What Does Full Time Equivalent Mean, and Why is it Important?

Full time equivalent is a metric that you can use to work out how all of your employees as a group translate to an equivalent number of full-time employees, no matter your overall headcount or how many hours each of your employees works on an individual basis. 

Although it might seem complicated at first, this is actually a really useful calculation that can support HR and Finance teams with a wide range of goals. Let’s dive a little deeper and learn about why full time equivalent matters to your business.  

This is part of an extensive series of guides about workforce management.

Tell me again, but slower. What exactly is full time equivalent?

If your company only hires full-time employees – you will be able to see at a glance your full-time equivalent metric, (hint: it’s the same number as your employee headcount.) However, in today’s workforce, non-traditional working options are more popular than they have ever been, and it’s likely that your organization hires part-time employees, contractors, or seasonal workers as part of the business. In this case, a simple headcount won’t help you to work out your full time equivalent.

Instead, add together all the hours that part-time employees work, and then combine that number with the number of hours full-time employees have worked during the same time period. Now you’ll have an annual number of hours that all of your workers have provided in that year. I know, it looks like a lot, eh? 

Divide that number by 2,080 (which is 8 hours x 5 days x 52 weeks, if you’re wondering) and boom – you have your FTE magic number. This is the number of full time equivalent staff you have on board. You can learn more about completing an FTE calculation here. 

Note: Some regulations have their own specific guidelines for how many hours constitutes full-time, and so you may need to adjust the numbers to meet these rules. While 2,080 is based on a 40-hour work week, for the Affordable Care Act regulations, the IRS states that any worker who is employed more than 30 hours a week, or 130 per month is considered full-time. For an FTE calculation to comply with ACA, add up all the hours worked per month, but don’t include more than 130 hours per month for any worker, and then divide that number by 120. 

What can I do with full time equivalent data?

Full time equivalent allows you to calculate and analyze your workforce a lot more accurately, and also explains how much value and workload you’re getting out of part-time staff in comparison to a full-time baseline. 

You might look at your workforce and think “Wow, I have 30 people working for me, why is productivity low?” or “Why are we not meeting objectives?” If those 30 people are a mixture of full-time and part-time workers, and your FTE explains you actually have the equivalent of 15 employees – that could help to guide how many more staff you should hire, or where to make changes. 

Let’s say you feel strongly that there is a discrepancy between what part-time staff are getting done compared to full-time employees. This is just a gut feeling, but FTE allows you to put science behind that feeling. With FTE, you can compare the work that each cohort does in a more accurate way, understanding the productivity levels with the right data to hand. 

Perhaps you’ll find that part-time staff or independent contractors are more productive or effective than the equivalent in full-time staff, or perhaps part-time staff are struggling to get the job done with their hours. Either way, you can take that data on FTE, alongside additional information on output, and make the relevant changes to your workforce structure.

Tracking your FTE over time can also support the business in analyzing workforce trends, especially if you can measure this number by specific teams or departments. You might see that the number of FTE you have in Cloud Services has tripled over the past 5 years, or that you are unable to fill vacancies on the Success team, leading to a lower FTE than you’ve had in the past. This data can then be used to explain poor CSAT scores or reduced customer retention to the board, helping CS leaders in obtaining more budget or support from the executive leadership to turn the situation around.

Is FTE required by law?

There’s no legal requirement to work out your FTE. However, your full time equivalent metric will be used to work out certain regulatory factors, such as whether you are considered a large or a small business. Small businesses may be able to qualify for small business health insurance plans, but their FTE number will need to be under 50. In this situation the business will also qualify for tax credits that are equal to 50% of employer-paid health contributions, which can be a great perk for smaller business owners.

On the other side of the scale, once you have an FTE of more than 50, you’ll be classified as an Applicable Large Employer for that tax year, and you’ll need to comply with added elements of The Affordable Care Act, for example providing employees with health care and ensuring that they receive the relevant information about that care.

Are there other ways to use the idea of FTE?

We’re glad you asked! There are simpler FTE calculations that you can use for employee management or cost analysis. For example, you can compare a part-time worker’s salary to a full-time worker of the same seniority or role to ensure that they are being treated fairly. If your full-time worker makes $60,000 per year, and you have a part time worker who is 0.5 FTE (working 20 hours per week), they should be making $30,000 if you want all things to be equal. 

This quick calculation can help you to create job descriptions, and accurately compensate workers no matter how many hours they work. It can also support better workforce planning and analysis, as you can see exactly what the cost of your workforce would be when considering various simulations.

See Our Additional Guides on Key Workforce Management Topics

Together with our content partners, we have authored in-depth guides on several other topics that can also be useful as you explore the world of workforce management.

Skills Gap

Global Payroll

Contractor Agreement

Contractor Management

Gig Economy

How To Pay an Independent Contractor

Independent Contractor

Future Workforce

Independent Contractor Taxes

Written by
Stoke Talent

Team

Leave a Reply

Your email address will not be published.