HR Mistakes Small Businesses Make (and How to Avoid Them)

Human Resources (HR) is often the last thing on a small business owner’s mind—until something goes wrong. Unfortunately, small missteps in HR can snowball into costly problems, from legal penalties to high employee turnover.

The good news? Most HR mistakes are avoidable with a little foresight and planning. Here’s a rundown of common HR pitfalls small businesses face and, more importantly, how to sidestep them.

1. Misclassifying Employees

The Mistake:
Treating employees as independent contractors or mislabeling non-exempt employees as exempt can save money in the short term but lead to major compliance issues. Misclassification often means skipping overtime pay, taxes, and benefits—big no-nos under labor laws.

The Fallout:
In 2022 alone, the Department of Labor recovered over $213 million in wages for employees who were misclassified (U.S. Department of Labor). Misclassification penalties can include back wages, fines, and legal fees.

How to Avoid It:
- Clearly define roles before hiring.
- Use IRS guidelines to determine if a worker qualifies as an independent contractor.
- Understand federal and state laws on exempt and non-exempt employees.
- Conduct regular audits to ensure compliance.

2. Neglecting Compliance Updates

The Mistake:
Employment laws change frequently, and what worked last year may not comply this year. Small businesses often overlook new state and federal regulations.

The Fallout:
Non-compliance fines can range from $500 to $100,000 per violation, depending on the severity (SHRM).

How to Avoid It:
- Subscribe to updates from the Department of Labor and state labor offices.
- Schedule an annual review of employment policies and practices.
- Partner with an HR consultant or attorney to ensure compliance.

Pro Tip: If your business operates in multiple states, pay close attention to varying laws like minimum wage and paid leave requirements.

3. Ignoring Employee Handbooks

The Mistake:
Skipping an employee handbook or using a generic template that doesn’t reflect your business can lead to confusion, inconsistency, and legal risks.

The Fallout:
Without clear policies, disputes over time off, behavior, or performance can escalate. Employees may feel your policies are arbitrary or unfair, leading to dissatisfaction or turnover.

How to Avoid It:
- Create a customized employee handbook that reflects your company culture and policies.
- Update the handbook annually to align with new laws and internal changes.
- Clearly outline expectations, benefits, and disciplinary procedures.

Companies with clearly defined HR policies reduce turnover by 30% (Harvard Business Review).


4. Failing to Properly Document Performance Issues**

The Mistake:
Many small businesses rely on informal feedback, skipping formal documentation of performance issues. This becomes a problem when you need to terminate an employee.

The Fallout:
Without a documented record of underperformance, terminations can lead to wrongful termination claims or disputes.

How to Avoid It:
- Implement a consistent performance review process.
- Use written performance improvement plans (PIPs) when addressing issues.
- Train managers to document incidents objectively and consistently.

Pro Tip: Always focus on facts, not emotions, when documenting performance concerns.

5. Overlooking Onboarding

The Mistake:
Treating onboarding as a one-day task rather than an ongoing process leaves new hires feeling unprepared and disconnected.

The Fallout:
A poor onboarding experience increases turnover. Glassdoor reports that companies with effective onboarding improve employee retention by 82%.

How to Avoid It:
- Develop a structured onboarding program that covers both job-specific training and company culture.
- Pair new hires with mentors or buddies.
- Schedule regular check-ins during the first 90 days.


6. Inconsistent or Nonexistent Policies

The Mistake:
Small businesses often rely on verbal agreements or ad hoc decision-making, which can lead to inconsistency and perceived favoritism.

The Fallout:
Without standardized policies, employees may feel treated unfairly, and managers may inadvertently act in ways that could be seen as discriminatory.

How to Avoid It:
- Establish clear, written policies for key areas like time off, harassment, and workplace behavior.
- Train managers to apply policies consistently.
- Regularly review and update policies as your business grows.

7. Skipping Exit Interviews

The Mistake:
When an employee leaves, skipping an exit interview means losing valuable insights into why they’re leaving and how your business could improve.

The Fallout:
You miss opportunities to identify patterns, such as poor management practices or toxic workplace issues.

How to Avoid It:
- Conduct exit interviews for every departing employee.
- Ask open-ended questions about their experience and reasons for leaving.
- Use their feedback to refine your workplace policies and practices.

8. Failing to Prioritize Employee Development

The Mistake:
Small businesses often focus on immediate tasks, neglecting long-term employee growth and development.

The Fallout:
Employees who don’t feel supported in their career goals are more likely to leave. LinkedIn’s Workplace Learning Report found that 94% of employees would stay longer at a company that invested in their learning.

How to Avoid It:
- Offer training opportunities, even on a small budget (e.g., online courses, mentorship programs).
- Schedule regular career development conversations.
- Provide clear paths for growth within your organization.

9. Underestimating the Importance of Workplace Culture

The Mistake:
Failing to nurture a positive workplace culture leads to disengagement, conflict, and high turnover.

The Fallout:
Gallup found that highly engaged teams are 21% more productive, and employees in positive workplaces report lower stress and higher job satisfaction.

How to Avoid It:
- Foster open communication and encourage feedback.
- Recognize employee achievements regularly.
- Address conflicts promptly and fairly.

10. Trying to Do It All Without Help

The Mistake:
Small business owners or overburdened managers often take on HR tasks without the necessary expertise or time, leading to mistakes.

The Fallout:
HR errors can expose your business to legal risks, cost you money, and reduce team morale.

How to Avoid It:
- Invest in HR software to streamline payroll, compliance, and benefits administration.
- Partner with an HR consultant for audits, complex issues, or ongoing support.
- Delegate HR responsibilities to a qualified team member if possible.

The Bottom Line

HR mistakes may seem small at first, but their impact can be significant for a small business. From compliance issues to poor onboarding, these missteps can harm your team, your reputation, and your bottom line.

By proactively addressing these pitfalls, you can build a strong HR foundation that supports your team, protects your business, and sets you up for long-term success. Because when your HR practices are strong, your business thrives.