October 19, 2023
By Paul H. Calabrese, Principal
The continuing challenges of recruiting and retention have prompted some government contractors to revisit their employee benefits and consider offering unlimited paid time off (PTO). Increasingly, companies are makifng a strategic decision to provide unlimited PTO to compete for the best talent by offering better work-life balance. While only 6% of employers currently provide unlimited PTO, a 2023 US News article profiled some well-known companies like Netflix, Oracle and LinkedIn who now offer unlimited vacation days.1
Before considering unlimited PTO like an increasing number of commercial firms, it is important for government contractors to understand what it entails, potential pitfalls, and the impact in terms of the Federal Acquisition Regulation (FAR) and the Cost Accounting Standards (CAS).
What is Unlimited PTO?
Simply put, unlimited PTO allows exempt or salaried employees to take off time from work at any time, for as long as desired, on the condition that their work is completed. It is intended to reduce the employer’s administrative burden by eliminating the need for cumbersome time tracking.
Under an unlimited PTO policy, leave is expensed when taken, as opposed to standard PTO policies where accrued vacation is incurred on a recurring basis despite whether any leave is taken. Accrued leave is expensed monthly and charged to a liability, then the vacation account is relieved when the leave is taken. The liability account for each employee is increased when the employee receives a raise in pay, but may also be limited or written down to a yearly rollover cap.
For government contractors, vacation expense may be included in a separate, fringe benefits cost pool to be allocated to all indirect and direct labor. Alternatively, paid absence may reside within an overhead or General and Administrative (G&A) cost pool.
Variations in Unlimited PTO Policies and Potential Pitfalls
The 9 companies profiled in the US News article noted a variety of experiences and approaches to unlimited PTO. For example, Netflix’s workplace culture already offered the flexibility to adjust work schedules as needed. Because they do not track working hours by the day or week, it just made sense to apply the same logic to vacation time. While that works for a commercial enterprise, not tracking PTO would be a challenge for government contractors who must account for the total time that an employee works. Also, early feedback on unlimited PTO policies points to employee reluctance to take time off in some cases. One employer, Chegg, responded to this issue by providing mandatory PTO. This practice would also present challenges for companies under contract with the US government.
As noted in a 2020 article published by Kenney & Sams, other challenges for unlimited PTO policies come at the state level. Some states, including Massachusetts, are a “use it or lose it” jurisdiction meaning that employees are required to use their accrued vacation time or risk forfeiture. Under this scenario, there would be specific requirements for companies transitioning from paid vacation to unlimited PTO. Employers must be aware of state laws governing PTO to avoid potentially violating state wage laws in the process of updating their PTO benefits.2
Impacts for Government Contractors
As government contractors consider unlimited PTO, they should keep three important issues in mind.
- Time tracking of unlimited PTO;
- Notification of the Administrative Contracting Officer (ACO) of a benefit change; and
- Whether the policy change amounts to a Cost Accounting Practice Change under the CAS.
Time tracking is an essential requirement of a FAR-compliant, project cost accounting system. FAR 53.209-1 prescribes a checklist of an adequate accounting system, i.e. “Pre-Award Survey of Prospective Contractor Accounting System” per the use of the SF Form 1408. The evaluation checklist on page 2, item 2.e. requires “a timekeeping system that identifies employees’ labor by intermediate and final cost objectives”. Without time tracking, it would not be possible to comply with this checklist and the contractor would have an inadequate project cost system unable to determine actual time charges. Consequently, for a government contractor, unlimited PTO time must be tracked to compute its value.
The contractor must notify the ACO with respect to a new plan for unlimited PTO either before implementation or within a reasonable period after it, per FAR 31.205-6(a)(4).
“No presumption of allowability will exist where the contractor introduces major revisions of existing compensation plans or new plans and the contractor has not provided the cognizant ACO, either before implementation or within a reasonable period after it, an opportunity to review the allowability of the changes.”
Cost Accounting Practice Change
Does unlimited PTO become a Cost Accounting Practice Change? FAR 9903.302-2 defines a change to a cost accounting practice as any alteration in a cost accounting practice except initial adoption of a cost accounting practice, elimination of a cost or function, or revision of a cost accounting practice for a cost which was previously immaterial. While this is not a change to a method or technique to allocate, measure, or assign a cost, it is a new or different cost requiring an accounting practice appropriate for the new or different cost. While unlimited PTO is not a Cost Accounting Practice Change per the CAS, contractors would likely be subject to an advisory audit from the Defense Contract Audit Agency (DCAA) or other cognizant audit agency for non-DOD contracts.
Considerations for Government Contractors
When considering the implementation of an unlimited PTO benefit, government contractors must be aware of state laws. Transitioning from a paid, accrued PTO method to unlimited PTO could potentially involve the illegal forfeiture of earned compensation.
In addition, any unlimited PTO policy for a government contractor will not mitigate the administrative burden of tracking time. Timekeeping is a mandatory requirement per the FAR SF 1408 checklist. Further, if the company was forced to provide mandatory PTO in light of employee reluctance to use their time off, it would be difficult to do this with contractual obligations.
A government contractor must also notify the ACO of a new compensation plan. In response, the ACO will likely request an advisory audit. Consequently, the government contractor would have to satisfy DCAA’s audit scrutiny even if the plan change would lower indirect costs.
Government contractors considering a change from paid and accrued PTO to unlimited PTO should consult a CPA with experience in this area. GRF CPAs & Advisors’ team of government contracting experts helps clients considering this change in PTO understand the potential impact to their financial statements and tax returns and realize the implications within the FAR and CAS. Our team also provides liaison support as needed to interface with cognizant agency auditors.
1 Adam, Jamela. “13 Companies That Offer Unlimited Vacation Days.” US News, June 9, 2021. https://money.usnews.com/careers/slideshows/companies-that-offer-unlimited-vacation-days
2 “Pitfalls to Avoid When Transitioning to An Unlimited Vacation Policy.” Kenney & Sams, P.C., August 21, 2020. https://kslegal.com/pitfalls-to-avoid-when-transitioning-to-an-unlimited-vacation-policy/