When assessing the size of a company or group, it can be easy to focus on levels of turnover and gross assets causing the calculation of employee numbers to slip through the net.

The requirements for the calculation of employee numbers are outlined in s.382(6) and 384A(7) of the Companies Act 2006. To calculate average employee numbers for a standalone company:

a)      Find the total number of persons employed under contracts of service by the company for each month (whether throughout the month or not),
b)      Add together the monthly totals and
c)      Divide by the number of months in the accounting period.

There is no distinction for full-time or part-time employees or for employees on zero hours contracts.

A common question concerns directors – are directors employees? Yes, they are if they have service contracts for operational roles. These contracts do not have to be written, they can be verbal or implied.

What about groups?
Where employees serve more than one group company, such as a parent company and a number of subsidiaries, it is necessary to consider how agreements are structured. If the employee is employed by one company which then recharges other group entities for the employees’ time, there is one employee. However, if the employee has contracts of service with each group entity, then they are counted multiple times. This means that we may have a higher number of employees within a group for the purpose of company law than are disclosed in the notes to the financial statements.