This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand how to calculate employee numbers for the purpose of determining the size of a company or group and for disclosure in the accounts.

Members may also wish to refer to the following related helpsheets:

• Is a company or group small?
• Is a company micro?

The number of employees is an important part of the criteria for determine company size (see Is a company or group small? or Is a company micro? helpsheets) and is also required to be disclosed in the accounts.

When considering a standalone company, the number of employees is calculated in the same way to both determine the size of the company and disclose the number of employees.

When considering a group scenario however, the number of employees to determine the size of the group is calculated differently from the number of employees to be disclosed in the group accounts. This is considered in further detail below.

When determining whether a company is small or micro in size, section 382(6) and section 384A(7) of the Companies Act 2006 outline the requirements with respect to the number of employees. The number of employees means the average number of persons employed by the company in the year, determined as follows:

1. find for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not),
2. add together the monthly totals, and
3. divide by the number of months in the financial year.

If the calculated number is not a whole number, then for the purpose of determining company size we would need to round up, this is because the employee numbers threshold is determined as “not more than”.

For the purposes of disclosure of the average number of employees, sections 411(3)-(4) of the Companies Act 2006, whilst worded slightly differently, require the same steps in the calculation.

Do we calculate full-time equivalent for part-time employees?

No. In both section 382 and section 411 of the Companies Act 2006, we are required to calculate the number of persons employed under contracts of service. It doesn’t matter whether they were full-time or part-time or, for that matter, whether they were employed for the whole month.

The result is that a company with five full-time staff will have five employees under company law, but a similar company with a similar business which chooses to have 10 part-time employees job sharing five jobs will have 10 employees, not five, for this purpose.

Some companies may choose to disclose the number of full-time equivalent employees in addition to the above requirements.

Are directors employees?

The answer is yes if, and only if, the directors also have service contracts for operational roles. If they only receive director’s fees and have no day-to-day operational role for which they are entitled to remuneration, then they are not generally employed under a contract of service.

If a company determines it has no employees, it should still disclose that fact.

Does a contract of service have to be in writing?

Not necessarily. It is possible to have a verbal or an implied contract of service, but this is not automatic. Judgement should be applied on a case-by-case basis, considering all relevant facts and circumstances.

When determining whether a group is small in size, section 383(5) states that the aggregate figures are ascertained by aggregating the relevant figures determined in accordance with section 382 for each member of the group.

Put simply, this means we add up the number of employees we have calculated for each group entity in accordance with section 382.

Example

Holdings Ltd has 30 employees as calculated under section 382 for its year ended 31 December 2020. On 30 June 2020 it acquired 100% of Subordinate Ltd which has a year end of 31 October 2020 and for that year has 35 employees as calculated under section 382.

It does not matter that the year ends do not coincide or indeed that the subsidiary was only a member of the group for six months. We calculate the employee numbers for the subsidiary following the instructions in section 382 (per section 383(7)(b), as the year ends are not co-terminus, we base the calculation on the subsidiary’s period ended last before the parent company period end), we calculate the employee numbers for the parent, and then add the two figures together. The resulting number of employees for the group is 65. We do not average out the employees for the six months of ownership of Subordinate Ltd over the 12 month accounting period of Holdings Ltd.

Employee serving more than one group company

Where one individual serves more than one group company (for example a parent and its two subsidiaries) consideration should be given to the structure of the arrangement.

If the individual is employed by one company which then recharges the other group companies for its employee’s time, then we have one employee.

If, however, the individual has contracts of service with each of the three group companies, then they would count as one employee in each company, and three employees therefore for the group purposes.

If the number of employees is critical in determining group size, great care is needed in the calculation.

When preparing group accounts, the number of employees disclosed for the group may not be the same as the figure calculated for determining the size of the group. This is because s411(7) of the Companies Act 2006 says that s411 (information about employee numbers and costs) applies in relation to group accounts as if the undertakings included in the consolidation were a single company.

As a result, an employee with contacts of service with more than one group entity would only count as one employee for disclosure purposes in the group accounts.

Additionally, where entities are member of the group for part of the year, they only affect the average calculation for the part of the year during which they were such a member.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.