Running a small business is tough. And let’s face it—HR isn’t always top of mind when you’re juggling sales, customers, and the day-to-day grind. But ignoring common HR pitfalls can lead to costly penalties, high turnover, and serious headaches down the road.
From misclassified employees to poor onboarding, here are the most frequent and expensive HR mistakes small business owners make—and how to fix them.
1. Misclassifying Employees
One of the most common and costly HR mistakes is misclassifying employees—treating someone as a 1099 contractor when they should be a W-2 employee, or getting exempt/non-exempt status wrong.
The penalties? Massive. Businesses can face up to $2.5 million in legal costs and back wages annually due to misclassification issues.
Fix it: Know the rules and classifications. If you’re unsure, check with an HR advisor to avoid expensive legal trouble.
2. Skipping Policies, Contracts, and Handbooks
“Everyone knows the rules” isn’t a strategy. Without clear documentation, disputes become he-said-she-said nightmares—and you could be exposed legally.
Fix it: Every business should have:
- Written job offers or contracts
- A complete and current employee handbook
- Documented processes for onboarding, leave, and discipline
3. Believing Culture Is HR’s Job (It’s Not)
It’s a common misconception: “HR owns culture.” But in truth, culture starts with leadership. When company values aren’t actively modeled by owners and managers, culture becomes disconnected, inconsistent, and often ignored.
Fix it: Make culture everyone’s job—especially leadership. Reinforce values through hiring, feedback, and how you communicate daily.
4. Combining HR with Accounting
Trying to save costs by lumping HR with payroll and accounting? You’re not alone—but it’s risky. Human errors in business processes cost a staggering $3.1 trillion globally each year, and overloading roles is a major contributor.
Why?
- Lack of specialization leads to compliance mistakes.
- No checks and balances increases risk of fraud or payroll errors.
- Burnout from juggling too much causes turnover.
Fix it: Separate complex roles where possible. If hiring a full HR team isn’t feasible, consider outsourcing to reduce risk and gain expert support.
5. Weak Onboarding = High Turnover
A warm welcome and clear training go a long way. Yet many small businesses skip onboarding entirely—and pay the price.
Companies with poor onboarding see up to 50% turnover within 18 months, driving up recruitment costs and hurting team morale.
Fix it: Create a simple onboarding checklist. Set expectations, assign mentors, and give new hires the tools they need to succeed from day one.
6. Waiting Until There’s a Problem (Reactive HR)
If your HR approach is to wait until something breaks, you’re not alone—but you’re also taking a big risk. Reactive HR creates compliance gaps, missed opportunities, and unresolved employee issues.
In fact,. small businesses lose on average $10,000 per year due to non-compliance with HR regulations, and penalties for some violations (such as employee misclassification or data breaches).
Fix it: Proactive HR is smart HR. Review your policies annually, check in with employees regularly, and plan for growth before it happens.
7. Hiring Without a Process
Making hires without a structured process—relying on “gut feel,” skipping job descriptions, or rushing through interviews—can lead to expensive mistakes.
- 46% of new hires fail within 18 months, often due to poor role fit, mismatched expectations, or inadequate onboarding.
- According to the U.S. Department of Labor, a bad hire can cost up to 30% of that employee’s first-year earnings. That means hiring someone at $60,000/year who doesn’t work out could set your business back $18,000—not including the time, morale, and productivity lost.
Fix it: Build a Smart, Repeatable Hiring Process
- A clear job description
- A structured interview process
- Reference checks and assessment vehicle (PI, PXT, etc.)
HR mistakes may seem small in the moment—but they have a way of snowballing into major issues. By being proactive, getting support, and building smart HR systems, you can avoid costly missteps and create a workplace your team wants to be part of.
Need help getting your HR house in order? Focus HR is here to help. We specialize in helping small businesses get compliant, build strong teams, and grow with confidence. Book a free consultation here.
