While the personnel functions within a small company can be challenging, there are answers out there, too.
By Bill Price
Many businesses start as a family affair with their children pitching in. Sometimes it is two friends with nothing more than a handshake and a verbal agreement to split the profits. These small business situations may include arrangements for friends or part-time students to help out from time to time. Little regard is given to government regulations such as overtime or discrimination or reporting. Yes, these lapses frequently include multiple legal violations and underreporting of taxes.
There comes a point when these business owners begin to worry about the long arm of the government and begin to look into a more responsible way to run a business. The normal progression for the Human Resource (HR) management role is for that undertaking to go from the owner to an office manager to a human resource manager. During this transition period, much of the HR functions are outsourced.
So when do you bring the human resource role inside the company? I am going to provide a vague answer but it depends on the knowledge of management, the complexity of the HR role, and the employee turnover rate. A time honored rule of thumb is to staff one full-time human resource manager for every 100 employees. This would still require considerable outsourcing for a variety of activities.
Small businesses commonly accomplish the human resource management function by having an office manager who takes care of paperwork, pays the bills, and keeps an eye on basic personnel issues. The bulk of the HR role is outsourced to a PEO (professional employer organization), employer group, or a staff leasing firm. PEOs efficiently handle the payroll tasks and are capable of assuming most of the human resource responsibility. Some small companies transfer employees to a staff leasing firm and become a “co-owner” of the employees.
Beware that this does not release you from liability for the employee’s actions. For companies with fewer than 25 employees, the administrative costs of outsourcing range from 5 to 10 percent of salary, and this does not include the actual cost of taxes and benefits. For much larger companies, this drops to something like 2 to 3 percent per employee.
Getting Help for Small Businesses
I am not a strong proponent of government involvement in business, but there are some things that they do right. Informative websites that are user friendly are available online via the Small Business Administration and the Department of Labor small business resource center. In the Permian Basin we have the Small Business Development Center (SBDC) associated with the University of Texas of the Permian Basin. The SBDC is particularly adept in assisting with business plans and locating business financing.
It is well known in the HR field that companies with better strategic plans for human resource management have better survival rates. Small businesses typically lack a strategic plan for their human resource role. Thought should be given to how compensation relates to expected employee ability, which in turn relates to the capability of the firm. Specifically, are you a low cost provider or are you the premier leader in the industry? Do you have a plan for employee growth and ability? Have you thought through the benefits packages offered and how this relates to employee morale and turnover? Does your employee growth plan match the overall company growth plan?
More than half of the people in the United States work for small firms. The U.S. Small Business Administration defines a small business concern as one that is independently owned and operated, is organized for profit, and is not dominant in its field. In addition, the factors that determine whether an entity is a small business actually vary depending on the number of employees (upper limit ranges from 100 to 1,500) or in some cases depends on the revenue dollars. For example, in the category of crude petroleum extraction, the upper limit for deciding whether a business is a small business is “fewer than 500 employees,” while for support businesses the dividing line is “less than $35.5 million in annual revenues.”
Management and human resource activities tend to be fairly informal in small companies. Management is able to quickly make adjustments in work conditions for all employees. Training, in particular, is accomplished by supervisory on-the-job training.
The Small Business Administration estimates that small business owners spend up to 25 percent of their time on personnel related paperwork. Think about this. Is your time better spent on personnel or is it better spent doing other things?
There are several HR software systems available to assist small businesses with essential record keeping. These are priced at $200 to $500 depending on the package and are not difficult to understand. For example “Staff Files,” “Simple HR,” and the many HR products through gNeil Company should meet the needs of most companies with fewer than 100 employees. The products track employee basic information, hours worked, performance evaluations, benefits, training, and supporting documents. Some of these packages have employee manuals and handbooks that can be customized to fit the needs of the firm.
The best place for job descriptions is O*NET, which is supported by the Department of Labor. This is a wizard that allows employers to construct an organization chart, that guides employers through a job description, and that assists in developing the candidate requirements. It is quite powerful and it is free.
Key HR Functions
Small business owners tell me the most challenging task is finding great employees. Professional positions are particularly difficult to recruit, as highly qualified professionals are reluctant to join very small companies. One of the best ways to find hourly employees is by word of mouth. By this I mean that you discuss your needs with current employees and ask them to help. Talk to suppliers and customers as you explain your needs for good employees. These contacts tend to recommend honest hardworking employees, as their own reputation is on the line. Unfortunately, this is typically a slow process. It is not unusual for owners and supervisors to go shopping at the competition, chatting with their friendly employees, then slipping them a business card with an invitation to apply for a job. Not only is this unethical, it can cause a lot of ill will among your competitors. Employment agencies are expensive, and newspapers should be a last resort as this often brings around numerous unqualified candidates.
Basic employee testing can be outsourced to specialists. For example, drug testing for employees is easily handled by local labs specializing in this. When a candidate is expected to have a specialized skill, then the company can test his or her ability by using a work sample. For example, if the job is to be driving a forklift, an employer can test their ability to drive and perhaps move heavy crates. A dangerous direction to go is administering intelligence tests or homemade knowledge exams. From a legal perspective, these are not likely to be properly administered or interpreted. They may not be truly valid predictors of job ability and easily lead to lawsuits if candidates are rejected. Don’t do this unless you have a professional agency assist you.
Interviews of candidates can be accomplished in a small company more efficiently than in a large company. The main reason why is that the interviewer is typically the owner of the firm and thus is someone who knows exactly what he or she needs and thoroughly understands the company culture. On the other hand, owners may be too friendly. If they are not completely familiar with potentially discriminatory questions they can easily wind up in the courts for saying the wrong thing.
Paying wages that are too high is expensive and paying wages that are too low leads to low morale and high employee turnover. You have to get this right in the beginning. If you don’t know the going pay rate for a new position, you can try internet web sites like salary.com for some help. A more comprehensive source is the DOL “Career One Stop” website, which has a wizard that walks you through a matrix to arrive at a probable pay scale. I checked this and found that in Odessa, Texas, a welder will earn an annual median wage of $40,000 while the top 90th percentile can reach $83,900. These are both free sources of information.
One of the understated benefits for employees in small businesses is the flexibility in work schedules, which can allow for extra time off or unusual work schedule accommodation. As a small business owner, you should be aware that it is still important to offer some type of health insurance. In spite of what supporters of Obamacare say, small businesses have always been able to offer insurance at a cost comparable to that paid by larger companies. They do this by utilizing group plans through a PEO or Employer Group, or through employee leasing. Other savings are realized by customizing the insurance package.
If you have fewer than 50 employees, you can also use the Affordable Care Act small business exchange which offers insurance at a group rate. If you have fewer than 25 employees (making less than $50,000 on average) you may qualify for the health care tax credit. You must pay at least half of the total cost for the insurance. However, the tax credit is is worth up to 50 percent of your contribution toward the employee’s premium, which makes this a very attractive option for small businesses. Try this website to find out more: https://www.healthcare.gov/small-businesses/ .
I’ve tried to highlight some of the ways whereby small businesses are able to cope with the human resource tasks. The problem is that most human resource functions and laws apply equally to large and small businesses. Consequently, the HR role is handled by the owners or an office manager, with the bulk of the personnel functions outsourced to another agency. Therefore, small businesses do have difficulty meeting the HR challenge when human resource professionals are not present to handle this role.
Dr. Bill Price is the Associate Dean and a Professor of Management at The University of Texas of the Permian Basin. He has previously held several positions in human resource management and other leadership roles. He has taught various courses in human resources and has published a number of articles in the areas of human resource management and strategy. He can be reached at firstname.lastname@example.org.