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Do companies need a HR department?

If you are unsure as to whether your business should have a HR department and if you are thinking of introducing one, how you should best go about this? The below will give you a clear guide.

Is it illegal to not have a HR department?

No. You are entitled to choose whether you do or do not hire a HR manager or whether you have an in-house HR department. You will need to provide a contact in order that employees know how to access HR documentation and know who to go to if they have a grievance or need health and safety information. It will be entirely up to you and your business need as to whether you choose to hire a full time or part time employee or not.

Companies with no HR department: How to protect yourself

Even if you do not choose to hire a HR manager, there are other things you can do to protect your business from employee issues getting out of hand. You might choose to outsource HR advice to an external HR professional or to an employment solicitor at the point when advice is needed. This will help, particularly if you have already sought advice in drafting initial policies and contracts from a HR professional or employment solicitor, as you may then have the confidence and guidance needed to apply legally compliant policies going forward.

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At what point does your business need a HR department?

There is no hard and fast rule as to when you should or should not have an in-house HR department. It is likely that if you only have a handful of staff, that you can manage by just seeking early professional advice on your business’ HR processes and draft documentation, seeking advice again on an ad hoc basis if your business experiences specific staffing issues. If this is the case for your business, our employment solicitors are experienced in dealing with new businesses looking to hire their first employees and would be happy to help with this. If, however, you feel that you need more regular day-to-day support with HR issues, you might want to consider your business hiring a HR department directly. This may be if:

  • Your business is expanding rapidly. You may be taking on a lot of new employees at once at the same or a new location and may need assistance with the recruitment and retention of the best employees for your business. You may need somebody internal to the business to help with this, someone who has intimate knowledge of the workings of your business, and the roles and candidates needed for the roles your business wants to fill.
  • You wish to tightly review performance. You will probably find it easier and less expensive to employ a HR person directly so that someone within the business can assess employee performance over a prolonged period. This will help you ensure that they have the correct training, equipment etc, if your business requires for performance to be regularly checked. This might be particularly useful where not reaching an expected level of performance can be particularly costly to the business and so investment in this area is worthwhile.
  • You are unsure of current employment law and how to keep up with necessary related HR changes required in your business. Employment law is constantly changing. If you have a lot of employees it can be difficult to keep up with all of the relevant changes, so you may wish to hire someone in-house to stay on top of these changes and advise you of how these will affect your business.
  • Increasing employee disputes. Whether this is specific to your business and changes you have made or part of the general trend towards increasing employment disputes since the abolition of Employment Tribunal fees, employee disputes are on the rise. This means that having an effective HR department in-house, who could act quickly to try and diffuse disputes, could be helpful.
  • HR is becoming too much of a distraction so you can’t effectively run your business. It may seem expensive hiring an employee to deal with HR, but if there are so many issues that this is becoming too time consuming for senior individuals in the business, it may actually be a cost saving if this can be taken out of the hands of senior managers so that they can concentrate on bringing in business.

Pros and cons of having a HR department

For you to assess whether your business should consider employing an in-house HR professional, here are some of the general advantages and disadvantages of doing so:

Advantages of an in-house HR professional Disadvantages of an in-house HR professional
You are able to deal with urgent HR matters faster when they arise, because you can order your own priorities as a business and do not have to await the availability of another professional from another business. You are able to retain control in-house and check-in with progress on any employee concerns as regularly as required.   It could be expensive to pay the salary and other employment benefits of an individual who may not be fully engaged if you do not have many HR matters to deal with.
Similarly, an external HR adviser or employment lawyer may not be able to offer the same level of personal attention and dedicate as much time to issues that may seem more delicately dealt with over more time, in-house.  The particular individual(s) may not have experienced a particular scenario before and may need external legal or more specialised HR advice in any event and so the business may end up paying twice to resolve the same HR issue.  
Employees may feel more comfortable talking to someone they know from inside the business, rather than an external HR adviser. As some employment complaints can be sensitive in nature it is important that HR is approachable and not distant.   If an in-house HR professional makes a mistake it will be the business that pays, if external legal or HR advice is sought you have the benefit of having asked the advice of a third party and could sue if reliance on their expertise has led to an avoidable loss for the business.
  Less legislative compliance might be the result of a generalist in-house HR department, as opposed to companies which specialise in payroll or pensions.  
  Fewer people employed does not only mean a reduced wage bill, but fewer people to supervise and manage. A business might wish to streamline and just concentrate on the central role they perform and so benefit from the efficiency of outsourcing HR functions.  

Creating a HR department: Where to start

There is a lot to think about if setting up an in-house HR department, so where do you start? Here are some suggestions that you may want to consider:

  • Company culture. Make sure that everyone is clear what your business stands for, what its ethics are and how it operates. If this is clear, hopefully this will lead to a cohesive and positive working environment and a team all pulling in the same direction.
  • Job descriptions. Be clear exactly what roles you wish for your business to fill and the precise skills, qualifications and experience that will be required and is desirable for each.
  • Company structure. Be clear on the hierarchy, salary levels, who reports directly to whom, as well as who or which department is responsible for what.
  • Clear, precise, well drafted employment contracts and policy documents. It is recommended that you seek professional advice in getting these documents right in the first instance and updated periodically, in order to ensure they are still legally compliant. If you would like assistance with this, please contact our specialist employment solicitors. It will be a worthy investment to have all of your policies clearly set out in writing, as there will be less uncertainty and so less likelihood of employees and employers being unsure where they stand on workplace issues and so less likelihood of conflict.

How to succeed as a one person HR department

Whether working as a one person HR department or as part of a team, it is critical that you are accessible and approachable to all staff, so that you can be made informally aware of any issues in the workplace at the first available opportunity. If you are aware of issues as soon as they arise, you are more likely to be able to resolve them before a deeper conflict ensues.

It is also advisable that if you are working alone, that you join relevant professional groups (whether this be networking within the HR profession or joining online forums or groups related to HR professionals) this should offer you extra support if you need it.

You could also seek advice from the Chartered Institute of Personnel and Development (CIPD) relating to HR matters at work.

Don’t claim to be an expert on everything. If you are unsure and unable to find the answer about a HR issue, be honest and seek further advice. We often find ourselves supporting HR professionals who are extremely experienced and knowledgeable but who have an unusual HR issue upon which they would like specialist legal advice, please do get in touch if we can help.

Internal audit checklist for HR department

It is a good idea to audit or review your business’ HR policies, procedures and documents at least once every year and for some business’ more regularly than that is recommended.

You will need to be clear on your aims before you start, to ensure that you achieve them. For example, you may want to consider any negative feedback from employees on policies or procedures, comments from exit interviews and reasoning for poor retention of staff, looking at whether the business’ recruitment policy is fit for purpose.

It can be helpful to look at the following during your HR audit:

  • Is your business legally compliant? Are company policy and procedure documents up to date with current employment law? If not, how will this be remedied? How quickly can this be done and how much might it cost? If you are in doubt and would like support with this, please contact our employment solicitors.
  • Is your business following best practice? Are the best practices as suggested by the HSE and ACAS being followed? Are your own business’ policies being followed as drafted and intended?
  • Is the business’ intended strategy being implemented? Do your business’ processes and procedures align with its strategy and help your staff work towards implementing the intended strategy? If not, how can this be changed? Does your strategy need modifying if the policies and procedures cannot be altered sufficiently?
  • How is HR performing in the different areas of your business? Are there areas of the business where HR is performing well and not so well within your business? If there are areas where HR is not achieving its optimum how can this be changed? You may particularly want to review critical HR functions such as recruitment, training, employee relations and performance management.

Having a clear checklist of what you need to review from the outset can be helpful in ensuring that nothing is missed. Looking at hiring you may want to consider:

  • Job descriptions
  • Forms
  • Medical information
  • Advertisements
  • Data protection and GDPR
  • Initial employment checks and documents

With new employees you might want to look at communication and training on the company’s culture, policies and procedures and ensure these are all accessible and fully understood.

Other policies relating to employee relations are worth reviewing regularly, such as performance management, as well as disciplinary and grievance procedures, as there are statutory requirements relating to these.

It can also be helpful to regularly review wages, benefits, hours, sickness management and annual leave of staff, to ensure that this is fair as between staff members within your business and competitive in your business’ market.

Another important area of change which should be reviewed carefully is data protection and GDPR. If you are unsure of the business’ obligations and whether it is compliant, speak to a professional adviser.

Once you have a clear checklist and have reviewed this, your business should look at providing a HR questionnaire/survey for employees to complete. This should try to collect useful data which is relevant to the HR audit you are carrying out and should of course be confidential. Information that you will probably want to draw out from a successful HR audit questionnaire might relate to:

  • Absence rate and reasoning for this
  • Diversity statistics (for example gender pay differences)
  • Time-to-hire metrics
  • Compliance training information
  • Overtime payments and employee expenses
  • Productivity
  • Employee happiness and well being (mental health)
  • Retention rate within the business as a whole and in respect of certain areas of the business

Having collected and collated all staff questionnaire data, you should then be in a good position to evaluate the business’ policies and procedures and see if any adjustments need to be made and how this may best be done for your business. If you would like assistance with setting up an audit or implementing any changes after a HR audit has been carried out, please contact our employment solicitors.

About our expert

Sally Gwilliam

Sally Gwilliam

Employment Partner
Sally joined the employment team in August 2021 as a senior employment solicitor and became a partner in October 2023. Sally qualified in 2004 at international law firm DLA Piper, and worked there for a further 11 years. There she gained excellent skills and experience in employment law working for medium and large businesses across multiple jurisdictions and on complex legal and strategic issues. Since 2015, Sally has worked for two smaller legal businesses where her client base changed to SMEs giving her a fantastic understanding of the differing needs and priorities of any size of business and in a wide range of sectors.

What next?

If you need advice on Human Resources functions, or with drafting or reviewing HR policies and procedures, our employment law solicitors can help. Call us on 0800 689 1700 or fill out the short form below and we’ll get back to you within 24 hours.

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