How to calculate the number of full-time equivalent employees (“FTEEs”).

Small businesses that want to get the Paycheck Protection Program loan forgiven, need to prove they kept the same number of FTEEs. A common mistake when calculating the number of employees is to use payroll reports or form 941 instead of FTEE. This could cost you 33%. Here is how to avoid that.

This story has been updated with SBA’s Loan Forgiveness Application issued on May 13th.

Content

1. The numbers on payroll reports and form 941 are overstated
2. What’s the legal definition of FTE?
3. Calculating the number of FTEE
4. Why Full-time Employees is the right measure
5. SBA rules and other sources of Information
6. About me

1. The numbers on payroll reports and form 941 are overstated

The reports issued by payroll providers (e.g. ADP , Paycheck) overstate the number of FTEE due to rotation. Those overstated numbers are also reflected on form 941.

For example, if you employ 100 people but 1/3 of them have rotated, the reports will show 133. This is because these reports count all social security numbers included in the payroll. Thus, despite the fact that you only had 100 people at any given time, the reports will show 133.

This is quite important. Imagine that you chose the first option to calculate loan forgiveness. The first option is the average number of FTEEs per month employed from February 15, 2019, to June 30, 2019. The number, reflected on form 941, is 133.

This year, due to the recession, rotation is eliminated. Thus, form 941, will show 100. The loan forgiveness will then be reduced by 33%. If your loan is for $1,000,000, you will lose $333,333.

2. What’s the legal definition of FTE?

In the US, the Department of Labor doesn’t have a definition for FTE (most European countries do have a definition). The DOL states “The Fair Labor Standards Act (FLSA) does not define full-time employment or part-time employment. This is a matter generally to be determined by the employer”.

The SBA finally clarified that on form 3508 published in May 2020.

The weekly number of hours for a FTE is 40, according to SBA Loan forgiveness form 3508

3. Calculating the number of FTEE:

Wages: use 40 as the number of hours per week. Convert the totals first. For example, if your payroll shows that the number of hours worked was 1,000 per week or 2,000 on a Biweekly basis, the number of FTEEs is 25 (1,000 divided by 40 or 2,000 divided by 80). For as long as you are consistent in all periods, you will be compliant with the PPP.

To calculate FTEs, divide the number of hours worked per week by 40 (80 Biweekly)

Salaried workers: manually count the number of employees who were working 40 hours a week. Make sure to avoid double counting.

Where to find the number of hours worked

The number of hours worked is shown on most payroll reports.

4. Why Full-time Employees is the right measure

It was the right decision for Congress to use FTEs instead of headcount to calculate loan forgiveness. Although headcount or position count figures are readily available, they may provide a grossly incorrect figure, as shown above.

I teach a graduate Finance class at NYU. Last semester, despite the fact that it wasn’t in the Syllabus, I taught my students why FTEs is a better measure than headcount. I am glad I did. I didn’t know back then that knowing this formula could save Small Businesses $80 Billion. Below is the slide. Take Finance classes in college. They are useful.

Why Full Time Equivalent is a better measure than headcount

5. SBA rules and other sources of Information

SBA rules

SBA. FAQ. Paycheck Protection Program. May 3rd.

SBA. FAQ. Paycheck Protection Program. April 8th.

The CAREs Act. All the documentation and regulations (236 pages)

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PPP. What is included in payroll costs?.

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Other documents

Bipartisan letter asking for greater flexibility

ABA guidelines. The document has answers to 76 FAQ. Fortunately, the government of Phoenix, AZ has made the content available to all of us.

6. About me

I worked as VP Finance, Global Controller and CFO at Procter & Gamble, Tetra Pak, and Nivea and now work in Private Equity (PE). I also teach Finance at NYU. We have created a program to help small businesses navigate the PPP process. This is part of that project.

Here is other material from my class that I have made available:

How to make/ read a Profit & Loss and Balance Sheet.

This would help you to manage your business and your investments. Slides are here and P&L video is here.

Balance Sheet video is here.