Building an HR Department: A Step-by-Step Guide + Checklist

If you’re in the process of getting your business off the ground, setting up an HR department should be at the top of your checklist.

Whether it’s a startup or a large corporation, having a quality HR team will allow you to focus on the people within the company — and this is, arguably, what’s going to make you successful in the long run.

So where do you begin?

Our step-by-step guide will help you understand the vital functions of an HR department and give you the necessary tools to build one.

What is an HR department?

An HR department is a business support function that is critical to organizations.

The HR department manages the employee lifecycle and employee experience, starting from pre-hire, all the way through to offboarding and leave processes. They’re responsible for various workflows, including recruitment, learning and development, rewards, employee relations, and policy.

One of the most important functions an HR department has is to mitigate legal risk by ensuring the organization adheres to labor laws. The department also acts as a sounding board to resolve employee complaints and supports employee engagement. The department must work with the organization to always keep its interests and goals top of mind.

The role of HR

HR departments play a vital role in the health of an organization by managing and looking after the most important asset: its people. Here are the five main functions of an HR department.

1. Compensation and benefits

HR is responsible for managing rewards and benefits, creating and sustaining compensation structures that are inclusive, fair and designed to attract and retain top talent.

They will be heavily involved in designing salary structures and managing pay review processes, overseeing benefits like health insurance, retirement plans and wellness perks, administering performance reviews, and managing bonuses and incentives.

A critical part of this work is to conduct market research to ensure reward provision is still competitive, as well as to stay on top of trends and updates related to pay and reward, making recommendations to managers as needed.

2. Compliance

HR departments are the gatekeepers to labor compliance, an area of law that can have significant legal and financial risks if it is mishandled.

HR teams stay on top of labor laws and ensure continuous compliance. They oversee safety standards, address harassment and discrimination complaints, ensure fair employment practices, and manage legal risks.

While this risk can never be eradicated, it’s the role of HR to minimize exposure and work with leaders on addressing behavior or practices that can harm the organization.

3. Employee relations

HR is an important link between balancing business needs with the expectations of employees; therefore, they will work to foster positive work environments and help resolve workplace conflicts. To this end, HR teams will manage grievances, disciplinaries, mediation processes and appeals, working to maintain harmony and minimize ill feeling.

HR teams should also promote a positive workplace culture and establish policies and processes that support this. HR teams are the gatekeepers of employment law and will work with leaders to ensure legal risks are minimized. Through these processes, communication and dialogue are of the utmost importance.

4. Recruitment and staffing               

HR departments are central to the attraction, recruitment and retention of top talent for the organization.

This is a big task, and involves many different workflows such as creating job descriptions that are accurate and inviting, using the right platforms to advertise roles, establishing effective screening and interviewing procedures, and managing the onboarding process to ensure new hires are set up for success.

HR teams must work with leaders and hiring managers to ensure everything comes together to create the best experience for candidates.

5. Training and development

HR takes the lead in managing training and development processes, ensuring employees are equipped with the knowledge and skills they need to do their job well and be set up for future growth.

HR will work with managers on identifying skill gaps and assessing training needs, organizing and (in some cases) facilitating training workshops, working on targeted development opportunities for high-potential employees, and fostering a culture of continuous learning.

While different HR teams will have different levels of involvement in learning and development, they will all need to advise managers and coach employees on the right learning options for them, and direct people to the appropriate resources as needed.

The evolution of HR

Historically referred to as “personnel”, the modern HR department as we recognize it today started in the 1900s with the purpose of hiring and compensating employees.

The National Cash Register Company established a personnel department in 1900 to deal with workplace complaints.

Since then, the traditional HR setup has evolved as an administrative department to help streamline costs, focusing on compliance and record-keeping, and supporting accounts with payroll. In more recent times, HR department responsibilities have evolved into a function that shapes workplace culture and is a critical part of an organization’s strategy.

Technology has been a key driver of this transformation. In the late 1990s, emergent tools like HR information systems and applicant tracking systems enabled HR to streamline administrative work and focus on transformation and strategic alignment. Today, cloud-based systems and the integration of AI have enabled HR to broaden their scope and drive even more positive change in organizations.

Why you need an HR department

An HR department is a critical part of an organization and is often described as the “beating heart” of the business due to its important impact on organizational goals and human capital.

Here are the five main reasons why having an HR department is crucial:

1. Effective talent acquisition and retention

As labor markets become increasingly competitive, ensuring that organizations have the right talent in the right jobs at the right time is vital.

HR departments do a lot of the legwork in ensuring an effective talent acquisition and retention strategy is in place by creating engaging recruitment campaigns, developing hiring strategies, eliminating bias and ensuring cultural fit is considered.

HR teams will also run talent succession interventions to ensure top talent is nurtured and high-potential employees are given the tools they need to succeed, all of which is essential for long-term success.

2. Employee development and training

The unfortunate reality of training and development processes is that they often become deprioritized in the face of urgent organizational tasks. An HR department is critical in keeping learning and development top of mind and ensuring that every employee has equal access to it.

Effective learning and development processes ensure that organizations remain competitive in ever-changing business environments, and that their high-potential employees are looked after, nurtured and ready for future roles in the organization. These efforts contribute to the company’s overall and future success.

3. Ensuring legal compliance and risk management

HR departments possess specialized knowledge and skill sets when it comes to identifying and responding to legal risks.

While business leaders might be aware of these risks, they often lack the necessary technical knowledge to respond to workplace concerns or legal breaches. Without proper governance, organizations can risk being subject to financial penalties, reputational damage and legal action from both the government and affected employees.

HR departments help businesses navigate these risks and stay up to date on policy changes. They advocate for both the organization and the employee but ultimately have to keep the business legally compliant.

4. Fostering a positive work environment

HR plays a key role in creating and sustaining a healthy workplace culture, strategically planning actions to keep everything consistent. While this responsibility lies with all managers and employees, HR teams can provide extra support and guide the business in creating fair and positive interventions that can make a lasting difference.

HR also helps employees feel valued and supported by establishing open communication channels and setting up recognition programs to value contributions. The effect of this is felt through improved productivity, motivation, recognition and employee satisfaction.

5. Streamlining administrative processes

While HR has come a long way from its role as an administrative department, it does have an important part to play in supporting the organization in keeping agile and working efficiently.

Many HR tasks are inevitably clerical in nature, such as employee record-keeping, managing performance appraisals, and payroll. These processes are essential to every organization; after all, if employees weren’t paid on time, they wouldn’t stick around for very long!

HR departments keep on top of these processes, and through the use of technology and smarter business practices, they can ensure they don’t take up any more time than is needed.

How to build an HR department

Having an HR department is vital, but building one can be overwhelming. To help make the process easier, we’ve broken it down to easy steps that you can follow to build an amazing HR department.

Step 1: Start with company culture

Before you set up your HR department, you must first establish the culture of your company.

The main purpose of an HR department is to focus on the people within the organization. This involves protecting, developing, paying, hiring and promoting them. All of this ties in with company culture, as the HR department will focus on fostering it within every function. As a result, it’s important that you establish one.

When your human resources team hires a candidate, they portray the company’s culture to the applicant. The same goes when they’re writing policies or creating trainings, as they have to ensure that the company culture is reflected in these documents. Even when they’re fostering employee engagement and evaluating benefits, company culture acts as the backbone of these processes.

Company culture is at the heart of any major HR function, so if you’re a startup, do not overlook this step — it is, quite possibly, the most important one you’ll take. If you’re a larger organization looking to build your HR department, perhaps re-evaluate the culture you currently have and ensure it’s going to propel your organization in the right direction.

Step 2: Define the company’s “why”

The most fun part about building an HR department from scratch is creating a vision for the company’s professional growth. As a startup, you’re taking the time to think about your organizational “why”.

Why is your company doing what it does? Take some time to do some goal setting as you’re creating a vision, and remember: HR is the face of that vision, as they’re often the first contact candidates have with your company.

So, when building this department, your goals, vision and, ultimately, purpose will play a major role. Quite honestly, an effective HR department cannot be built without one.

Step 3: Establish a mission plan

When establishing the mission for your organization, it’s time to get down to the nitty gritty. You’ve established the ‘‘why’’, so now it’s time to define what you are going to accomplish and exactly how you’re going to accomplish it.

Think of this as giving your future HR department the tools they need to drive your organization forward by following a detailed mission plan. For example, it will allow them to create job descriptions, future trainings and employee activities based on the organization’s overall mission.

When candidates apply for jobs at your organization, they may check if your company’s mission plan aligns with their professional objectives. So, you’ll want to make sure your mission clearly defines what you do and how you’re doing it in a concise way.

Here are a few mission statement examples to help get you started:

• Tesla: “To accelerate the world’s transition to sustainable energy.”
• Starbucks: “To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time.”
• Google: “Organize the world’s information and make it universally accessible and useful.”
• JetBlue: “To inspire humanity — both in the air and on the ground.”
• PayPal: “To build the web’s most convenient, secure, cost-effective payment solution.”

Take your time to create a mission plan that people can believe in and make it known as you establish your organization and move forward with building an HR department.

Step 4: Create an HR department proposal

In this step, you want to create a list of requirements for your HR team.

Start by evaluating how many staff members the HR department will need, and then define the department’s organizational structure — basically, establish who will report to whom. Lastly, establish a budget, and evaluate how much money you’ll allocate to the HR department.

While working on your proposal, consider if you want the HR department to:

• Create an on boarding process
• Outline specific regulations
• Determine employee benefits
• Maintain employee recognition programs
• Prepare for audits

Even if your organization doesn’t require approval by senior management before moving forward with the creation of an HR department, creating a proposal would still be extremely beneficial, as it will create a roadmap for you to refer back to.

Step 5: Recruit your HR team

Now that you have established what you want from your HR department, it’s time to write some job descriptions and get started with the hiring process!

First things first, start by recruiting an HR manager who meets the requirements you’ve laid out and who will assist with the next steps in propelling your department, and organization, forward.

Once you’ve hired the head of HR, you’ll be well on your way to a fully functioning human resources department! If your organization needs more HR professionals to their team, consider adding some of the below roles to grow your human resources department:

• HR director
• Chief HR officer
• Recruitment manager
• HR coordinator
• Payroll coordinator
• Recruiting coordinator
• HR generalist
• Benefits administrator
• HR specialist
• HR administrator

Utilize the expertise of your new HR professional to fulfill your staffing needs and continue the recruiting process as needed.

Step 6: Outline employee compensation and benefits

As you set up your human resources department, you must also establish employee compensation and benefits that will be offered by your organization. Some specific benefits to consider are:

• Insurance (medical, dental, vision, life)
• Retirement accounts (401k, pension, IRA)
• Paid time off (sick leave, vacation, holidays)
• Employee perks (bonuses, gift cards)

Take your company culture and mission into account, and choose specific benefits that would fit your organization’s profile.

As for employee compensation, check the market and ensure that your pay structure is competitive and fair. Keep in mind that, as the economy changes, your compensation plans will need to be adjusted accordingly.

Step 7: Develop HR policies

Developing HR policies will help you manage employee expectations but also provide you with the necessary structure to address issues that may arise within the workplace.

To do this, you must first consider what are the organization’s non-negotiables and what rules all team members should abide by. These could revolve around issues such as:

• Discrimination and harassment
• Leave and time off
• Health and safety
• Disciplinary action
• Recruitment
• Employee conduct
• Applicable state/federal law policies (at-will employment, etc)

Step 8: Define safety and health regulations

While health and safety regulations will vary greatly based on your organization’s location, in the US, federal compliance with the Occupational Safety and Health Act will be required to ensure of the safety of your employees.

Focus on introducing specific health and safety measures such as:

• Establishing emergency evacuation plans and exit routes
• Having first aid and medical supplies
• Ensuring safe working conditions
• Providing safety equipment and gear

Prioritizing health and safety will allow your employees to focus on their duties without concerns about their working conditions.

Step 9: Put together an employee handbook

After you have developed your policies and regulations, it’s time to put them into a comprehensive employee handbook that all team members can refer back to over the course of their employment.

The handbook should be a manual for your employees, outlining company rules, vision and mission, policies, and expectations. It’s best practice to continually update the handbook as your organization and policies change. Establishing clear expectations through an employee handbook effectively will help support your new HR department moving forward.

Step 10: Set up your payroll system

One of the main functions of any human resource department is payroll. So, establishing this system early on is crucial.

In order to effectively pay your employees on time, you must establish appropriate policies and procedures as well as guidelines for what to do when errors occur. Consistent, timely pay is the best way to build trust with your employees, so take the time to ensure this system is set up correctly and is fully integrated within your HR department.

Step 11: Create onboarding and recruitment procedures

When it comes to onboarding and recruitment, it’s essential to create a streamlined system by implementing procedures that will support your organization.

Using employee onboarding tools can help ensure a smooth process, both from the organization’s and the candidate’s perspective. These tools can automate tasks, manage documentation and track compliance.

You should also take into account how you the onboarding process will flow from the candidate’s perspective, too, and ensure it includes following documentation for compliance purposes:

• Signed/accepted offer letter
• Work verification (I-9 for US)
• Company specific documents (signed policies, NDA, non-compete, proprietary property, etc)
• Payroll information

Create a fun and engaging onboarding experience for your employees, but ensure the above items are included to maintain appropriate records and effectively welcome your new employees to the team!

Step 12: Create quantifiable metrics

Now it’s time to establish deliverable metrics for your HR department. When your employees understand what is required of them, you’re defining what success means to the organization.

Some examples of metrics specific to hiring could include:

• Time to hire
• Interview to offer ratio
• Offer acceptance rate
• Cost per hire
• Quality of hire

Be sure your organization sets clear deliverables and communicates them effectively to ensure the continued success of your HR department.

Step 13: Review the department’s growth

The next step to build an HR department is to review its growth down the line.

Start by evaluating components that worked and those that didn’t. You can summarize your findings in a document and keep track of ongoing changes through it.

One of the best things you can do as a company is to review results and make appropriate changes for the future. Setting up an effective HR department will help you maintain steady growth!

Step 14: Build a performance management system

HR departments should align business strategy and processes to manage performance at work. There are several components to this.

Firstly, a game plan for managing performance must be created and shared with all employees. Secondly, a system should be designed to track and monitor employee performance. This is based around setting goals, providing regular feedback and measuring performance through annual review frameworks.

Factoring in a reward-based talent management process will also motivate hard workers and establish a higher-performing work culture that yields great results.

Step 15: Build relationships with external stakeholders

HR departments can never do it all alone. The most effective departments build positive and lasting relationships with external stakeholders to drive competitive advantage. These stakeholders can include recruitment agencies, legal advisors and benefit providers.

HR teams should regularly attend networking events and keep up to date with HR publications to understand what companies and sectors can provide support, and continually build their network to stay on top of trends and help the organization and employer brand remain competitive and relevant.

Step 16: Establish training and development programs

Because a key HR responsibility is to support employee growth, setting up a learning and development strategy is vital for building an HR department. This might start in conjunction with setting up recruitment processes, through an effective onboarding process.

A learning and development strategy will include “must-have” processes like compliance training or health and safety training, but it should also include “nice-to-haves” like leadership development training for aspiring managers, and factor in a wide range of training delivery options, such as workshops, mentoring and eLearning. Encouraging modern training trends like gamification is also highly recommended.

Step 17: Foster a strong employer brand

An employer brand is what prospective employees are thinking, reading and saying about your workplace.

Developing a positive employer brand is essential for attracting top talent and converting their interest into hires that stay in your company. HR departments must work with stakeholders to showcase the organization’s activities, values, culture and growth opportunities in a way that will appeal to candidates looking for work, as well as existing employees who are considering whether or not to stay.

An employer brand can be developed in conjunction with the organizational strategy and marketing teams, and is communicated through recruitment events, volunteering days and open-house events.

Step 18: Implement continuous improvement practices

Success is never final! Building an effective HR department is not a finite process, as it requires ongoing management, evaluation, and a lot of refinement. Therefore, it’s vital that HR leaders create a process that enables and tracks the need for adjustments and how these are measured.

Annual audits of HR policies are a great place to start, so you can identify what’s working and what isn’t. Gathering feedback from employees, such as through pulse surveys and engagement surveys, helps keep you aware of what’s going on.

Establishing continuous improvement processes ensures the department evolves with the company, remains legally compliant, and continues being a valuable asset to the organization.

Step 19: Invest in technology and tools

Although HR departments are heavily administrative areas, their primary purpose is to facilitate company culture and be there for the business and its employees. Therefore, streamlining administrative work is not just a nice thing to do; it’s the hallmark of a modern HR function.

Consider implementing an HR information system to manage records and automate certain tasks. Specialist software can support and streamline processes like payroll, data management and recruitment. If you invest in these tools early, a time-consuming element of growing your HR department will be done and dusted.

Step 20: Prioritize communication channels

Establishing an effective internal communications strategy is vital for maintaining effective communication between HR and management, employees and other stakeholders. Effective communication in this regard is vital for establishing trust and transparency in the organization.

Creating a wide array of communication interventions is the best approach. This includes town halls, an open-door policy or anonymous engagement surveys. Ensure all communication received is acted upon and that senior leaders champion this in the first instance.

What to look for when hiring HR managers

When thinking about how to build an HR department, HR managers are central to the HR department structure. Here’s what to look for when recruiting one to the team:

• Adaptability: To work flexibly in line with agile and ever-changing business needs.
• Analytical skills: To use data to guide decision-making.
• Conflict resolution: To mediate disputes and find organizational harmony.
• Emotional intelligence: To be empathetic and understand employee concerns.
• Leadership ability: To guide teams and influence decisions.
• Strategic thinking: To ensure alignment between HR and the organization, and to create and adhere to long-term plans.
• Strong communication skills: To convey information and communicate assertively and professionally with employees and management.
• Technical skills: To understand and stay on top of HR-related policies and legislation.
• Tech-savviness: To keep the HR team proficient in HR tools such as ATS, HRIS and other software.
• Training expertise: To design, facilitate and target learning programs to the right people.

Checklist

Now that you know what steps you need to take to build an HR department from scratch, it’s time to get started! To stay on track, make sure to utilize this checklist:

Key takeaways

HR departments are a critical part of any business and have a complex array of responsibilities. When considering how to start an HR department, here are some key considerations to keep in mind:

• Whereas HR departments were historically administrative and broadly remain so to this day, they have lots of other responsibilities, not least of which is driving organizational culture.
• HR departments benefit businesses in different ways, from keeping them legally compliant to fostering positive work environments.
• When building your HR department, keep organizational priorities at the foundation of the strategy.
• HR departments ensure that the organization’s most valuable asset, its people, is aligned with organizational priorities.

If you build your HR department well by selecting the right people and aligning what they do with organizational strategy, you will discover a recipe for success that ensures synergy between your organizational goals, its people, and regulatory requirements — a balancing act that only HR can achieve!

What other steps are necessary to set up an HR department? Let us know in the comments section below!

This article is a partial update of an earlier version originally published in 2016, and contains contributions by Shalie Reich.