The Hidden HR Risks Costing Your Business Money (and How to Fix Them)

HR mistakes are like slow leaks—you don’t notice them at first, but give it time, and suddenly, you’re knee-deep in legal fees, lost wages, and employee drama you never saw coming. And if you’re a small business owner juggling everything from payroll to client demands, HR is probably the last thing you want to think about—until it becomes a problem you can’t ignore.

Here’s the bad news: HR mistakes cost money. 

Here’s the good news: You can fix them before they drain your business.

Let’s get into the biggest HR risks that might be quietly eating into your budget—and how to stop them before they turn into expensive nightmares.

1. Misclassifying Employees and Contractors Will Come Back to Bite You

A lot of small businesses love hiring contractors instead of full-time employees. No benefits, no tax obligations, less paperwork—it sounds like a dream. Until it isn’t.

If you’re telling a contractor when to work, how to do the job, and requiring them to use your tools, congratulations, you’ve just hired an employee! The IRS (US) or HMRC (UK) will be happy to correct you—with fines, back taxes, and legal headaches.

How to fix it:

• If you control when, where, and how they work, they’re an employee. Full stop.

• Read up on IRS contractor guidelines (US) or IR35 rules (UK) before hiring.

• When in doubt, ask an expert—misclassification penalties are no joke.

  
  

2. Payroll Mistakes: The Fastest Way to Make Employees Hate You

People work for money. Mess up their paycheck, and suddenly, that "great company culture" doesn’t mean much. Late payments, incorrect tax deductions, or “forgetting” to pay overtime? All of these can land you in serious trouble.

In the US, wage theft claims can get your business sued. In the UK, HMRC doesn’t play when it comes to minimum wage violations and pension contributions. And no, payroll software isn’t foolproof if you’re not using it correctly.

How to fix it:

• Use a payroll system that calculates everything correctly—wages, overtime, taxes, pensions.

• Double-check your payroll reports before payday (trust, your employees will).

• Stay up to date on minimum wage laws and employment tax regulations—you don’t want HMRC or the Department of Labor knocking on your door.

3. Hiring the Wrong Person (Then Paying for It—Twice)

Hiring in a rush is like buying a shirt that “kind of fits” because you don’t have time to try it on. You’ll regret it, and now you’re stuck with it.

Bad hires don’t just cost you money in salary. You’re paying for lost productivity, wasted training time, and the whole hiring process all over again when they leave in six months.

And if you’re thinking, “I can just train them up,” let’s be real—you’re not gonna have the capacity or energy.

You don’t have the time, budget, or patience to mold an employee from scratch. Small businesses need people who can hit the ground running, not ones who need a full career makeover.

How to fix it:

• Be specific about what you need before posting the job.

• Don’t just hire someone because they “seem like a good fit.” Use structured interviews and check references.

• Consider a trial project or contract period before making a long-term commitment.

4. No Employee Handbook? Enjoy the Chaos.

Without written policies, your team will guess how things work. That’s how you end up with someone taking a three-hour lunch or thinking it’s fine to answer customer emails with “lol idk.”

A handbook isn’t just about rules—it’s about making sure everyone knows what’s expected, so you don’t have to deal with “But I didn’t know that!” when problems come up.

How to fix it:

• Write down your policies on conduct, leave, and performance. Keep it short and clear—nobody’s reading a 50-page manual.

• Have every employee sign it so there’s no room for “I wasn’t told.”

• Update it when laws change, or when you realize, too late, that you should’ve had a policy about something.

5. Firing an Employee Like It’s the Wild West

You can’t just wake up one morning and decide you don’t like someone’s vibes anymore. Even in the US, where at-will employment exists, wrongful termination claims are a real thing. In the UK? Even stricter rules.

Fire someone the wrong way, and you could be looking at a lawsuit, a tribunal, or a social media post dragging your business for filth.

How to fix it:

• Document everything—performance issues, disciplinary actions, warnings. No documentation? No defense.

• Follow a structured termination process and be professional about it.

• Get HR or legal advice before you let someone go, unless you enjoy expensive surprises.

6. A Toxic Workplace That’s Costing You Good Employees

People quit bad workplaces, not just bad pay. If you’ve got great employees constantly leaving, it’s time to look at what’s happening internally.

Are managers micromanaging? Is there zero career growth? Is your office culture giving off “silent quitting” energy? These are all things that make people pack up and leave—and recruiting their replacements costs a lot.

How to fix it:

• Pay attention when employees leave. If it’s a pattern, there’s a reason.

• Set clear expectations for managers—bad leadership is a top reason people quit.

• Invest in growth opportunities, fair pay, and an actual work-life balance.

7. Pretending HR Isn’t a Priority Until It’s an Emergency

A lot of small businesses run HR on a “we’ll figure it out later” basis. And then later comes, and it’s a legal claim, a compliance fine, or an employee mess that could’ve been avoided.

HR isn’t just something big companies deal with. The sooner you get your processes in place, the fewer disasters you’ll have to clean up.

How to fix it:

• Don’t wait for a crisis—get HR support before you need it.

• Set up regular HR check-ins to catch problems before they escalate.

• If hiring a full-time HR person isn’t in the budget, fractional HR is your best bet.

HR Mistakes Are Draining Your Business—Time to Stop the Bleeding

If you’re dealing with constant hiring issues, payroll headaches, compliance problems, or high turnover, it’s not just bad luck. It’s an HR problem. And if you don’t have time to fix it? That’s where we come in.

Phare HR helps small businesses get their hiring, compliance, and people management under control—so you can stop wasting time, money, and energy on avoidable HR disasters.

Book a free HR check-up today and get your business back on track.