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Key questions accountants ask about the requirement to disclose the average number of employees in a company’s financial statements.

Is there a statutory requirement to disclose the number of employees?

The requirement to disclose the average number of employees comes from Companies Act 2006 (s 411), which states:

(1)The notes to a company’s annual accounts must disclose the average number of persons employed by the company in the financial year.

(1A) In the case of a company not subject to the small companies regime, the notes to the company’s accounts must also disclose the average number of persons within each category of persons so employed.

The disclosure requirement is also highlighted in:

  1. Financial Reporting Standard (FRS) 102, paragraph 1AC.33 of which states: 

The notes to a small entity’s financial statements must disclose the average number of persons employed by the small entity in the reporting period.’

and

  1. FRS 105 The FRS applicable to the Micro-entities Regime, paragraph 6.2(b) of which states:

‘The notes to the financial statements of a micro-entity in the UK shall be presented at the foot of the statement of financial position and shall include information about: … (b) employee numbers as required by section 411 of the Act (see paragraph 6A.2 of Appendix A to this section);

6A.2 The notes to a micro-entity’s financial statements must disclose the average number of persons employed by the micro-entity in the financial year’

How do you calculate the average number of employees?
The calculation of the average number of employees is in Section 382(6) of the Companies Act 2006, which states:

‘The number of employees means the average number of persons employed by the company in the year, determined as follows—

(a) 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),

(b) add together the monthly totals, and

(c) divide by the number of months in the financial year.

For the purpose of this calculation, if an employee leaves during the month you assume that they have worked for the whole of that month.’

Who should be included in the calculation?

Section 382(6)(a) refers to ‘persons employed under contracts of service’. However, a ‘contract of service’ is not defined in the Act. We therefore need to look at the distinction between contract of service and contract for service, based on the legislation and/or case law.

Whether or not an individual is working under a contract of service (either express or implied, whether oral or in writing) will be determined based on the agreement between the individual (employee) and the employing party (employer). The contract starts as soon as the employee starts work and provides the employee with entitlements to certain statutory rights, such as statutory redundancy payments and statutory maternity pay and the right not to be unfairly dismissed.

This can be contrasted with a contract for services, where the relationship between the parties is not that of employer and employee.

It is appropriate to include all employees, but exclude any casual workers as such workers would not be considered to be employees.

Should the directors be included in the calculation?

For company law purposes, directors are not automatically employees of a company. The definition of director (s 250) also includes shadow directors (s 251).

Section 250 states:
In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.’

Section 251 states:
In the Companies Acts “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.’

In conclusion, according to the Companies Act directors hold an office and are known as officers of the company. However, there is no reason why an officer of the company cannot also have a contract of service with the company and if this is the case, the directors should be included in the calculation.

The usual position is that an executive director will usually have a contract of service with the company, and so would be included in the calculation.

Non-executive directors are not generally employed under a contract of service and as a result they should not be included.

Should seconded employees be included in the calculation?
Where a company is a member of a group and directors/employees from another group member perform services for the company (‘seconded’ directors/employees), these would not be included in the calculation because their contract of employment is with another company.

Should part-time employees be included in the calculation?

Section 382(6) requires disclosure of the average number of employees and it makes no reference whether there are full-time or part-time employees, so in this respect it would include both.

Conclusion

Regardless of the accounting standard that an entity wishes to adopt, ‘the average number of employees’ disclosure is a mandatory disclosure and cannot be filleted out of the accounts for filing purposes.

 The disclosure itself informs the user of the accounts as to how many employees, on average, the business has employed during the reporting period.

Article from ACCA In Practice