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Top 14 HR Challenges for Small Businesses

Julie Ritzer Ross
Julie Ritzer Ross

To keep your small business running smoothly, you must be capable of handling the inevitable HR challenges that are sure to arise. Here are the top HR issues and how to resolve them.

  • Small businesses may be impeded by HR-related challenges more than larger businesses due to limited resources, including staff and money.
  • Effective HR management – including knowledge of the HR challenges faced by small businesses and the solutions and strategies that exist to address those challenges head-on – is critical for startups and small businesses in a competitive business environment.
  • HR obstacles commonly faced by small businesses involve compliance and hiring issues, salary and benefits management, and employee recruitment and retention.
  • This article is for small business owners and human resources professionals who want to know what the top HR challenges they are likely to encounter are and how they can address them. 

All employers grapple with human resources (HR) challenges. For small businesses, however, these obstacles can pose more of a challenge because of the size of the company, limited financial resources and a smaller pool of human capital. That makes effective HR management extremely important in an ever-more-competitive business environment. 

What are the top HR challenges businesses face?

Even companies with a good understanding of human resources management encounter HR-related challenges. Here are 14 of the most common HR challenges faced by small business owners:

1. Legal and regulatory compliance

Not complying with federal, state, and local employment laws, including those that govern hiring practices, wages, taxes, sick leave, and workplace safety, can lead to hefty fines. They could drive you out of business.

Staying up to date on employment laws is increasingly difficult as not only are they changing, but in many cases, they are becoming more complex. Keeping abreast of these changes and ensuring compliance can be a full-time job.

Solution: Business owners should periodically check the U.S. Department of Labor's online Employment Law Guide for the latest developments in federal employment law. An additional resource is your state's department of labor website, where you can learn about changes that may impact your business. Consult an attorney with your specific questions and/or to assess your business's level of compliance with applicable employment laws, particularly state and local ones.

2. Finding the right employees

Employee recruitment requires time and money, two things that small businesses frequently don't have. It takes the average U.S. employer 52 days to hire the right candidate and costs $4,000. Replacing an employee costs more, about 33% of the predecessor's annual salary. There are also no guarantees that the person you hire will be right for the job.

Solution: Establish set criteria for making hiring decisions, including years of experience required and the recommended skills and educational background needed for each position. Ask behavior-based questions to ensure that a candidate is the right cultural fit for your company. Consider hiring a staffing company to assist with recruitment or that can refer "temp-to-hire" candidates who work on a trial basis while you assess how well they fit the role.

3. Retaining talent

Keeping talented employees can be as difficult as finding the right employees in the first place.

Solution: Offering a competitive salary, along with an attractive benefits package, is a good start. Proper onboarding is important, too. According to the Society for Human Resource Management, onboarding should involve training that covers four components: compliance (rules and regulations), clarification (roles and responsibilities), culture (the organization's values and "personality"), and connection (relationships with existing staff, supervisors, and mentors). Allowing and encouraging your employees to explore and learn new skills may also increase the likelihood of keeping them, said Julie Jensen, founder of Moxie HR Strategies.

4. Training employees

Providing proper employee training may not only increase the efficiency of your organization, it may also foster employee engagement and loyalty. For small business owners, money and time may be a barrier to providing it, however.

Solution: Managers and other senior leaders can serve as mentors for employees.

5. Conflicts between owners/managers and employees

Gregory Besner, founder of CultureIQ and author of The Culture Quotient, said it is important to recognize that managers have a significant influence on one's experience at work. "If employees don't feel supported by their manager and valued at work, conflict will ensue," Besner told Business News Daily.

Solution: Have those in charge undergo management training to develop leadership skills. These skills should minimize conflict and empower you and your managers to better handle conflicts that arise.

6. Resistance to organizational change

Inevitably, your business's management structure, internal processes and strategies change as your company grows. Decreased productivity, sagging morale and other problems can accompany this evolution.

Solution: Communication is critical. In your discussions with employees, focus on the rationale behind the changes and the good that you expect may come from them, even if the transition poses challenges. Address the changes often in team meetings, emails and company newsletters.

7. Workplace diversity

A workforce comprising individuals from different cultures, ethnic groups and generations yield small businesses the broad perspective, fresh ideas and innovation they need to remain competitive, Besner said. Still, companies struggle with intolerant employees. Further, companies that fail to correct the situation and protect workers from harassment are at greater risk of lawsuits, financial consequences and damage to their reputations.

Solution: Fostering a company culture that prioritizes teamwork and mutual respect is the first step. Set standards of behavior and accountability – and adhere to them unfailingly. If your company doesn't have a diversity and inclusion training program, here is how to implement one.

8. Employee compensation

Small businesses typically lack the deep "pockets" of large businesses, putting them at a competitive disadvantage with retaining employees. The cost of benefits, taxes, training, and the like – totaling as much as three times the employee's salary – makes matters worse.

Solution: Benefits like a 401(k) plan can help compensate for a lower salary. The same is true of perks that improve employees' work/life balance, such as flexible working hours and extra paid time off. Commuter benefits, free food and discounted memberships to wellness programs can also fill in the gap. 

9. Developing a competitive benefits package

A good benefits package ranks among job candidates' top criteria when deciding whether or not to accept a job offer. According to a study by Justworks, the quality and options of health benefits weigh heavily for 88% of job candidates considering whether or not to accept a job offer. Research from Accenture reveals that 68% of individuals consider pension and retirement benefits a "decisive factor" in whether or not they take a job. For small businesses, the cost of benefits can be difficult to bear.

Solution: Businesses with 50 or fewer employees may qualify for the Small Business Health Options Program (SHOP). Some associations offer group health plans that allow companies to obtain price breaks on employee health insurance by teaming up with other businesses as if they were to obtain health insurance as if they were one employer. And consider this: Retirement benefits, such as 401(k) plans, yield tax breaks that may offset the expense of introducing them. 

10. Employee productivity

Employee productivity is critical to the success of every business, but low employee engagement and motivation, inadequate (or no) training, and/or too few staff can impede organizations.

Solution: Start a dialogue with staff to identify specific productivity issues. Brainstorm ways to address them. Hold employees accountable for their performance, setting specific goals and objectives, and holding formal performance reviews to document progress. Enhance motivation and engagement by investing in training wherever possible, and regularly recognize employee contributions and accomplishments. "You would be surprised at the extent to which a nice word, praise and trust influence employees to give their maximum," said Mike Sheety, owner of That Shirt.

11. Resistance to technology adoption

Technology continues to evolve, and businesses that resist implementing it stand to become obsolete. Another problem that many small businesses grapple with are employees who are resistant to change.

Solution: Explain to your employees why and how the technology is being adopted, emphasizing how it will not only benefit the business but make their jobs easier. Establish clear goals and deadlines for completing each technology implementation initiative. Take advantage of any training available from technology vendors to increase employees' comfort level with the new programs.

12. Managing remote employees

Keeping your remote workers, who may be spread out across the country, engaged and productive is challenging, which in turn leads to frustration for managers. 

Solution: According to the Harvard Business Review, establish daily procedures for checking in with remote workers and set formal expectations for the frequency, method, and ideal timing of communications.

You can also build trust and camaraderie among your remote staff by soliciting their feedback and acting on it, inviting them to online social events, and keeping them abreast of company developments. Remain flexible about telecommuters' schedule, provided they complete all of their work within their allotted hours.

13. Maintaining a sense of calm and normalcy in turbulent times

The COVID-19 pandemic, political upheaval, and general unease in the country have made it more challenging to maintain the level of calm and equilibrium needed to keep businesses running smoothly, said Melissa Nardiello, operations and human resources coordinator at Rebel Interactive Group.

Solution: Nardiello's company holds weekly Zoom meetings during which employees play games, give shout-outs to each other and receive training on different topics. Many of the company's Slack channels are devoted to "keeping things real," Nardiello said, providing outlets for employees to post pet photos, brag about their children, and add workplace-appropriate memes and jokes. 

14. Managing HR without a dedicated HR staff

"Most often, small business owners cannot afford to hire an HR professional and will then either do it themselves or appoint someone else – such as their spouse or the office manager – to handle these types of matters," said Ivelices Linares Thomas, founder and CEO of The HR Hotline. This may work for a little while, but not for the long term. [Read related article: When Is It Time to Hire a Full Time Human Resources Employee?]

Solution: Professional HR outsourcing firms offer access to HR support on a subscription basis. External HR consulting firms can assist your company with updating its employee handbook; complying with federal, state, and/or local requirements; or preparing payroll, said Marina Galatro, executive HR consultant, HR services at ABD Insurance and Financial Services.

What is the importance of effective HR management?

HR encompasses many roles, from ensuring compliance with employment laws to overseeing and executing recruitment, training and managing benefits programs.

Effective HR management – including efforts to handle common HR obstacles – is important, because it increases the likelihood of your company recruiting and retaining real assets that can push your company ahead. Further, it reduces the risk you face by not complying with laws and regulations, it ensures that your employees are adequately trained to do their jobs, and it ensures that workplace conflicts are swiftly and properly handled.

Key takeaway: Effective HR management and familiarity with strategies and solutions to overcome common HR-related obstacles are critical to the success of businesses.

Image Credit: fizkes / Getty Images
Julie Ritzer Ross
Julie Ritzer Ross,
Business News Daily Writer
Julie Ritzer Ross graduated from New York University in 1980 with a Bachelor of Arts degree in journalism. A two-time recipient of the Jesse H. Neal Award for business feature writing and, she has covered a wide variety of B2B topics—from general business and technology to marketing and human resources—for a wide range of publications. Before becoming a freelance journalist 25 years ago, she held a series of editorial positions with several New York City and Northern New Jersey-based trade magazine publishers. When she’s not writing, she enjoys reading, travel, cooking and spending time with family and friends.