The FTE calculation is based on hours worked rather than number of workers. It is applicable for both employees and freelancers as it ‘translates’ the number of hours worked by your entire workforce.
For example, you could have four employees but only one FTE, if your four workers are working a number of hours that equals one full-time employee.
Can you accurately and easily make an FTE calculation for your workforce? If you’re not sure, you’re in the right place.
In this article we will look at what an FTE calculation is, why you might need one, and we’ll also walk you through the steps of completing your own full time equivalent calculation.
What is an FTE calculation?
FTE stands for full time equivalent, and it’s a metric that you can use to understand how all of your workforce together equates to a number of full-time employees. For example, if you have one full-time employee who works 40 hours a week, and two part-time employees who work 20 hours each, you have an FTE of 2. Your overall workforce is three people, but in terms of hours, it is the same as if you had two full-time employees.
You may need this calculation to show compliance with certain regulations, for example to prove that you are not an Applicable Large Employer (ALE), which would mean you aren’t mandated to provide health coverage according to the Affordable Care Act. It can also be useful for forecasting workforce needs, or working out fair salaries for candidates and employees.
Are all FTE calculations the same?
The way that you work out your FTE depends on what you need the number for. For example, if you’re looking to see if you are legally an Applicable Large Employer, your FTE calculation must exclude 1099 employees, also known as freelancers or independent contractors. If, however, you are looking to calculate your FTE to better understand your workforce trends and budget, you might want to specifically include these workers in your calculations, especially if they are paid by the hour and so you have easy access to comparable data.
Generally speaking your FTE calculation will not include independent contractors, so the process outlined below will remove them from the equation, and focus on FTE calculations for full-time and part-time workers.
A step-by-step process to complete your FTE calculation
First, you’ll need to work out how many part-time hours are worked for your business in a year. If your part-time employees don’t have set hours, or regularly complete overtime, you’ll need to use HR and accounting records to get this number. Next, add the number of full-time worker hours to the part-time hours, so that you now have a sum which shows the total hours worked for the entire year.
The final step for this calculation method is to divide this number by 2,080 hours – which is generally considered to be the number of hours that constitutes full-time employment. This has been chosen as it covers 8 hours per day x 5 days a week x 52 weeks per year.
Some people feel that this is not a perfect number, as it doesn’t take into account elements such as vacation or sick days, parental leave, or overtime. It’s important to consider that as long as your calculation doesn’t deduct any of the 40-hour work week when you’re adding your full-time employee hours, then you’re joining the party in not considering these deductions, so the numbers should work out accurately.
However, one thing that the number 2,080 doesn’t consider, is variances in culture or location. In Israel for example, it’s common to work 6 days per week, while in some companies 37 hours is considered full time.
If you would like to be more accurate about your calculation, in some cases you can modify the calculation to your exact business context, but only when the terms aren’t mandated by the government or regulatory body. For example, the right calculation to work out your compliance requirements with the Affordable Care Act is a simple matter of adding up all of your worker hours over a month (Don’t include any hours above 130 per month for each employee) and then dividing by 120.
Understanding the results of your FTE calculation
Let’s use an example to understand the general FTE calculation in context. Your company has 50 part time employees on the payroll. 10 of them work 20 hours a week, while the remaining 40 each work 10 hours per week.
Here comes the math. First, add up all the part time hours. This is 10 x 20 (200) + 40 x 10 (400) = 600. You also employ 20 full time staff who work 40 hours per week. 20 x 40 = 800. Now you add the two numbers together, 600 + 800 = 1,400. This is the number of hours of work done per week at your company. Multiply this number by 52 to get the annual hours of work, and you’ll be left with 72,800.
Now it’s time to divide this number by 2,080. 72,800 / 2,080 = 35. This is the number of full-time equivalent staff you are employing, which (despite you having a 90-person headcount) puts you well under the 50 FTE limit of being eligible for small business health insurance benefits, for example.
What else can I use an FTE calculation for?
Keeping track of FTE from year to year can help to track workforce trends, or accurately forecast for adding new members of staff to the team, even if they aren’t working full-time hours.
Depending on what you’re using FTE for, it might help to perform a different FTE calculation. For example, there’s a simpler calculation for using FTE to work out salary.
Let’s say you hire James to provide IT support part-time. He’s working for your company 17 hours a week. How much should you pay him? In this case, you don’t need to use the data of the whole company, you just need to compare James’ hours to a single full-time employee with an equivalent role. Divide 17 by your full-time hours (usually 40), which gives you 0.425. You can then take the full-time salary, for example $50,000 and multiply this by 0.425 to get James’ accurate FTE salary, which is $21,250. This is a fair way to provide compensation.
You could also use the FTE metric to look at the FTE of a particular team, then accurately gauge how many additional full-time or part-time staff are needed to meet a looming deadline or to support continued growth and scale.
If the team’s FTE is 5.0 and they need 20% more people-power, you know to hire one more full-time employee, or two part-time employees working at 0.5, and so on.