The Companies Act 2006 requires disclosure of average employee numbers in the accounts.
This provides an insight into the scale of the business operations, and where the Profit and Loss Account is also disclosed, gives an indication of the efficiency of operations.
What is the calculation?
The disclosure gives the average number of people employed by the company in the year, and is calculated as follows:
- Obtain the number of people employed in each month of the financial period separately. A person employed on a part time basis or for only part of the month is still recorded as ‘1’ for this purpose.
- Sum together the monthly totals
- Divide the total by the number of months in the financial period (eg. 12 for a standard financial year)
- Round up to the nearest whole number
Directors are only included if they also have an operational contract of service. This contract does not need to be in writing, and can be verbal, or implied based on the role of the Director.
Directors who do not undertake any operational activities, such as a non-executive Director, are not included.
Dormant and holding companies
Dormant companies are not trading and therefore by default cannot have any operational service contracts of employment in place. The number of employees will therefore be NIL and this should still be disclosed in the accounts.
The same logic applies for holding companies with no operations.
Employees working across more than one group company
A company within a group may run the payroll for all employees in the group. However, it is important to determine which company the service of employment is held with, in order to correctly calculate the average employees by individual company.
For example, where company A runs the payroll and recharges company B, and the contract of service is with company B, the employee will be included in company B’s average employee numbers, and not company A’s.
If the employee has contracts of service with both company A and B, the employee will count as one employee in each company’s average employee calculation. If the individual companies are consolidated into group accounts, however, the employee will only count as one employee.
If you need help with this, or with other advice, then please get in touch with our accounting team.