Three Common HR Problems in Small Businesses We See as Consultants (& How to Fix Them)

Three Common HR Problems in Small Businesses We See as Consultants (& How to Fix Them)

When it comes to the oft misunderstood issue of human resources (HR), small businesses often encounter a myriad of problems that can impact their operations and compliance. As HR consultants, we’ve been through numerous client engagements and identified three recurring issues that frequently plague small businesses. In this blog, we’ll delve into these common HR pitfalls and explore strategies to mitigate them effectively.

Common HR Problem in Small Businesses 1: Misclassification of Employees

One of the most prevalent HR mistakes we encounter is the misclassification of employees. Particularly concerning exempt versus nonexempt status. This distinction between hourly and salaried employees is crucial. It affects various aspects of employment, including overtime eligibility and tax implications.

Misclassification can arise from a lack of understanding of the criteria for each classification. It can also come from overlooking key attributes of the job roles. The repercussions of misclassification can be significant. Leading to potential legal liabilities, back-pay obligations for missed overtime, and scrutiny from regulatory authorities.

Image of a "Tax due" notification due to a small business encountering one of the three common mistakes we see as HR consultants
Don’t fall into the trap of employee misclassification

To address this issue, small businesses must familiarize themselves with the criteria for exempt and nonexempt classifications and conduct thorough assessments of job roles to ensure accurate classification. Seeking guidance from HR experts or outsourcing HR functions to professionals like ADDA can provide valuable support.  Understanding complex employment regulations and avoiding costly misclassification errors require expert knowledge.

Common HR Problem in Small Businesses 2: Payroll Errors and Compliance Challenges

Payroll administration is another area where small businesses often encounter challenges. Ranging from simple errors to complex compliance issues. Inadequate understanding of payroll regulations, coupled with reliance on software or inexperienced personnel, can result in payroll mistakes with far-reaching consequences.

Common payroll errors include:

These errors not only lead to financial discrepancies but also increase the risk of penalties and legal consequences.

Hands counting money representing the common HR problem of not understanding payroll
Make sure you understand payroll regulations!

To mitigate payroll pitfalls, small businesses should invest in robust payroll systems, provide comprehensive training for personnel responsible for payroll processing, and stay abreast of changes in tax laws and regulations. Outsourcing payroll services to experienced professionals can also offer peace of mind and ensure compliance with payroll requirements.

Common HR Problem in Small Businesses 3: Inadequate Performance Management and Documentation

Performance management and job descriptions are often overlooked aspects of HR in small businesses. Yet they play a crucial role in mitigating legal risks and fostering a productive work environment. Without clear performance expectations and documented performance evaluations, businesses expose themselves to potential legal challenges related to wrongful termination and discrimination claims.

In the absence of proper documentation, employees terminated for performance-related reasons may challenge the validity of their dismissal, leading to costly legal disputes. Moreover, inadequate performance management practices can hinder employee development and undermine organizational effectiveness. If you don’t perform a regular skills gap analysis for your team, for example; you’re never going to know how to improve their productivity.

People looking at skills gap metrics to avoid one of the three common problems we see in small businesses as HR consultants
Make sure you get your Performance Management in order!

To address this issue, small businesses should prioritize the development of comprehensive job descriptions, establish clear performance expectations, and implement robust performance management processes. By documenting performance evaluations, disciplinary actions, and termination decisions, businesses can mitigate legal risks and demonstrate adherence to fair employment practices.


In summary, small businesses face several common HR challenges that can impede their growth and success. From misclassification of employees to payroll errors and inadequate performance management, these issues require proactive measures to ensure compliance and mitigate legal risks.

By addressing these HR pitfalls through strategic planning, ongoing education, and, when necessary, outsourcing HR functions to experienced professionals, small businesses can navigate regulatory complexities effectively and focus on driving their business forward.

Remember, proactive HR management is key to mitigating risks and fostering a thriving workplace environment.

If you’re struggling with HR challenges in your small business, don’t hesitate to reach out for expert guidance and support. Together, we can overcome these obstacles and pave the way for sustainable growth and success.

Fill out the form to learn how our business solutions can help you today!


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