Academic journal article Journal of Business and Entrepreneurship

Human Resource Management Practices in Small Business

Academic journal article Journal of Business and Entrepreneurship

Human Resource Management Practices in Small Business

Article excerpt


The viability of a small business is determined by the quality of its personnel. If its employees are well-chosen, well-trained, and well-positioned, its own future is much more secure. The purpose of this study is to examine the two extremes of human resource management practice - hiring and firing - and to relate these to the dual challenges of preventing employee problems and eliminating problem employees in small businesses. Results indicate that managers who are thorough in their pre-hiring investigation are more likely to prevent the occurrence of employee problems, and that managers who are more highly trained have a higher incidence of employee termination.


Small firms, as defined by the Small Business Administration, currently employ more than 40 million people and produce goods and services valued in excess of $900 billion each year in the United States (9). In addition, most employment growth continues to come from the small business sector. Thus, given the economic importance of small firms, any serious problems they face cannot be considered insignificant. Such problems, if they are widespread, could seriously influence the economy as a whole.

While small business problems may have a variety of sources, McEvoy (6) believes that many of the problems can be traced to the selection, development and utilization of human resources. In a small firm, perhaps even more than in a large corporation, a few individuals can make or break the firm. A mistake by an alcoholic machine operator may result in an expensive lawsuit and some bad publicity for a large firm, but may result in financial ruin and loss of reputation for a small firm. Such considerations make the job of human resource management in a small firm a critical one. Hiring the right personnel is important. Solving problems is crucial, and eliminating problems that cannot be solved is a necessity. It is essential to examine small business human resource management practices to provide information which will assist individuals who are currently involved in small business or those who are interested in operating their own small business.


The selection process has a significant effect on the quality of any firm's employees, whether the firm is large or small. An essential part of the selection process includes checking references of job applicants (8). In a small firm, where multiple interviews and testing are less likely to occur, reference checking assumes even greater importance. While Gatewood and Field (2) found that companies check references 50-90% of the time, a study by Lotito and Bryant (4) revealed that up to 75% of the employers they surveyed do not check references prior to hiring new employees. Why would any employer omit this seemingly simple step to verify the credits of a potential employee? Perhaps the increased risk of lawsuits claiming "defamation of character" indicates that this step should be taken with caution.

To avoid lawsuits, legal counsel often recommends that clients confirm only that the applicant in question worked for them, the term of employment, and the rate of pay (8). Some seeking employment have recently won large awards (Davis v. Ross, 1985; O'Brien v. Papa Ginos, 1986; Lewis v. Equitable Life Assurance Society, 1986) based on the claim that a reference resulted in defamation of character (4). In other words, reference checking produces very little information and therefore, may be considered by some a useless step.

The whole process is complicated by the fact that, to avoid a negligent hiring suit, an employer must carefully inquire regarding the background of those hired. The courts expect the manager to obtain relevant job information when checking potential employees' past work histories, but may find those same managers guilty of libel for comments that hurt past employees' job opportunities. Thus, the courts have created a Catch-22 for employers. …

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