Article written by:
Dustin Minton, CPA
Director, Restaurant Services

As businesses have begun to wrap up their Paycheck Protection Program (“PPP”) loan covered period or decide whether to extend a little longer, the number one question is around the full-time employee equivalent (“FTE” or “FTEE”) calculation.  This is understandable as the rules have changed a lot, are quite confusing, and the FTE ratio can have a significant impact on your forgiveness amount.  We have compiled a listing of commonly asked questions around FTEs and provided some best practices on how to calculate average FTEs for your loan forgiveness application.  Before you invest too much time on calculating your average FTE, please scroll down to the safe harbor tests to determine whether Safe Harbor 1 may be applicable to you related to reduced business activity.

What is the definition of an FTE?

The FTE calculation converts a company’s total employee count (including both full- and part-time employees) into the “equivalent” number of full-time employees working 40 hours a week.  The original loan forgiveness application clarified the base hours of 40 hours per week to calculate an FTE.

Two options of calculating the number of FTEs are provided:  (1) calculating based on actual hours worked or (2) simplified approach of using an FTE of 1.0 for employees working 40 hours or more and 0.5 for employees working less than 40 hours in a week.  You can elect the option that is more favorable to you and that option must be used to calculate all FTEs for all reference periods.

Tip:  It is beneficial to calculate both options as the results can differ significantly and one will be more favorable to your circumstances.

What time periods do I need to calculate FTEs?

There are multiple time periods to calculate FTEs when preparing your PPP loan forgiveness application:

  • The “forgiveness period”. Calculate both and choose the one for the application that is more favorable to your results:
    • Covered Period (“CP”) ranging from eight to 24 weeks beginning on the date of your loan disbursement.
    • Alternative Payroll Covered Period (“APCP”) ranging from eight to 24 weeks beginning on the first day of the payroll period beginning after the date of your loan disbursement. The Alternative Covered period can be helpful when you increased your FTEs over the forgiveness period as the APCP can allow for a later payroll to be included than would be included in the Covered Period.
  • Baseline reference period to determine whether FTE penalties apply. Calculate both and choose the one for the application that is favorable to your results:
    • Option 1 – 2/15/19 to 6/30/19
    • Option 2 – 1/1/20 to 2/29/20
  • FTE Safe Harbor calculations:
    • FTEs as of February 15, 2020 (based on the pay period including this date)
    • Average FTEs during the period 2/15/20 to 4/26/20
    • Number of FTEs as of the earlier of the submission date of loan forgiveness application or December 31, 2020

On page 1 of the application, it asks for “Employees at Time of Loan Application” and “Employees at Time of Forgiveness Application”.  Please remember this is not based on FTEs; rather, this is based on the definition used by the Small Business Administration (SBA) and counts each employee as one.

Reminder:  The CP or APCP can be any amount of weeks between eight and 24 weeks, but must end no later than December 31, 2020.  This was a recent change announced.

Is my FTE calculation based on all payroll periods included in eligible payroll costs?

Eligible payroll costs include payroll costs both paid and incurred during the CP or APCP; however, the FTE calculation is based on the payroll periods incurred within the eight to 24 weeks elected.  For example, if you elected a ten-week covered period, we would expect FTEs to be calculated on ten weeks of payroll registers even though you may have captured 11 weeks of eligible payroll costs.

Tip:  The first payroll paid during the covered period likely covers days prior to the beginning of the covered period.  This payroll would be excluded from the FTE calculation and the other payrolls would be included.

How do I actually calculate my FTEs?

There is more than one way to gather, organize, and analyze the data to calculate average FTE, but let’s follow this example of instructions to demonstrate the process:

  1. Identify which payroll periods will be used for each FTE calculation for the time periods described above.
  2. Download each payroll register into Excel including fields of employee ID, employee name, check number, check date, week ending date, earnings code, hours, pay rate, and check amount.
  3. Create a pivot table showing columns of “week ending date” and rows of “employee ID” and “employee name”.
  4. Copy that pivot table into a new section of the file to freeze the data so you can perform the calculation.
  5. Using the frozen data, calculate the FTE by employee using the Actual method of dividing the employee’s hours for each week by 40 hours and rounding to the nearest tenth.
  6. Using the frozen data, calculate the FTE by employee using the Simplified method by writing a formula of counting each employee working 40 hours or more as 1.0 and those working less than 40 hours as 0.5.
  7. Create a summary tab showing all time periods needed to be calculated:
    1. Separate “Actual” from “Simplified”
    2. Column headings should show each payroll period included within that time period
    3. Last column heading should be the average
  8. On the summary tab, sum up the data columns for each payroll period and include under the respective time period and payroll period.
  9. On the summary tab, average the totals for each payroll period and method to arrive at your average FTE.

Reminders: 

  • The FTE calculation needs to be by employee and rounded to the nearest tenth.
  • Owner/employees should not be included in the FTE calculation; however, their payroll is included in payroll costs based on compensation restrictions in place.
  • Exclude overtime from the calculation as anything over 40 hours is 1.0.

How do I know which FTE calculation option and reference period to use?

The next step is determining which calculation option is best for you – Actual or Simplified.  Create a table to show this comparison as such:

  • Row headings would include
    • Covered Period
    • Reference Period #1 FTE
    • Reference Period #1 Ratio
    • Reference Period #2 FTE
    • Reference Period #2 Ratio
  • Column headings would include:
    • Actual Hours
    • Simplified Method

Based on this table comparison, you can decide which reference period to use (2/15/19 to 6/30/19 OR 1/1/20 to 2/29/20), as well as which FTE calculation to use (Actual or Simplified).

What are these FTE safe harbors and how do they work?

If you have determined that the FTE reduction penalty applies to you because you have done the above analysis, or you suspect that it does because of reduced operations, then you can assess whether one of the safe harbors apply to you.

There are two FTE Reduction Safe Harbors as follows:

FTE Reduction Safe Harbor 1: If you were unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Tip:  This may cover a lot of businesses that have mandated capacity constraints, like restaurants and hospitality venues, through their covered period and can show business activity is well below what it was prior to February 15, 2020.  If you can prove this, you may not need to go through the exercise of calculating your FTEs.

FTE Reduction Safe Harbor 2: This calculation is on the PPP Schedule A Worksheet and is based on whether you reduced your average FTE between February 15, 2020 and April 26, 2020, compared to the pay period inclusive of February 15, 2020.  If you did, then this safe harbor may apply to you.

The next step is comparing your average FTE as of the earlier of the date the loan forgiveness application is submitted or December 31, 2020 to the FTE count as of February 15, 2020.  Therefore, if you end your chosen covered period at Week ten and apply for forgiveness during Week 12, you will need to calculate your FTEs as of Week 12.  If your average FTE for the current period is greater than the FTEs as of February 15, 2020, no penalty applies and you passed the safe harbor test.

What if you fail the safe harbor tests?

If you fail both Safe Harbor 1 and 2, you will be assessed an FTE reduction penalty which is calculated as your average FTE from your chosen covered period divided by the average FTE from the chosen reference period.  This ratio is then multiplied by the total amount spent during the covered period to calculate the reduction in forgiveness.

Tip:  An FTE ratio of less than one can be “overcome” if the amount of spending is greater than the loan amount by more than the reduction.  For example, a borrower with a $1,000,000 loan and a 90% FTE ratio can still obtain 100% forgiveness if their total spent is more than $1,111,111.  Given that the covered period can be between eight and 24 weeks it may make sense to include a couple of extra weeks in the forgiveness period to increase the amount spent to “overcome” the FTE ratio reduction amount.

What are these FTE exemptions and how do they impact my average FTE calculation?

During the ever-changing rules around the PPP, FAQ #40 was issued to provide some relief to businesses that were unable to hire employees to fill empty roles.  Later on, additional exemptions were added resulting in the following exemptions:

  • Any positions for which the Borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020, and the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020;
  • Any positions for which the Borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer; and
  • Any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

If you have any former or current employees meeting one of these criteria, you may have an exemption to include for your average FTE calculation.  Documentation of these exemptions is extremely important to support these exemptions.  These exemptions are added to your average FTE calculation in Table 1 of PPP Schedule A Worksheet right above where it says Box 2.  It is easy to miss.

Now that you have identified these potential exemptions, how do you calculate the average FTE for each employee?  Let’s discuss an example:  Say Employee A voluntarily quits during Week two of your chosen covered period and you have been unable to fill that position through Week eight, the end of your chosen covered period.  This employee would have an average FTE assigned to them for the covered period; however, you would also have Employee Exemption A being calculated for Weeks three to eight based on the average hours the former employee worked.  This allows your average for this employee to not be impacted by their choice to terminate and your inability to fill the position.

Reminder:  It is important to only include those FTE exemptions if the position was unfilled by a new employee.  There is no double-dipping allowed.

What is my safe harbor cure date?

If you recall prior to the PPP Flexibility Act, the cure date was June 30, 2020.  The revised loan forgiveness application clarified the cure date as the earlier of the submission date of your loan forgiveness application or December 31, 2020.

What does the application require?

The Loan Forgiveness Application Revised June 16, 2020, requires the Loan Forgiveness Calculation Form and PPP Schedule A to be submitted to the lender.  PPP Schedule A Worksheet is not required to be submitted to the lender; however, we think it is prudent to use this worksheet to work through both the FTE calculation and Wage Reduction calculation.

PPP Schedule A Worksheet has Table 1 and Table 2 which asks for employee name, employee identifier, cash compensation, average FTE, and salary/hourly wage reduction.  Using the above instructions on calculating FTEs, you will have the data to support these tables.

The data from PPP Schedule A Worksheet flows into PPP Schedule A which is required to be submitted to the lender.  We believe it is best to have as much documentation in place as possible to facilitate the forgiveness process and audit process should you be audited by the SBA.

So as you can see the FTE calculation can be quite cumbersome and confusing and there are a lot of considerations to evaluate from time periods to use and applicability of safe harbor tests.  If you have questions, please contact a member of GBQ’s SBA team – Rebekah SmithDustin Minton, or Jeremy Bronson.

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