Full-time equivalent (FTE) is a method of converting hours worked by part-time employees into an equivalent number of full-time employees.
Why are FTE calculations important? Business managers need a way to make accurate budgets and forecasts for workforce power, measure the productivity of workers, prepare certain business metrics to gauge company performance and determine compliance with labor laws.
FTE converts the hours worked by part-time employees into the equivalent number of full-time employees (those who work 30-40 hours a week).
On an annual basis, FTE is considered to be 2,080 hours (8 hours a day, five days a week). However, this figure doesn’t consider deductions for vacation, jury duty, sick time or holidays. If these deductions are considered in the calculations, FTE could be as low as 1,680 hours a year. The base number of hours depends on each company’s policies and benefits.
What Is the Purpose of FTE?
Companies use FTEs to determine workloads for their employees. The objective is to figure out the number of part-time employees and the hours they will work that will add up to the same number of hours worked by full-time employees. Accountants use this data to calculate wage rates and payroll expenses.
- FTEs are useful measurements for creating departmental budgets and estimating labor costs. These figures help managers plan for the number of part-time employees required to accomplish tasks or projects and the amount of wages needed for the budget.
- Companies also use FTEs to measure the effectiveness and productivity of its part-time workers. This is because part-time workers are typically paid less and receive fewer benefits than full-time, and the company managers need to know if using part-time makes economic sense.
- In addition, FTEs are used to calculate number performance metrics such as revenue per employee, profits per employee or number of employees per square foot of retail space.
When Is a Job Part-Time?
The answer isn’t quite so simple because the specific number of hours per week that defines a part-time job doesn’t exist. It varies between industries, size of companies and regions.
Even government agencies do not have a common set of rules for determining the hours for part-time jobs:
- The U.S. Department of Labor itself doesn’t define the meaning of full-time work, leaving it up to the employer to set that number.
- The U.S. Bureau of Labor Statistics defines part-time employees as anyone who works 34 hours or less per week. Anything exceeding 34 hours is considered full-time.
- While the Fair Labor Standards Act doesn’t define full-time or part-time hours, it does say that any employee who works more than 40 hours per day is considered as working overtime and must be paid at time and a half wage rate.
- The Patient Protection and Affordable Care Act defines a full-time employee as anyone who works at least 30 hours a week or 130 hours a month. Employees who work 29 hours or less are considered part-time.
Each employer can decide the number of hours and which jobs will be classified as part-time positions. One employer might use 35 hours per week as the threshold, while another company would define anything less than 35 hours per week as part-time.
How to Calculate FTE
To calculate FTE, you will need the number of part-time employees you have and the number of hours they worked. Seasonal workers don’t count unless they work more than 120 hours a year.
For the purposes of these calculations, we’ll define working 40 hours per week as full-time employment.
Let’s say a company that has 12 employees. Three employees work full-time, five work 30 hours a week and four work 25 hours a week.
The simplest method is to add up the total hours worked by all of the employees — full-time and part-time — and divide by 40. The results are as follows:
- Three full-time employees work 120 hours (3 employees x 40 hours)
- Five part-time employees work 150 hours (5 x 30 hours)
- Four part-time employees work 100 hours (4 x 25 hours)
- Total number of hours worked is 370
The number of FTEs for this example is 370 full-time and part-time hours divided by 40 equals 9.25 employees. A manager can now use this figure to prepare various performance metrics for the business.
Suppose the company has total revenue of $1,295,000. The revenue per employee would be
$1,295,000 divided by 9.25 or $140,000 sales per employee.
This metric could then be tracked over time to measure performance trends.
How to Use an FTE for Project Planning
Managers can use FTEs to plan workloads and timelines.
Suppose a department manager oversees a project estimated to take 100 hours to complete. One full-time employee working 40 hours/week could complete the project in 2 1/2 weeks (100 hours ÷ 40-hour work week).
The manager wants to use lower wage part-time employees and aims to complete the project in 5 weeks.
One alternative is to use two employees working 10 hours a week. Even though the project takes longer to complete, the manager saves money by using lower-cost part-time employees.
FTE and the U.S. Health-Care Reform Law
A company’s FTE determines if it is considered an applicable large employer (ALE) for the purposes of providing health insurance for its employees.
Under the Affordable Care Act (ACA), a company must provide health insurance to its employees when the headcount is 50 people or more. For this reason, a calculation of the headcount must include the FTEs for part-time employees. Keep in mind the law doesn’t require health insurance coverage for part-time employees even though they are included in the determination of the threshold headcount.
Employers may decide to offer some health-care options to part-time employees as a benefit to attract more applicants. In some cases, a company might offer health-care coverage for employees working as few as 20 hours in a pay period.
Remember that the Affordable Care Act considers 30 hours per week as full-time and that hours worked is based on a four-month average. This means that the ACA considers an employee who works 30 or more hours per week, or 130 hours a month, is a full-time employee. The base for a four-month period is 520 hours (130 hours per month times 4).
Suppose ABC Company had 30 full-time and 25 part-time employees who worked a total of 3,000 hours in the past four months.
The calculations would be as follows:
- Each part-time employee worked 120 hours in the past four months (3,000 hours ÷ 25 employees).
- The FTE for each part-time worker is 0.23 (120 hours ÷ 520 hours).
- The total FTE for all 25 part-time employees is 5.75 (25 x 0.23).
- Add 30 full-time to 5.75 part-time for a total of 35.75 FTEs.
In this case, while the total headcount is 55 employees, the calculations show that ABC Company has an FTE of 35.75, which falls under the threshold of 50 full-time employees as defined by the ACA.
Some workers aren’t considered employees and aren’t included in calculations for FTE:
- Interns don’t count unless they’re being paid. Freelance contractors aren’t employees and aren’t included.
- Seasonal workers, such as retail clerks working during the holiday season, aren’t considered unless they work for the company at other times during the year.
- Owners, spouses and business partners aren’t counted.
FTE: A Final Word
Calculations for FTEs are important for companies that use part-time employees. FTE conversions are crucial for preparing budgets, making labor estimates and evaluating employee productivity. They also are necessary for consistency of business performance metrics, especially when comparing a company to industry statistics.
Recent trends show that larger numbers of people are choosing to work in part-time jobs — some out of necessity and others by choice.
Whatever the reason, employers will have to deal with budgeting and planning for part-time employees as these types of workers increase in the workforce. Knowing how to calculate and measure the effectiveness of FTEs is an important management skill. Using FTEs also helps ensure compliance with government regulations.