Full-time equivalent or FTE is used by businesses to calculate the full-time hours worked within their business among all employees. It would not be wrong if we say that a full-time employee working 40 hours equals 1 FTE whereas, a part-time employee working 20 hours is equal to 0.5 FTE.
In order to meet legal requirements of your business finances, you need to know how to calculate FTEs. For that, you have to take out the total hours worked by part-time employees and divide the total hours worked by full-time employees. After that, you can also figure out the equivalent number of full-time workers you employ.
Now that you know what is FTE , let’s understand what is FTE employee.
A FTE employee is an worker who works full-time as per the policy. For example, if an employee covers his assigned working hours, only then he will constitute as one full-time employee.
Or we can say that,
– 1 full-time employee working 1 official full-time zone is equal to 1 full-time equivalent (FTE) employee.
– 2 Part-time employees working half time of the companies official FTE schedule is equal to 1 full-time equivalent (FTE) employee.
– 4 part-time employees working a quarter of full-time scheduled employees are equal to 1 full-time equivalent employee.
Full-time equivalency has many uses, as stated that business analyst uses it to calculate labor cost. It is also used to calculate the number of employees required to complete a project.
Let’s look at the reasons why companies find FTE useful:
The full-time equivalent proves a reliable indicator of how underworked or overworked a team member is during the given time period.
To understand what is FTE, let us figure out how to calculate FTE step by step.
For example, an employee has been hired to work for 40 hours and his FTE is 1. However , if that same employee works for 60 hours per month, then their FTE is 1.5.
With the help of identifying other employees’ full-time equivalency, one can easily track organizational costs i.e., overspend and underspend costs.
If in case your team relies on part-time employees, understanding their contributions as a reflection of FTE will help you calculate valuable metrics, incorporating the profits they generate.
Applicable Large Employees (ALE) is a term used for employers having more than 50 full-time employees or full-time equivalent workers. They must comply with the various rules established in Affordable Care Act (ACA).
There are six important steps to calculating FTEs
Draft a list of employees paid with a year-end W2 form. The list must include the employee’s name and the number of hours they work weekly. Make sure to keep out time divided for paid and sick leaves both .
For example, you need to find what is FTE for company R.
A company R has a total of five employees including 3 full-time employees working 40 hours per week and two part-time employees working 10 hours and 25 hours per week respectively.
A full-time position is equated to around 35-40 hours a week. If a company says 40 hours per week is a benchmark that needs to be followed by all the employees and if in case any employee is working less than 40 hours, that must be considered as a part-time employee. The same condition will be applied if the company considers 30 hours per week as a standard for a full-time role.
In our above example, company R considers 40 hours per week as a full-time role.
Calculate complete number of hours served by the employee full-time or part-time in a year. For an easy calculation, multiply the number of weeks in a year and the number of hours for a full-time position.
To calculate total working hours per week, multiply hours by 52 i.e., the number of weeks in a year. The result will be the number of hours worked annually.
Add the total number of hours of the full-time employees and part-time employees.
For example ,
Full-time employees 40*52= 2080 *3 (number of employees) = 6,240
Part-time employees (10*52) + (25*52) = 1,820
To calculate the FTE of a part-time employee, divide the total hours worked by the part-time workers by the annual hours worked by a full-time worker.
What is FTE of company R’s part-time employees
Divide total number of part-time hours served by the number of hours served by one full-time worker.
1,820 hours /2,080 hours = 0.875 FTE
Add the total number of FTEs served by full-time workers, i-e., 1 FTE of a full-time employee to the part-time FTE you calculated in the 5th step.
One full-time employee has an FTE of 3 and one part-time FTE is 0.875
Therefore, the total FTE of Company R is 3.875
What is FTE is no more a question as we have discussed it thoroughly in above content. FTE has multiple uses and methods to calculate depending upon the purpose. FTE will help you plan the project for your work according to the deadlines and the financial estimates. Having accurate FTEs for all employees will also help employers determine authority and responsibilities toward them. That might include their PTO rate and eligibility for certain federal programs. After figuring out why you need to use FTE, identify methods to calculate it through.
See Also: What’s The Difference Between Gross Pay And Net Pay?
Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.