If you’re just starting out as a small employer, you might have to take on new job responsibilities and administrative tasks as you grow. Many of these tasks would typically fall under human resources (HR).
According to a recent survey, 64% of small business employees say that their employer is involved in HR operations, which makes 24% of workers feel uncomfortable. Additionally, 47% think that the HR structure at their company is unprofessional1. This can contribute to a lack of trust and morale in the workplace.
If your business grows faster than you can handle on your own, it’s time to set up your first HR team. This four-step guide will help you determine how to set up an HR department and learn which tools your new team needs to succeed.
In this blog post, you’ll learn:
- How to build an effective HR department that supports your employees and business goals.
- How to organize essential employee documents and ensure regulatory compliance.
- Competitive employee benefit options that can help you attract and retain talented workers.
What does an HR team do?
A human resources department manages initiatives related to a company’s employees. While taking on an HR role yourself may save money upfront, handling all of the responsibilities in addition to your other job roles isn’t realistic in the long run.
The following are some key functions of an HR team:
- Keeping current employee records
- Talent acquisition, such as:
- Developing a recruitment process for potential hires
- Drafting job postings
- Helping hiring managers find qualified candidates
- Assisting in the selection process
- Creating an onboarding process
- Job performance management
- Payroll management and determining fair compensation rates
- Disciplinary actions
- Conflict resolutions
- Risk management
- Updating company rules and employment policies
- Creating emergency action plans
- Supporting employee morale and well-being
- Training employees and offering career planning
- Maintaining compliance with labor laws
As you can see, an HR department is more than just a talent management team. HR is a resource for building employee trust, addressing concerns, and ensuring employee relations between senior management and other staff members run smoothly. Most importantly, they should care about the well-being of their employees and the company’s culture.
Next, we’ll get into the four steps you should take to set up an effective and impactful HR department.
1. Define your organization’s culture
Before you build an HR department, you must consider your company’s culture and core values that you want your entire organization to embody.
According to SHRM, about 83% of employees at companies with a good workplace culture are more driven to produce exceptional work than those who have a poor company culture2. The culture you create will determine which employees are a good fit for your business and its strategic goals. It also gives your HR team direction to recruit and retain workers effectively.
Your HR department also plays a key role in shaping a positive company culture and promoting employee engagement.
A core HR function is establishing initiatives that promote a positive work environment, such as:
2. Organize important employee documents
The next step is creating and organizing the employee files that your HR team must manage.
Generally, there are three distinct types of employee files to create and maintain:
- Employee I-9 forms
- Personnel files
- Medical files
Let’s go over each in more detail.
Employee I-9 forms
Form I-9 is an employment eligibility verification document3. It helps you verify the identity and employment authorization of anyone you hire to work for an organization in the United States.
The federal government requires you to have new employees complete this form. You must also keep a completed I-9 on file for each employee, including citizens and non-citizens. Business owners must keep all of their employees’ I-9 forms for a certain amount of time. They also must make them available for inspection by authorized government officers if needed.
Having all of your I-9s in a single file is a good idea. This way, they’re easy for your new HR team to find and reference later.
Personnel files
Another key HR function is creating and maintaining a separate personnel file for each employee. That way, you’ll have all their information in one place.
Here are a few things you might include in your employees’ files:
- Résumés and employment applications
- You should keep these files, even for potential candidates you don’t select, for at least one to three years
- Offer letters, employment agreements, or contracts
- Employee compensation, such as annual salary or hourly wages
- Basic employment data (including W-4s)
- Information about participation in benefit programs
- Awards, recognition, or disciplinary documents
- Employee performance and time records
- Termination documentation and exit interview information
Medical files
The last type of file you’ll want your HR department to maintain is a separate medical document for each employee.
These files include any information related to health or medical issues, such as:
- Applications for insurance
- Doctors’ notes excusing an employee from work
- Medical examination information
- Information related to disability
Maintaining confidentiality for all employee files, particularly those containing medical information, is essential. This is because the federal government classifies many of these documents as protected health information (PHI).
The HIPAA Privacy Rule provides federal regulations for how “covered entities,” such as employers, must safeguard a person’s PHI. It also establishes strict guidelines for the disclosure of this information.
3. Implement competitive employee benefits
Once you’ve organized your essential employee files, your HR department is ready to take on the vital role of choosing employee benefits and perks.
You’ll need competitive benefits to attract and retain top talent in your industry. Our 2024 Employee Benefits Survey Report found that 81% of workers say a company’s employee benefits package is a key factor in whether or not they accept a job.
In the following sections, we’ll review a few employee benefits options.
Group health insurance
Group health insurance is one of the most popular options for employer-provided health benefits. With a fully-insured traditional group health plan, the employer offers insurance from a carrier to eligible employees and their dependents.
Employees like group plans because they’re usually familiar with group health insurance, and the employer and employee share the monthly premium cost.
However, the downsides are that group health policies can be expensive, and the premium rate typically increases annually. This can make it challenging for small businesses and nonprofits to offer a group plan. Additionally, plan options are generally limited and may not work for all your employees’ needs, especially if you have multi-state or remote workers.
Employers can also offer a self-funded group plan. With this type of plan, the employer covers employee medical claims directly. While employers can save money by not paying premiums, it comes with a lot of risk for small employers. If your employees make frequent or expensive medical claims, you could end up spending more money than you have set aside, putting your business in jeopardy.
Health reimbursement arrangement (HRA)
A health reimbursement arrangement (HRA) is a tax-free health benefit option that allows you to provide a tax-free allowance that employees can spend on qualifying medical expenses, including individual health insurance premiums.
Three of the most popular types of HRAs available are:
- The individual coverage HRA (ICHRA): An ICHRA is an alternative to group coverage for organizations of all sizes. It has no contribution limits and allows for employee class customization.
- The qualified small employer HRA (QSEHRA): A QSEHRA is for employers with fewer than 50 full-time equivalent employees (FTEs). While it has annual maximum limits, there are no minimum limits.
- The group coverage HRA (GCHRA), also called an integrated HRA: Like the ICHRA, the GCHRA is for employers of all sizes, has no annual limits, and allows employers to set different allowances using employee classes. However, this benefit only reimburses employees for out-of-pocket costs, not premiums. Employees must participate in your group health plan to use a GCHRA.
With a QSEHRA or an ICHRA, employees can buy their preferred individual health plan, while a GCHRA allows you to supplement your employer-sponsored group health plan.
With an HRA, employers can set their own budgets and completely predict their costs. HRA reimbursements are also free of payroll taxes for employers and income tax-free for participating employees.
Employee stipends
Suppose you want to give your employees a flexible benefit that they can use for a broad range of perks. In that case, you should consider an employee stipend. Employee stipends enable you to provide a monthly expense allowance or reimburse your staff for various lifestyle expenses.
You can use stipends to reimburse individual employees for everyday items, including:
A taxable health stipend works similarly to an HRA but with fewer regulations on what expenses are eligible for reimbursement. They’re also an excellent option for organizations that employ 1099 contractors or international workers. If you have any employees who receive advance premium tax credits (APTC), a health stipend allows them to receive a health benefit without affecting their APTC eligibility.
However, because health stipends are taxable and don’t satisfy the Affordable Care Act’s employer mandate, many organizations prefer HRAs when considering a health benefit.
Other employee benefits ideas
There’s no shortage of employee benefits that you can offer your employees. To get the best engagement out of these perks, make sure you have a benefits administration strategy or benefits specialist on your team.
Other employee benefits ideas include:
- Life insurance
- Disability insurance
- Unemployment insurance
- Retirement benefits
- Vacation time
- Employee assistance programs
- Education assistance
- Access to mental health services
Providing benefits will help increase employee satisfaction and productivity. It can also reduce turnover rates and promote a healthy work environment.
4. Create an employee handbook
The last item on your HR department’s to-do list is to create a comprehensive employee handbook.
Handbooks aren’t exactly the most exciting thing to read. So, it’s common for new employees to skim over them without understanding them. It’s your HR team’s job to make your handbook engaging, memorable, and easy to read—that way, new employees don’t miss out on essential information they need to be successful at work.
If you’re unsure what to include in your handbook, here are a few ideas:
- Your entire organization’s history
- Employee orientation procedures and company goals
- A reference to organization-wide procedures or resources
- How-to guides on the tools the team uses
- Payroll information
- Company policies on eligibility for employee benefits
- Dress code policies
- Code of conduct
- Social media policy
- Drug and alcohol policy
- Anti-discrimination policy
- Time-off policy
- Safety policy
Conclusion
Building an HR department from scratch takes time. But it comes with a payoff for your business. Once you’ve completed the above four steps, your dedicated HR team can keep your organization running smoothly without having to manage every detail yourself. Investing your resources into building an effective HR department will equip your organization with the essential HR expertise to improve employee retention and stay compliant.
If you’re interested in offering personalized benefits to your employees, PeopleKeep by Remodel Health can help! Our HRA software helps organizations like yours launch and manage employee health benefits in minutes.
Contact us if you’re ready to find the right HRA for you and your employees!
This blog article was originally published on January 6, 2015. It was last updated on May 12, 2025.
2. The State of Global Workplace Culture in 2024
3. Form I-9
