Understanding more about full-time equivalent (FTE) will help your business with budgeting issues or meet certain legal requirements. You may need to determine how much you will spend on a project so you can have the right resources. In this case, knowing the FTE meaning will aid you as you prepare the budget. It will also keep you on track with the Affordable Care Act requirements for paying out benefits.
Understanding FTE
The FTE meaning is full-time equivalent but is also sometimes called whole-time equivalent. It represents the number of hours one full-time employee works in a week. It provides a unit of measurement by which management can project costs, time, and personnel for various tasks. It provides a standardized way to assess employee hours and measurements.
An FTE provides a metric for your business to calculate stats such as profits or expenses spent per employee. It also helps management keep on top of the hours they are paying for versus only how many employees they have working for them. Simply knowing the number of employees that you have doesn’t tell the whole story. Instead, knowing the FTE provides more information.
FTE Employee
As the acronym implies, an FTE employee is the equivalent of a full-time employee. What does that mean exactly? If your business considers 40 hours a full week of work, then an employee who works 40 hours would be equivalent to one FTE. If an employee only worked 20 hours in a full week, this employee would be equivalent to 0.5 FTE. This is how you would count an FTE for internal purposes, but when it involves compliance with other agencies, such as the Affordable Care Act (ACA), other guidelines must be followed (more on that below).
Why You May Need to Use FTE
There are various reasons you may need or want to use FTE for your business. Some companies need to track FTEs because of laws such as the Patient Protection and Affordable Care Act (ACA). Laws stipulate that companies with 50 or more FTEs must offer group health insurance. Keep in mind that the ACA considers 30 hours one FTE. Even if your business counts 40 hours a week per FTE, it’s 30 hours in the eyes of the ACA.
You may also want to use FTE for the following:
- Calculate personnel requirements for projects you’re working on
- Budgeting your resources
- Salary calculation
- Accrual of paid time off for employees
- Analysis of staffing
Steps to Calculate FTE
As noted above, FTE is expressed as a unit of measurement that directly relates to how many hours a week the employee works. You can calculate FTE by taking the total number of hours worked by part-time employees in a week, month, or year plus the total number of hours worked by full-time employees and dividing by the average number of hours worked by full-time employees. (For a year, that is 2,080 hours with 40-hour workweeks and 1,560 hours with 30-hour workweeks, which is considered full-time for ACA reporting).
You can follow these steps to calculate it accurately:
Start by creating a list of all your employees and the hours they worked.
Now, you can separate your employees into two lists, which include full-time and part-time employees. Be sure to keep the hours they worked next to their names.
Add up all the employees that work full-time and the number of hours they work in one column and do the same for the part-time employees in another column. It will look like this:
- Full-Time Employees: 15
- Hours worked per week: 40
- Part-time Employees: 20
- Hours worked per week: 15
Accounting for vacation and holiday time, let’s assume the employees work 40 weeks a year. The next step is to multiply the number of employees by the hours by the number of weeks (40). Using the example above, you would have the following:
- Full-time employees: 15 x 40 x 40 = 24,000
- Part-time employees: 20 x 15 x 40 = 12,000
In some instances, your employees won’t all work the same number of hours. So, you may have several columns of information that you’ll need to multiply for the FTEs.
This provides the total number of FTE hours per year. You may want to determine the monthly amount or even the weekly amount. You can easily adjust this by multiplying the appropriate monthly hours or weekly hours versus yearly hours.
If you want to find out more about the FTE value for a specific position, you can divide the number of hours worked by the number of hours considered to be full-time. If you use 40 hours as full-time, someone who works 35 hours has a 0.875 FTE. Someone who works 30 hours has a 0.75 FTE.
Some businesses may realize that they are getting more benefit or production out of full-time employees, or it could be the other way around.
FTE Calculation Example
Let’s examine a sample company to see how an FTE would work. Here is an example:
The Fusion Company is bidding on a contract and needs to ensure they charge the right amount. They need to know the appropriate number of employees to do the job. The job is estimated to take about 750 hours of work, and the bid calls for you to complete the work in 60 hours. Here is the FTE calculation that management can use:
750 (total hours) / 60 (hours in the workweek) = 12.5 FTE
This indicates that the company will require 12.5 employees to work a full-time shift each day to fulfill the requirement. The company can select eight full-time (40 hours a week) employees and four part-time (20 hours a week) employees or any other combination that equals 12.5 FTE. Keep in mind that two part-time employees who work 20 hours a week will equal one FTE.
Understanding FTE can assist management with many aspects of business operations. Whether it’s for project management or ACA compliance, knowing how to calculate it will be an asset.