Building an HR Function from Scratch: UK Small Business Guide

Most businesses build HR capability reactively - hiring someone after the first crisis rather than before it. This guide gives you a phased approach that lets you build the right capability at the right time without over-investing early or under-investing until it hurts.

Phase 1: Compliance Foundation (1-10 Employees)

At this stage, you are not building an HR function. You are meeting your legal obligations and avoiding the most common mistakes that will cost you later.

Legal Minimum Requirements

Before anyone starts work:

• Conduct a right to work check and keep a copy of the document
• Issue a written statement of employment particulars on or before day one (legal requirement since April 2020)
• Confirm employment status correctly - employee, worker or self-employed
• Check whether auto-enrolment applies and enrol eligible workers

Ongoing:

• Pay at least National Minimum Wage (rates change every April)
• Provide statutory sick pay when eligible
• Give the correct holiday entitlement (5.6 weeks statutory minimum)
• Comply with working time regulations (rest breaks, 48-hour week)

Policies you need:

• Disciplinary procedure (required by ACAS Code of Practice)
• Grievance procedure (required by ACAS Code of Practice)
• Health and safety policy (legally required once you have 5+ employees)

Common Mistakes at Phase 1

Misclassifying workers as self-employed. If someone works regular hours, uses your equipment, and you control how they do their job, they are probably a worker or employee regardless of what the contract says. HMRC's IR35 rules and employment tribunal decisions have made this an increasingly expensive mistake.

Using template contracts downloaded from the internet. Generic templates may be out of date, miss key clauses for your sector, or not reflect your actual working arrangements. A solicitor-reviewed contract costs a few hundred pounds and protects you indefinitely.

No probation process. Probation is not legally required but it is your window to exit someone fairly without the full unfair dismissal procedure. Without a properly run probation review, you lose that window.

What to Spend Money On at Phase 1

• A solicitor to review your employment contract template (one-off cost)
• An outsourced payroll provider
• An HR software tool for leave tracking and basic employee records (many cost £2-5 per employee per month at this stage)

Phase 2: Processes and Tools (10-25 Employees)

Once you are past 10 employees, the volume and variety of people situations increases rapidly. You need to move from ad hoc decisions to repeatable processes.

What to Build in Phase 2

Recruitment process

• A standard hiring process: job brief, advertising, screening, interviews, offer, right to work, contract
• Interview scoring criteria so decisions are evidence-based
• An onboarding checklist so every new starter gets the same experience

Performance management

• Regular 1:1s between managers and their teams (monthly minimum)
• An annual or bi-annual review process
• A clear process for managing underperformance before it reaches the formal disciplinary stage

Absence management

• A sickness absence policy with return to work interviews
• Trigger points for managing persistent short-term absence
• Clear guidance on when to refer to occupational health

HR records

• A central record of all employees with start dates, roles, salaries and right to work status
• Personnel files maintained properly (contract, offer letter, probation review, any disciplinary or grievance documents)

Updated policies

• Flexible working policy (employees now have the right to request from day one)
• Data protection / privacy notice for employees
• Equal opportunities policy

Resourcing for Phase 2

At 10-25 employees you have two practical options:

Option A: HR retainer service. Services like Citation, WorkNest or Peninsula provide employment law advice, template documents, and a helpline for a monthly fee (typically £150-500/month depending on headcount). This covers most situations without a permanent hire.

Option B: Part-time HR advisor. A freelance or fractional HR professional, typically 1-2 days per week, who can own HR tasks and give you a more hands-on service. Expect to pay £300-500 per day for an experienced HR professional.

Many businesses use a combination: a retainer for legal advice and an office manager or EA for the administrative side.

Phase 3: Dedicated HR (25-50 Employees)

Beyond 25-30 employees, the case for a dedicated HR hire becomes compelling. Not because headcount alone demands it, but because the complexity of managing a larger workforce requires someone whose entire focus is people.

Signals That You Need Dedicated HR

• You are running three or more disciplinary or grievance cases per year
• Manager quality is inconsistent and you have no way to address it systematically
• Turnover is high and you do not know why
• You have had a tribunal claim or come close to one
• Hiring has become your biggest operational bottleneck

What a Dedicated HR Person Does at This Stage

• Owns the full recruitment process end-to-end
• Manages all employee relations cases
• Runs the performance management cycle
• Advises and coaches line managers
• Keeps compliance up to date
• Builds and manages the employer brand
• Tracks and reports people metrics

Hiring Your First HR Person

Look for someone with generalist experience in businesses of a similar size and sector. An HR Business Partner or HR Manager with 3-5 years of generalist experience is the right level - not a specialist (e.g. L&D only) and not an HR Director who will be over-qualified and expensive.

Salary range for a first HR hire: £35,000-£50,000 depending on location and experience. In London, add 15-20%.

The Common Thread Across All Phases

The biggest predictor of whether your HR function works is not the tools you use or the policies you write. It is whether line managers understand their responsibilities.

At every stage, invest time in helping your managers understand:

• How to have direct performance conversations
• When to involve HR early (always better than late)
• How to document conversations and decisions
• Why process matters even when the outcome feels obvious

A business with average policies and good managers will consistently outperform one with excellent policies and managers who avoid difficult conversations.

This is guidance, not legal advice. For specific employment law queries, consult an employment solicitor or ACAS.