What is FTE?
FTE or Full-Time Equivalent is a metric that quantifies an employer’s number of full-time employees regardless of how many hours each employee works. It was created to measure part-time employment in terms of full-time hours. In other words, an employer who has both full-time and part-time workers can quantify all hours worked in terms of full-time employment.
One full-time employee is classified as 1.0 FTE. A part-time employee who works half-time (according to the employer’s or regulator’s definition of full-time weekly hours) is .5 FTE.
How does an employer calculate FTEs for a calendar year?
For the FTE measurement, an employer calculates all employees’ hours and determines a monthly average for the year.
The IRS gives the following instructions:
“To determine its workforce size for a year an employer adds its total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year and divides that total number by 12.”
How does the federal government define a full-time employee?
The FLSA (Fair Labor Standards Act) doesn’t define full-time employment. Therefore, the FLSA generally applies equally to full-time and part-time employees. Some state employment laws take workforce size and full-time vs part-time employment into account. Employers should understand state and local laws that require them to define full-time employment at their company. The laws may involve meals/breaks, fair workweek or PTO obligations.
Affordable Care Act Applicable Large Employer (ALE)
As mentioned previously, the FLSA doesn’t specify how many work hours qualifies for full-time employment. The IRS, however, does put a number on it to regulate ACA provisions including the ACA shared responsibility payment and some small business tax credits.
The Affordable Care Act (ACA) contains provisions that only apply to Applicable Large Employers or ALEs. An ALE is an employer with 50 (or more) full-time employees.
For the purposes of determining ALE status, the IRS defines a full-time employee as one who works on average 30 hours per week or 130 hours per month (or more).
If an employer has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is an ALE for the current calendar year, and is therefore subject to the employer shared responsibility provisions and the employer information reporting provisions. Internal Revenue Service
Why is it important to understand workforce size in terms of FTEs?
When you analyze staffing in terms of hours worked rather than number of employees, it gives a more accurate picture of business performance.
Understanding labor in terms of FTEs can help employers:
- Create compensation plans
- Determine part-time pay based on full-time salary levels
- Build a yearly hiring plan
- Improve productivity
- Identifying Full-Time Employees, Internal Revenue Service
- Determining if an Employer is an Applicable Large Employer, Internal Revenue Service
- What Are Full-Time Equivalents (FTEs)?, The Balance Small Business
- Stay Compliant With Hiring Laws as Your Workforce Grows, Swipeclock