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10 Common HR Challenges Faced by Small and Medium Enterprises (+ Practical Solutions)

Updated: Jul 13, 2023

10 Common HR Challenges Faced by Small and Medium Enterprises (+ Practical Solutions)
10 Common HR Challenges Faced by Small and Medium Enterprises (+ Practical Solutions)

Running a small or medium enterprise (SME) comes with a unique set of challenges, and among them, human resources (HR) management often takes center stage. As SMEs navigate their growth journey, they often face HR hurdles that can impede their progress and hinder employee satisfaction. While large corporations often have dedicated HR departments and substantial resources to tackle HR issues, SMEs often face limitations in terms of expertise, budget, and time. Consequently, they encounter a distinct set of HR challenges that can hinder their growth potential and ability to attract and retain top talent.

In this article, we delve into the common HR challenges faced by SMEs, shedding light on the intricacies of managing human resources in small and medium-sized organizations.

1. Attracting and Retaining Top Talent

This is one of the significant HR challenges SMEs face is attracting and retaining skilled employees. Large corporations often overshadow SMEs with their brand recognition and attractive benefits packages. In contrast, small businesses may struggle to provide the same level of career advancement and growth opportunities as larger organizations. This means that employees, especially those seeking upward mobility, may be more inclined to join companies that offer a clear career path and opportunities for professional development.

Solution: To overcome this, SMEs can focus on building a strong employer brand, emphasizing their unique selling points, and offering competitive compensation packages. Additionally, providing growth opportunities and fostering a supportive work culture can help retain talented individuals.

2. Limited HR Resources

SMEs frequently struggle with limited HR resources, often lacking dedicated HR personnel, tools, including HR software, and departments. This constraint can lead to inadequate employee onboarding, payroll management, and performance evaluation processes.

Solution: Investing in HR automation tools, outsourcing certain HR functions, or hiring an HR consultant, such as a professional employer organization can alleviate this challenge and ensure smooth HR operations without overburdening the existing workforce.

3. Compliance with Labor Laws

SMEs often operate with lean HR teams, making it difficult to stay updated on labor laws and implement necessary compliance measures. The extensive and varying nature of labor laws across jurisdictions adds to the challenge, as SMEs struggle to keep track of the numerous regulations applicable to their industry.

Financial constraints further compound the challenge of labor law compliance for SMEs. With limited resources, many SMBs find it difficult to hire legal experts or consultants specializing in labor law, leaving them without the professional guidance needed to navigate complex regulations. As a result, SMEs may lack awareness of applicable labor laws or recent changes, putting them at risk of penalties, fines, or lawsuits due to non-compliance.

Solution: SMEs can cultivate a solid understanding of labor laws in their respective states of operation through ongoing education and training for HR staff and managers. They can identify compliance gaps and take corrective actions through regular internal audits. They should also establish comprehensive policies and procedures aligned with labor laws, implement effective record-keeping systems, and actively monitor and engage with legal resources to stay updated on changes.

4. Developing Effective HR Policies

SMEs often struggle with establishing robust HR policies that promote fairness, transparency, and compliance. With Effective HR policies, SMEs can build a culture of trust, fairness and inclusion, as the responsibilities of both employer and employee will be outlined. HR policies can have a huge impact on employee motivation, organization reputation and the ability to attract and retain talent.

Solution: It is crucial to develop a comprehensive employee handbook that clearly outline policies and procedures related to performance management, leave and attendance, code of conduct, and other essential HR aspects. Small and mid-sized businesses can seek guidance from HR professionals or use templates available online to create policies that align with their organizational values and legal requirements.

5. Employee Engagement and Morale

A positive work environment and high employee morale are critical for SMEs to retain talent and boost productivity. Limited resources might restrict the implementation of extravagant engagement initiatives, but SMEs can focus on frequent communication, recognizing employee achievements, providing opportunities for professional development, and conducting regular feedback sessions.

Solution: Although SMEs may not be able to match the salaries offered by larger companies, they can provide unique perks and benefits that appeal to employees. These can include flexible work arrangements, opportunities for ownership or equity, professional development programs, or a strong work-life balance. These strategies can significantly enhance employee engagement and morale.

6. Managing Workplace Diversity and Inclusion

Managing workplace diversity and inclusion is a challenge that even bigger corporations struggle with. Implementing diversity and inclusion initiatives requires a cultural shift within the organization, which can face resistance from employees or management who may be resistant to change or have ingrained biases. Overcoming resistance and fostering a supportive and inclusive environment can be an ongoing challenge, especially for small and medium enterprises.

Solution: One affordable solution for SMEs to manage workplace diversity and inclusion is to establish employee resource groups (ERGs). ERGs are voluntary, employee-led groups that bring together individuals with shared characteristics or interests. ERGs provide a forum for employees to share experiences, offer support, and promote awareness and understanding of different perspectives within the organization. They can organize events, workshops, and training sessions that help foster an inclusive culture, educate employees, and celebrate diversity. By leveraging the power of ERGs, SMEs can create a more inclusive and supportive work environment while managing diversity and inclusion effectively within their limited resources.

7. Adapting to Technological Advancements

As technology continues to evolve, SMEs often struggle to keep up with the latest HR tools and trends. However, embracing technology can streamline HR processes, enhance data management, and enable efficient remote work.

Solution: Small business owners can consider investing in user-friendly HR software, conducting regular training sessions, and encouraging a tech-savvy mindset among employees can help SMEs adapt to technological advancements and stay competitive in the market.

8. Performance Management

Goal-oriented performance management systems combined with employee development plans can boost productivity, align individual performance with organizational objectives, and create a culture of continuous improvement. But establishing effective performance management systems can be challenging for SMEs, especially when resources are limited.

Solution: A practical solution that SMEs can adopt is to implement regular performance reviews, set clear expectations and goals, provide constructive feedback regularly, and reward performing employees.

9. Succession Planning

SMEs often overlook succession planning, which can lead to disruptions and productivity gaps when key employees leave. Small business owners can look out for high-potential employees, and provide them with growth opportunities and clear career paths. By doing so, they can ensure a smooth transition when key positions need to be filled. Additionally, they can cross-train employees, thus building a talent pipeline that can mitigate the risks associated with sudden departures.

10. Balancing Flexibility and Stability

SMEs often strive to strike a balance between providing workplace flexibility and maintaining stability. Remote work options or flexible schedules, can attract and retain top talent.

Solution: SMEs can establish guidelines that promote flexibility while ensuring that operational requirements and employee expectations are met. However, maintaining stability in terms of consistent policies, clear job roles, and effective communication is equally important.


Human resources management can be a complex endeavor not just for small and medium enterprises but also for large organizations. Here at The Mission, we help to reduces these challenges for businesses of all sizes.

Having HR challenges in your organization? Feel free to reach out to us today to get tailored solutions for your business. With more than 15 years of experience in the HR industry, we are committed to helping small and mid-sized businesses conquer typical challenges in the ever-evolving HR landscape.


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