Do Companies Need an HR Department?

August 14, 2025

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In the dynamic landscape of modern business operations, the question of whether companies truly need a Human Resources (HR) department is a topic of ongoing debate. Traditionally HR or ‘Personnel’ was heavily administrative and focused only on recordkeeping, payroll, benefits, hiring, training, etc. While these functions are crucial, they left little room for risk management and strategic contributions to business goals. In fact, half of Americans say that not having an HR department contributes to an unfavorable workplace environment.

In recent years, the role of HR has shifted to more of a strategic partner instead of a simple support function. HR professionals now play a critical role in driving organizational changes, fostering innovation, aligning human capital with organizational goals, fostering employee engagement, and developing talent management strategies. Yes, we still do all the other stuff, but we are capable of a lot more.

Let’s explore whether companies should have an HR department, the legal risks of running a business without an HR team, and whether you should consider outsourcing your HR needs.

Why Do Companies Need an HR Department

Although not a legal requirement, an HR department is essential for smooth business operations, especially during periods of growth (not to mention acquisitions or mergers). Apart from ensuring that recruitment, onboarding, payroll, benefits, compliance, training and development, and employee relations are managed professionally, HR also mitigates legal risks and functions as the company’s ‘culture keepers’. Some of the more significant tasks in HR include:

Ensuring compliance with federal, state, and local employment laws
Hiring, onboarding, developing, and retaining top talent
Training employees and providing support for professional growth and development
Managing employee compensation programs and benefits
Developing and managing the performance review process
Creating an inclusive and healthy company culture
Managing employee relations issues
Creating, maintaining, and updating employee policies and handbooks
Maintaining company records in accordance with Internal Revenue Service (IRS) and the Department of Labor guidelines

What are the Legal Considerations of Running a Company Without Having an HR Department?

While companies are not legally required to have an HR department to run a business, companies run the risk of exposing the business to significant legal risks. Companies remain fully responsible for complying with all applicable employment laws and regulations – with or without – their own HR team. This includes everything from workplace safety and anti-harassment policies to labor rights and recruitment practices. Failure to comply can result in significant legal consequences, including fines, lawsuits and damage to the Company’s reputation. So, while it’s completely legal to operate without HR, there must be someone in your organization who understands employment laws and HR best practices.

Should You Outsource HR?

Once you decide that you require an HR department, the next question that arises is whether to hire an in-house team or outsource your HR needs. Outsourcing HR isn’t uncommon, and in fact, nearly two-thirds (62%) of companies outsource some or the majority of their HR function.

Many companies turn to outsourcing for support in a number of areas, such as:

Recruiting, hiring, onboarding, and offboarding
Payroll
Compliance
Benefits administration
Performance management
Training and development

There are several benefits and drawbacks to outsourcing your HR needs. Let’s take a look at them:

Benefits of Outsourcing HR

Streamlines your operations: Outsourced HR providers are adept at handling everything from recruitment and onboarding to compliance and benefits administration, enabling smoother, more efficient operations without the challenges and expense of building an in-house HR team from scratch.
Lowers your HR costs: Hiring full-time HR professionals, especially those having deep legal or compliance expertise, can be an expensive proposition. With outsourcing, you can receive the same level of expertise at a fraction of the cost. This can be invaluable for growing companies looking to scale efficiently.
Mitigates your compliance risk: HR professionals and companies stay up to date with changing labor laws, tax regulations, and workplace compliance requirements at the federal, state, and local levels. Doing so helps lower the risk of costly legal missteps, especially for companies not having a strong in-house compliance background.
Lightens your workload. Outsourcing HR takes a lot of work off your plate and puts it on the plate of a capable HR professional.

Is Your Business Missing a Critical Piece?

Modern HR goes far beyond payroll and paperwork. It plays a vital role in safeguarding your business, fostering employee engagement, and ensuring your workforce is aligned with your strategic vision. Whether you choose to build an in-house HR team or partner with an HR consultant, the right solution can help you streamline operations, control costs, and minimize risk.

Find out why HR is essential for all companies and whether HR consulting might be right for you!

Potential Negatives of Outsourcing HR

May concern employees: Your employees may feel uncomfortable engaging with an external provider for sensitive matters, such as grievances or benefits. This may adversely affect morale or trust, especially in smaller companies, where personal interaction is valued.
May cause data privacy concerns: Outsourcing HR means disclosing sensitive information about your company and its employees. It is essential to work with a reputable firm that adheres to robust cybersecurity protocols and data protection standards to minimize the risk of data breaches.

Finding the Right HR Strategy for Your Company

While the traditional HR function continues to play a pivotal role in managing workforce operations and compliance, its evolution into a strategic business partner is increasingly crucial in today’s business environment. Without proper HR partnership, companies may have critical gaps in compliance, employee relations, and operational efficiency, risking legal exposure and reduced employee engagement.

What remains critical is ensuring that your company has qualified individuals, whether from your company or an outsourced firm, who are responsible for your HR function. The role of HR is not merely about administrative tasks but about shaping organizational culture, optimizing workforce performance, and fostering sustainable growth in an ever-changing landscape.