FTE. How do you calculate the average number of employees?
How to accurately capture the average number of employees
Getting the number of employees in any given setting involves doing a manual counting of those present at that time, or counting the number of entries in a registry. In the employment setting, however, variables like man-hours and duration of work expected suddenly come into play. This further complicates this previously assumed simple process.
Getting the right estimate of employees in a company or business is not as easy as you may think. Depending on the organization’s work structure, different methods are suitable for different business structures. In small companies, salary clerks and payroll accountants have, for a long time, applied the wrong methodology in calculating the average number of employees. This improper application of methods has cost small businesses vast sums of money. This loss directly impacts the business’s profit margins negatively.
The paycheck protection loan program was introduced for small businesses in the United States and a number of European countries. Through the program, small businesses would receive up to eight weeks of funding to cater for their payroll costs. In addition, the funds could be used in settling mortgage interests, rent, or periodic utilities.
Loans acquired through the paycheck protection loan program may be forgiven for companies whose average number of employees and the levels of salary remain constant. However, the forgiveness rate reduces relative to Full-Time Equivalent Employees (FTEE) numbers and salaries/wage levels.
The United States Department of Labor gives employers the freedom to independently determine their full-time and part-time employees. However, this is not the case in most European countries, such as the United Kingdom. These countries have guidelines that define the measure to be used to determine the average number of employees; Full-Time Equivalent (FTE). This provides the framework for a more informed decision-making process and away from the traditional counting of individuals method.
Below are the main methods of calculating the average number of employees in a business or company:
• Payroll Reports Headcount
• Employees Turnover Rate
• Full-Time Equivalent
• Number of hours worked / Normal annual working hours.
Payroll Reports Headcount
Employee rotations or promotions should not be assumed as a factor in determining the average number of employees in an organization. Payroll providers for a long time have not been capturing the number of employees in a company accurately. In most cases, this has resulted in overstatement of the number of Full-Time Equivalent Employees in the company. Additionally, form 941 has content that is similar to that of the payroll report. This means that errors reflected in the payroll report are most likely replicated in this form.
Take the example of a company with 100 employees. Assuming 1/3 of them have been rotated, the report will capture the company having a total of 133 employees. This is clearly an overstatement because the 33 have been counted twice. The method counts all social security numbers appearing in the payroll rather than the accurate numbers of 100 employees. This is because these reports count all social security numbers included in the payroll.
For a company with a majority of part-time employees, budget analysts may convert their total hours worked into a Full-Time Equivalent basis. This is done in order to identify the adequate number of full-time staff necessary to work on a specific project or task. Derived data may be applied in other fields such as financial analytics and while comparing profit to headcount. Converting staff to Full-Time Equivalent also helps in comparing the company’s numbers of employees to similar companies in the same level or industry.
Employees Turnover Rate
The Employee Turnover Rate is defined as the percentage of employees who have left the organization between certain financial time periods. Incidences in the work setting such as voluntary resignations, sacking, non-certification, and retirement are used in deriving turnover rate. Some key items excluded are internal transfers and promotions.
To calculate the annual turnover rate, one must derive the number of staff at the beginning of the financial year, those at the end of that year, and the employees who left within the year. Calculate the average number of employees in a company by adding your beginning and ending workforce and then dividing the result by two. The percentage is derived by multiplying the results by 100.
However, most companies prefer to apply quarterly or annual turnover rate calculations as opposed to monthly. This is because it may take longer to achieve substantial patterns or rates if reporting is monthly.
Full-Time Equivalent Employees (FTEE)
Companies apply Full-Time Equivalent in allocating staff across departments, depending on approved budget requirements or constraints. Besides, the management may also spearhead these allocations based on departmental needs for specific talent or employees.
The Full-Time Equivalent Employees method concentrates more on the number of hours worked rather than the number of employees in a company. It is possible to have four employees contributing to 1.0 Full-Time Equivalent. Basically, this would mean that each of the 4 employees contributes 0.25 Full-Time Equivalent. Thus, in a typical 40 hours workweek, each would be contributing 10 hours of work per week.
The Full-time equivalent (FTE) measure is derived from dividing an employee’s scheduled week hours by the employer’s designated week hours. An employer requiring full-time employees to work a minimum of 40 hours in a given week would therefore have all full-time employees being 1.0 Full-Time Equivalent. In contrast, the part-time workers may report 0.5 Full-Time Equivalent, depending on the number of hours they are required to work.
An employer with a 35-hour workweek is meant to divide the employee’s assigned hours by 35 to derive the Full-Time Equivalent. For example, an employee who works for 21 hours a week out of the scheduled 35 hours would derive a 0.6 Full-Time Equivalent.
Full-Time Equivalent is applied on different occasions, such as revenues/profits benchmarking per employee. Therefore, it’s important to convert a part-time employee’s hours to full units of measure for consistency in a company.
The Patient Protection and Affordable Care Act (PPACA) defines how a Full-Time Equivalent may be calculated. It also demands the employers to count FTEs to determine how the Act affects their organization’s operations.
Take an example of waged employees working 40 hours a week in a company and are required to maintain 1,000 hours weekly. This basically means that there are about 25 Full-Time Equivalents (1,000 divided by 40 hours per week). The consistency level is to be maintained during the financial years of the company. In counting salaried workers, manually count the number of employees working on a full-time basis (those working 40 hours a week while avoiding duplication).
What is included in “hours worked”?
Variations may exist depending on the country in question, but this principle is usually applied in the European Union.
The definition is all the working hours you paid a salary or other compensation for, except overtime hours. This means that paid holidays, leave of absence, sick leave, and compensatory days off must also be included. Suppose you divide the turnover by the average number of employees. In that case, you can thus give the impression of having very high productivity if you let the employees work a lot of overtime instead of hiring new staff… which often happens in larger companies governed by key ratios instead of reality. In the same way, you can make it look like you have high productivity if you bring in many hired consultants instead of real employees.
On an annual basis, the FTE is considered to be around 2000 hours. You will often find the number 2080 hours based on the simple calculation: 8 hours per day x 5 days per week x 52 weeks per year = 2,080 hours per year. But different countries have different recommendations. For example, in Sweden, it is advised to use 1920h as the annual total working hours.
Why Full-Time Equivalent is the appropriate measure
The Full-Time Equivalent helps avoid over-estimation of the average number of employees in an organization. This would help deter the company’s challenges later regarding the average rate while seeking forgiveness through the loan program.
The Full-Time Equivalent employees method helps avoid calculation of rotation and internal promotions of employees within an organization. Therefore, this provides a more accurate count of the average number of employees compared to the previous methods.