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What Is Full-Time Equivalent (FTE)?

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What Is Full-Time Equivalent (FTE)?

Full-time equivalent, or FTE, is a metric company based in the U.S. use to count how many hours all workers — including full-time, part-time, flexible, temporary, and as-needed employees — have worked. You might also find FTE referred to as whole-time equivalent (WTE) or work-year equivalent (WYE), depending on the context.

Knowing your company’s FTE breakdown is critical for strategic planning, accurate budgeting, and applying for tax credits.

What is an FTE?

It’s unlikely that you only employ full-time employees in your company — you likely receive help from part-time employees or temporary workers. The full-time equivalency measurement lets you calculate the hours those employees work compared to a full-time workload.

Once you’ve calculated your employee FTE, you can see how many part-time employees it takes to complete the same workload as a full-time employee.

You may use FTE in different stages, such as:

  1. Budgeted FTE: Your FTE budget includes how many hours your company has to work with inside a given time frame, like per month or per quarter.
  2. Target FTE: Your target FTE is your company’s ideal FTE requirements needed to meet annual budget and project goals, and it accounts for all needed resources.
  3. Financial FTE: Your financial FTE is the actual amount of FTE your company needed to complete a project or the total number of FTE for employees in a specific timeframe, including paid overtime. You use this information to adjust next year’s or next quarter’s target and budget.

Business managers, department heads, and even administrators in academic settings rely on the FTE system to determine the actual workload amount — and use that information for better financial planning, annual preparation, resource management, and scheduling.

Who is considered an FTE employee?

Who is considered an FTE employee?

FTE uses 1.0 to mean one full day of work, while 0.5 would mean half of that amount or less than a full day of work. Not every full-time employee is an FTE employee, since FTE status only includes employees who work hours contributing toward a 1.0 or 0.5 FTE measurement.

One whole FTE unit is 1.0, which can be made up of a single person or multiple employees. Let’s say a full-time measurement for your company is 40 hours per workweek. A single full-time employee could fulfill all 100 percent of this unit, or eight employees working five hours per week could. The same is true for a 0.5 unit — it can be made of one part-time employee working for 20 hours or four employees working five hours.

FTE typically only applies to those working 120 days or more for your company, including temporary or leased workers. This does not include:

  1. Seasonal employees who work less than 120 days, such as employees a tax firm might hire during tax season or a retail store might hire during the holidays
  2. Hours the company owner works, especially in small company contexts
  3. Any hours a small company owner’s family members work, including in-laws

You’ll find FTE employment in several industries, like government, financial, nonprofit, and academic organizations.

What about independent contractors?

Independent contractors are not the same as employees, and the U.S. government has strict standards to reduce how many companies misuse contractors as laborers without paying the appropriate taxes and benefits.

Some ways to determine the difference include:

  1. Payment: Consider how you pay the workers — per hour? Per project? Are they on a payroll? You are not required to pay for independent contractors’ benefits, workers’ compensation, or paid leave, though you may offer certain tools or incentives to entice the best talent. Employees are a part of your payroll, and you’re responsible for providing them with everything they need to complete their job efficiently.
  2. Management: How much control does your company have over workers, including where they work, the order of the projects they complete, and the tools and methods they use to complete tasks? Management has more say when it comes to employees since they are regular members of payroll and subject to benefits and applicable taxes. Independent contractors are self-employed and have more control over their workweek.
  3. Scheduling: While you might create the schedule of hours and projects your company needs to succeed by a specific timeline, it is ultimately up to independent contractors to choose which hours they are and are not available — without facing repercussions. While you could terminate your contract with a contractor if scheduling doesn’t work out — especially if contractors’ inability to work specific hours is a violation of your contract with them — you can’t issue disciplinary action in the same way you would with an employee.

Misclassifying employees as contractors causes incorrect calculations that could affect your FTE budget or accuracy. You could also face penalties from the government, including fees and legal settlements.

How to calculate FTE for part-time and full-time employees

Standard FTE assumes that typical employees work 40-hour workweeks, five days a week, and eight hours a day. Since there are 52 weeks per year, this equates to an average full-time employee having the opportunity to work a total of 2,080 hours. This number doesn’t reflect sick leave, paid time off, seasonal assistance, or paid overtime. It also doesn’t give you any insight into how those numbers break down across departments and individuals. Some industries might have more hours in their average year.

Follow these steps when calculating full-time equivalent employees:

  1. Create a list of each employee and how many hours they worked in the year. Make separate lists for full-time and non-full-time employees to simplify later calculations. Do not include contractors.
  2. Determine your company’s definition of full-time hours — is it a 40-hour workweek? 35 hours?
  3. Subtract all approved leave hours from the total number of each employee’s hours worked.
  4. Find the total hours for both your full-time list and part-time list.

Once you have this information, you can determine how many part-time employees are equal to a full-time employee in terms of FTE.

To get a total, divide the total number of full-time hours worked by part-time hours worked. For example, if your full-time employees work 40 hours per week and part-time workers average 20 hours per week, divide 40 by 20 and you’ll get 2, meaning two part-time workers equal one full-time employee. In other words, one part-time employee is equal to 0.5, or half, of a full-time employee for hours, worked.

You can repeat this formula weekly, monthly, quarterly, or annually for more specific insights.

FTE vs. headcount vs. hours — is there a difference?

FTE vs. headcount vs. hours — is there a difference?

There are differences between FTE, headcount, and hours worked.

Headcount is the total number of employees working in your company, including part-time and full-time workers. They are not measured in fractions or percentages — one employee is equal to one employee, no matter how many hours that employee has worked throughout the year. Calculating headcount is good for creating organizational strategies and setting goals, but it doesn’t give you specific insight as FTE does for data like departmental labor.

Hours worked are just like they sound — how many hours an employee has worked. You need to understand hours worked for financial processes, like billing and budgeting. It doesn’t give insights for planning like headcount does.

Instead of debating whether headcount, hours worked, or FTE is more or less effective, consider them three integral components of a successful company. You’ll use all the information from each category to create and orchestrate strategic plans with clearer insight into your daily operations.

Why is FTE important for your company?

FTE is a fixed unit, but you can apply it in several different ways, including:

  1. Scheduling: FTE helps scheduling teams avoid under or overstaffing during periods of slower or higher production or special projects.
  2. Mandatory benefits: Knowing your FTE is critical for determining whether your company is responsible for offering full-time employees mandatory benefits, such as affordable and minimum value group health insurance, which is required for employers with 50 or more employees under the Affordable Care Act (ACA). You do not have to offer this insurance to part-time individuals working 30 hours or less per week.
  3. Tax credits: Small businesses need to know their FTE to see if they’re eligible for the Small Business Tax Credit, which helps small businesses with 25 or fewer employees — not including the owner or their family members — offset the cost of mandatory health insurance. Input your information into an online eligibility calculator to see if this applies to you.
  4. Staffing insights: By calculating how many part-time workers are equivalent to a single full-time worker, you can get a closer look at individual employee statuses and determine how effective your part-time employees are by how well they are using the same time and resources. This information makes it easier to decide who should be a part-time employee and who would be a good asset for full-time employment. It can also help you decide who to terminate if productivity is down.
  5. Federal program eligibility: Many federal programs, including the Paycheck Protection Program, require FTE to determine eligibility.
  6. Project timelines: Use FTE calculations to make departmental, organizational, and managerial decisions when restructuring or taking on new tasks or to determine how many employees you need to complete specific projects.

What is an Applicable Large Employer (ALE)?

What is an Applicable Large Employer (ALE)?

The ACA legally requires that employers, individuals, and the government each help offer insurance to as many people as possible. Companies with 50 or more FTE hours worked — regardless of the actual headcount — legally classify as an Applicable Large Employer (ALE).

All ALEs are responsible for offering group health insurance unless they meet some specific terms and case-by-case scenarios. ALEs are subject to penalties and fines if they fail to do so.

According to the ACA’s definition of ALE, full-time employees work at least 30 hours per week on average, usually calculated based on the prior year’s FTE information. Companies in their first year can make estimates based on reasonable expectations. ALEs must offer insurance to each full-time employee who works at least 130 hours per calendar month.

What are employer shared responsibility provisions?

ALEs are required to offer affordable health coverage of minimum value to all full-time employees and their eligible dependents. Otherwise, the company needs to make an employer shared responsibility payment to the IRS if one or more full-time employees receive a premium tax credit for buying their individual coverage elsewhere, like through Marketplace.

This provision also requires employers to give employees 1095-Cs for tax purposes and to determine whether the ALE owes further payments or penalties. Use online estimator tools to examine what penalties or payments you might be held accountable for.

What penalties apply to companies that fail to meet the mandate?

Failure to meet the above mandate could result in penalties, including:

  1. The “pay or play” penalty for nonprofit and for-profit organizations, which the IRS determines based on the employer’s 1095-C and 1094-C forms and the employees’ individual tax returns.
  2. If you fail to meet the mandate for one full year but have met other requirements, you will owe an amount equal to the number of full-time employees you employed during that year, minus up to 30 employees. As of 2021, you would then multiply this amount by USD 2,700.
  3. If you fail to meet the above mandate for part of the year, you owe payment for each month you didn’t meet the requirements. Determine the payment amount by taking how many employees you employed in each month, minus up to 30 like before, but multiply by however many months out of 12 total and multiply by USD 2,700.

Penalties and fines cut into your bottom line and interrupt your daily operations — and could leave a permanent stain on your company’s reputation. Working compliantly is the best option for all involved.

Do 1099 workers or independent contractors count toward ALE?

Independent contractors or 1099 workers do not count toward ALE. You should also leave out any employees who work outside the U.S., leased employees, and workers who hold positions like direct selling or commission-based agenting.

Simplify global benefits and payroll with Globalization Partners

Knowing and tracking your company’s FTE is the best way to determine how part-time and full-time employees are performing, distribute talent, gain insights into which departments need more resources, and create accurate project timelines.

With so many employment intricacies, it’s crucial you clearly distinguish between each type of employee, especially if you’re managing a large global team. Globalization Partners’ global employment platform streamlines worker classification and ensures your company is compliant in key areas like employment contact generation and payroll.

Request a proposal today to learn more about our international payroll services and how we can help you manage and grow your global team.

Simplify global benefits and payroll with Globalization Partners

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