Employers pay employees and contractors in return for activities and services rendered according to specific, agreed-upon T&Cs stated in employment or service contracts. To process payments for employees and contractors, employers need to calculate how to make payments hourly, daily, weekly, or monthly. Employers use Full-time equivalent (FTE) to make these calculations.
Beyond the calculation process, FTEs are critical for employers for many reasons, including staying compliant with local employment laws in meeting minimum requirements for statutory salaries and wages as well as benefits.
Several variables are involved — and so much at stake — in calculating FTEs. This guide helps you understand what FTE is, who qualifies as an FTE employee, how to calculate FTEs (or FTE finance), and why FTE is critical for your business.
What is FTE?
An FTE is a measurement unit equivalent to a worker's one unit of work per day. For example, suppose an employer has (1.0) as a measurement unit for one work day of one employee. In that case, the unit refers to the worker's base work credit in hours (i.e., one hour) per day (assuming one work day equals eight hours) — and according to which an overall FTE is calculated to get how many hours are worked per day: 8 hours (8 [hours] x 1 [day]).
In short, context matters. Employers are free (unless otherwise required by law) to choose which base measurement unit (per day, per week, or year) for each employee to determine an employee's overall FTE according to their selected criterion. Some criteria could include your headcount, required hours to perform specific activities and needed workload in certain periods or projects.
Measuring FTEs is an everyday task of every business. This is more important for organizations employing a wide range of employees and contractors whose permanency and seasonality vary according to internal business requirements and external job market demands.
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Who is considered an FTE employee?
This is a country-specific question. How an employee is defined in a given jurisdiction makes it possible for you as an employer to identify a worker as an FTE employee.
You must understand who qualifies as an employee in your jurisdictions to avoid employee misclassification risks and possible regulatory penalties.
In the US, for example, who has considered an FTE employee includes:
- All eligible employees under U.S. federal and state laws
- Employees whose employment has been terminated during the tax year
- Employees who are covered under a collective agreement arrangement
- Employees who are not enrolled in healthcare coverage
Take your time properly identifying who qualifies as an employee first and, next, which identified employees are considered FTE employees in your jurisdictions of operation. Calculating your FTE could be challenging enough, given how shifting your workforce makeup might be across projects, over quarters, or during certain activities.
Hint: you can use an established employer of record, such as Skuad, to help you properly classify and pay your employees and contractors compliantly, smoothly, and cost-effectively.
How to calculate FTE for part-time and full-time employees
Definitions of a full-time employee and a part-time employee need to be established.
In a U.S. context, a full-time employee is determined according to US federal and state laws, including the Fair Labor Standards Act (FLSA).
The definition of a part-time employee is not directly addressed in FLSA. Employers decide it based on practice and each employer's operations, payscale, the scope of projects, and other factors.
Calculating FTE for full-time and part-time employees, or FTE breakdown, is not different in principle since full-time and part-time employees are, according to U.S. law, considered generally of equivalent status except for how many hours worked by each category of workers.
In calculating FTE for employees, employers are free to use any method of calculation as follows:
- Actual hours worked. This is a straightforward calculation method where employers add up all actual working hours by one employee per day (including all statutory holidays and leaves). For example, based on the 1.0-measurement-unit system, an employer may calculate an employee's by adding up work hours per year as follows:
8 hours (per day) x 5 days (per week) x 52 weeks (per year) = 2,080 hours of service
This calculation is based on an assumption an employee does not have any single vacation day or leave. However, all statutory holidays and leaves should be counted in the FTE calculation. Assuming an employee's records show actual working hours equivalent to 1980 hours and are paid for an additional 100 hours, such an employee is still entitled to 2,080 hours of service as follows: 1980 hours worked + 100 hours paid by or reimbursed to the employer on account of statutory holidays and leaves.
- Days-worked equivalent. This calculation method has a measurement unit of calculation days, not hours, including all statutory holidays and leaves.
- Works-worked equivalent. This calculation method has a measurement unit of calculation weeks, not days or hours, including all statutory holidays and leaves.
The number of employees, size, operations, the scope of the project, and more are factors each employer may consider in choosing which method to use to calculate FTEs.
That is why any given method or formula to calculate your FTE should be considered as only one of many options you can use. Ultimately, however you calculate your FTE, what matters most is how your calculations result in maximized returns and minimize financial and non-financial inputs.
FTE vs. headcount vs. hours
FTE, headcount, and hours worked sometimes confuse when calculating FTEs. In reality, however, each refers to a different concept.
The FTE is only a measurement unit to calculate how many hours your employees worked on an actual-hours, days-worked, or weeks-worked basis.
The headcount is your overall number of employees, which must be a whole, not a rounded number, as in FTE or hours worked.
The hours worked refer to how many hours your employees worked, including all statutory holidays and leaves as well as overtime hours.
You, as an employer, should consider all methods to stay flexible and to adapt to any labor market or regulatory changes you may encounter as you expand internationally. There is not, once again, a one-size-fits-all method for calculating FTEs, even in one jurisdiction and for each employer.
Why is FTE necessary for your company?
Numbers are critical for any business. Calculating FTE is not different. In addition to getting a clear-cut amount you should pay your employees, FTEs are essential for your company because:
- You can get insights into better scheduling your projects hourly, daily, weekly, or annually based on your FTE calculation method.
- You can better manage your workforce by using full-time, part-time, or contractor workers interchangeably or on a needs basis.
- You stay compliant with any in-country labor, tax, or payroll laws and regulations.
- You get tax credits, if and when applicable, for amounts eligible by law for small and medium businesses in certain jurisdictions.
- You optimize your staffing process by managing your human resources according to your current and emerging needs.
- You make better business decisions by accurately assigning activities to exact (not estimated) staff members.
In short, FTE is a metric your business may use to measure your overall performance. By connecting the dots between your human power (full-time and part-time employees as well as independent contractors), budget, business goals, technologies you use, and business partners, you can better orchestrate your business efforts to maximize your output and minimize your financial and non-financial input.
FTE: your bottom line
Whichever way you choose to calculate your FTE, you need to ensure your FTE not only meets compliance requirements for minimum salary or wage in your jurisdictions of operation but also to achieve several benefits aimed at optimizing your business process and maximizing your output. As such, FTEs should be front and center of your human capital management process.
This is where payroll management comes in.
Knowing how to manage your payroll is not always a straightforward process. It often involves several regulatory and financial complexities — more so if you have international operations where you need to manage international payroll. You can go solo and risk running against regulatory and financial risks by managing FTE calculation independently. Or, you may opt for an expert service provider.
Having an established employer of record, such as Skuad, is a step you should not think twice about to help you manage your FTE calculation process and beyond. The combination of our in-house expertise and cutting-edge HR platform provides an unmatched FTE calculation service you need most for your international operations.
Skuad is a global payroll platform that enables you to pay employees in over 100 currencies in 160+ countries. With Skuad, you can manage your payroll efficiently with no hassles.
To know more about Skuad, book a demo today.