many business owners go back and forth on is how to do HR. Should you do it yourself, outsource HR to an agency, or create an in-house HR department?

Most small business owners think good HR looks like:

Admin paperwork and document filing
Ticking the compliance box
Creating a "fun" work environment to keep people happy
Stepping in to fire employees

In my opinion, these are outdated, tick-the-box HR strategies. True strategic HR that drives business growth looks more like this:

Knowing each leader's unique strengths and weaknesses
Creating a deliberate, inclusive culture
Helping the business thrive
Streamlining and automating business operations
Implementing strong hiring practices to get the right people (and keep them)
Pushing boundaries and sometimes disrupting the status quo

In the following post, I’ll use my 25+ years helping business owners with their HR to explore this in more detail and dive into the common questions to answer if you need HR for your small business:

Do you need HR for a small business?
Is an HR department necessary?
What are the risks of not having an HR department?
Is it legal to run a company without HR?
What does HR do for a small business?
At what size does a company need HR?
How is HR in small businesses different from large companies?
How much does HR cost for a small business?

Do you need HR for a small business?

No matter how big or small your team is, you need HR support. Because your people are the engine that drives your business forward. If you don’t have people, then you don’t have a business.

So you need HR even if it's on a smaller scale. And, you need it for much more than just recruiting and hiring. HR plays an important role in ensuring legal compliance and making sure your company follows all industry rules and regulations. You also need it to administer payroll and benefits, to manage employee records, and to manage employee performance.

For very small teams, HR functions might be handled by the owner or outsourced to an HR consultant or service. As the business grows, a dedicated HR role becomes more important.

Is an HR department necessary?

An HR department is not strictly necessary for every business, especially small ones, but HR functions are always necessary. Here’s the difference between an HR department and HR services for your small business:

HR Department: A formal team dedicated to human resources. This becomes more essential as a business grows.

HR Services Functions: Tasks like hiring, payroll, employee relations, legal compliance, and performance management. These must be handled, regardless of company size. These can be managed by the company owner or manager, outsourced to an HR consultant or through HR software.

You don't need a formal HR department at first, but you do need to manage HR responsibilities effectively.

What are the risks of not having HR support?

Not having an HR support whether through a dedicated department or HR outsourcing can expose a business to several risks, even if it's small. Here are the key risks:

5 risks of a small business not having an HR department

Legal Non-Compliance: Without HR expertise, it's easy to violate labour laws, such as those related to wages, overtime, discrimination, or termination. This can lead to lawsuits, fines, or government penalties.
Poor Hiring Practices: Without structured hiring, businesses may face inconsistent screening, unqualified candidates, or even discriminatory practices, risking legal trouble and poor performance.
Inadequate Employee Documentation: Failing to keep proper records (like contracts, time sheets, and disciplinary actions) can hurt the company in disputes or audits.
Payroll Errors: Mistakes in payroll or tax withholdings can result in financial penalties and unhappy employees.
Workplace Conflicts: Without HR, there may be no clear process for handling grievances, leading to unresolved conflicts, low morale, or even legal complaints.
Low Retention and Engagement: A lack of employee support, benefits management, and performance tracking can lead to higher turnover and reduced productivity.
Lack of Structure and Policies: Without formal policies (e.g., attendance, leave, conduct), you may face inconsistent treatment of employees, which can cause confusion or claims of favouritism or discrimination.

Is it legal to run a company without HR?

Yes, it is legal in Canada to run a company without a formal HR department. There is no legal requirement that a business must have an HR team or manager.

However, HR responsibilities must still be fulfilled, even if handled by the owner, a manager, or an external provider. All Canadian businesses must comply with employment laws, including:

Employment Standards Act (provincial or federal)
Human Rights Codes
Occupational Health and Safety regulations
Pay equity laws
Privacy and record-keeping laws

What does HR do for a small business?

HR plays a key role in keeping a small business organized, compliant, and productive. It manages hiring by creating job descriptions, posting ads, screening candidates, and overseeing onboarding. HR also maintains employee records, tracks time off and performance, and ensures legal documentation is in order. Payroll and benefits are handled by HR, including accurate pay, tax deductions, bonuses, and managing benefits like health insurance.

Ensuring legal compliance is another major function, helping the business follow labour laws and avoid issues like discrimination or wrongful dismissal. HR also develops company policies, supports fair staff treatment, and coordinates training, performance reviews, and career development. It handles conflict resolution, advises on discipline, and fosters a positive work culture through engagement and team-building efforts.

At what size does a company need HR?

Once you reach about 10–15 employees, managing payroll, policies, and performance informally becomes more challenging and time-consuming. Around this size, many businesses either hire an HR person or outsource HR tasks.

You might need a dedicated HR department if:

You're growing fast and hiring frequently.
You're dealing with complex employment laws.
You want to create a strong, compliant workplace culture.
You need to reduce risk and liability related to employee issues.

How is HR in small businesses different from large companies?

HR requirements in small businesses differ from HR in large companies in several key ways:

1. Scope of Responsibilities: In a small business, HR usually handles everything. In large companies, HR is often divided into specialized roles (e.g., recruiters, benefits managers, compliance officers).

2. Resources and Budget: Small businesses have a limited budget, so HR may rely on basic tools or wear multiple hats. More funding in bigger organizations allows for advanced HR systems, professional development programs, and larger teams.

3. Formality and Processes: Small Business: HR practices tend to be more informal and flexible in startups, especially early on. Large companies have formalized policies, procedures, and documentation that are standard and legally necessary at scale.

4. HR Staffing: One person might manage all HR tasks in a small business, or the owner might handle HR without formal training. Bigger companies have dedicated HR departments with multiple professionals specializing in different areas.

5. Strategic Involvement: HR is often reactive in smaller firms. They are focused on solving immediate issues like hiring or compliance. HR is more strategic in big businesses. It’s involved in workforce planning, diversity initiatives, and organizational development.

6. Technology Use: Small businesses may use simple spreadsheets or affordable HR software, while large companies invest in enterprise-level HR systems (like SAP, Workday, or Oracle).

HR in small businesses is more hands-on, generalist, and resource-conscious, while in large companies it’s more structured, specialized, and strategic.

If you only need HR some of the time, why pay for it 100% of the time? With AugmentHR there are no retainers or subscription fees. You’ll get HR services on demand with flexible hourly fee packages and no commitment.

How much does HR cost for a small business?

In a previous blog, we wrote about how much HR should cost. Like most things, the answer is it depends. Considerations like the size of your company, industry, and location all factor in. Generally, the cost of HR for a small business is about $2,000 to $3,000 per employee per year. Costs per employee go down as you add more employees.

A final word on HR for small businesses

HR is not just about ticking compliance boxes or policing process & procedure. It’s about helping create a workplace where people feel respected, where they’re paid what they’re worth, and where they’re trusted to do the job you hired them to do. It’s that simple.

And here’s the thing: it’s ok to bring in expert help when something falls outside your realm of expertise. HR doesn’t have to feel overwhelming or complicated. Let a professional handle the people stuff, so you can focus on what you do best.

Our HR consultants have decades of experience combined across a wide range of businesses & situations. Call us to get your free HR compliance checkup of 8 key areas to see what you’re missing.

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Athina Iliadis is a senior HR consultant with leading HR services provider, AugmentHR. Athina uses her 25 years of experience in HR and her personable nature to help business owners navigate the tricky landscape of HR compliance, best practices and talent management and development. Her clients love her strong work ethic and ability to make the complex simple.