As a business owner or project manager, sooner or later you will come across the FTE abbreviation.
What does FTE stand for? And why should you understand a term that’s mostly used by HR specialists and accountants?
As you’ll understand by the end of this article, there are a number of situations when knowing what FTE is and how to calculate it may come in handy.
In this article, in plain language, we’ll explain:
- What’s FTE?
- How to calculate FTE?
- What’s an FTE employee?
- What’s the FTE salary?
- A few situations when you should calculate FTE
What is FTE? (+ FTE calculation)
FTE or full-time equivalent is used to convert the hours worked by several part-time employees into the hours worked by full-time employees.
Let’s say your company considers a full-time workweek to be 40 hours. On your team, you have Lisa who works all 40 hours per week. And you have 3 part-time employees – Jack who works 20 hours per week, Leva who works 15 hours per week, and Julia who works 5.
Now, Lisa is a full-time employee, so she is 1.0 FTEs. Jack, Leva, and Julia don’t work full 40 hours a week, and to calculate the full-time equivalent of the hours they work, you have to divide each employee’s work hours by the company’s hours for a full-time workweek.
So, the formula for FTE calculation is:
FTE = employee’s scheduled work hours / company’s hours for a full-time workweek
So, because Jack works 20 hours per week, he is 20/40 or 0.5 FTEs. Leva is 15/40 or 0.375 FTEs, and Julia – 5/40 or 0.125 FTEs.
What is a full-time equivalent employee or FTE employee?
All together Jack, Leva and Julia’s hours make up 0.5 + 0.375 + 0.125 or 1 FTEs. In other words, the three together are like one Lisa. And, even though the company employs 4 people, they only have 2.0 full-time equivalent employees.
In other words, a full-time equivalent employee is a combination of the company’s part-time employees. Each of your part-time employees counts as a portion of a full-time employee. When you add multiple part-time employees together, you get one or more FTE employees.
What is FTE salary and how to calculate it?
Because part-time employees only work a part of full-time hours, they also receive a part of the full-time salary.
For example, let’s say, Lisa who is 1.0 FTEs, receives $57k a year. Jack, Leva, and Julia would receive the same salary if they worked full time, but because they are not, their salaries are a part of this full-time salary.
For FTE salary calculation you should use this formula:
FTE salary = FTE x full-time salary
Therefore, Jack, who works 20 hours and is a 0.5 FTEs, earns 0.5 of the full-time salary or $28.5k a year. Respectively, Leva earns 0.375 of the full-time salary or $21’375, and Julia – 0.125 or $7’125 a year.
Bear in mind that FTE isn’t about workload or productivity – it’s only about hours. Even if Jack gets more done working half-time than Lisa, who works full-time, he is still 0.5 FTEs and receives 0.5 of the FTE salary.
Why should you calculate FTE?
Depending on your position at the company, FTE calculation can be important for several reasons.
FTE calculation for resource management
FTE can be used for planning upcoming projects and the total number of people to be scheduled for these tasks, both full-time or part-time.
For example, if you have a project that is estimated to require 60 hours of work, you would need 60/40 or 1.5 FTEs to do it.
Now, you could choose to assign one full-time employee and one part-time employee to work on the project for 1 week. You could also allocate work to 4 part-time employees to do the same work in one week. Or, if the project’s deadline is within one month, you could also go with a single employee working 15 hours a week (0.375 FTEs).
Tip: Once you know how many full-time and part-time employees you need for a certain task, use DeskTime’s Shift Scheduling feature to book employee hours.
Want your business to thrive?
Using time management software is a smart way to optimize business costs.
FTE calculation for financial analytics
As a company owner, you may want to compare headcount to profit – a metric that tells you how much profit each of your employees brings in over the course of a given period.
Profit per employee will help you understand your company’s overall efficiency. Generally, the higher your profit per employee is, the more efficient your company is.
To calculate your company’s profit per employee, you need to use this formula:
Profit per employee = business’s net income (= profit) / FTE employees
So, let’s say your company’s net income in 2019 was $2.1m and had 30 FTE. Thus, the profit per employee in 2019 was $70k a year.
In 2020, the company decided to let a few people go and made $1.8m with 25 FTEs. So, in 2020, the company’s profit per employee was $72k a year, which indicates higher efficiency, despite having fewer employees.
FTE calculation for employment laws and benefits
Depending on the country your business is established in, calculating FTE is needed to determine which employment laws you need to follow or what benefits your company is eligible for.
For example, during the COVID-19 pandemic, the US government established the Paycheck Protection Program that provides forgivable loans to small businesses to help cover up to 24 weeks of payroll costs, interest on mortgages, rent, and more.
To qualify for this program, the company can’t have more than 500 full-time employees or FTEs. So, if your company employs 900 half-time employees, it would still be eligible for the program because 900 employees working half-time would be equal to 450 FTEs.
There are many other programs and laws that are applicable to companies with a certain count of FTEs – consult with an accountant who is familiar with the laws of the country your business operates in.
To sum up
In some resources, FTE is also called WTE or whole-time equivalent. But regardless of what it’s called, it can be a useful unit of measure to allocate human resources to certain projects better, understand how efficient the company and its employees are, as well as to know what programs and laws the company qualifies for.
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