Government Contractors: Do You Allow Employees to Work from Home?

These days, many businesses have some employees who work from home — either occasionally or on a full-time basis. Keep in mind that telecommuting employees of federal government contractors are required to follow appropriate labor timekeeping policies and procedures.

If your government contracting business allows employees to work from home, be aware that these telecommuters are subject to U.S. government auditor, floor checks and interviews — the same as other employees.  

A contractor’s labor costs are usually the most significant costs charged to government contracts. These costs are also used as some portion of (or even the entire allocation base for) allocating indirect costs. Incurred labor hours are often used as the basis for estimating labor for follow-on work.

Unlike other expenses, third-party evidential matter, such as invoices and shipping documents, does not support labor hours and costs. Instead, a time sheet, hard copy or electronic facsimile prepared by each contractor employee is usually the supporting source document.

Your employees completely control source documentation for the original entry, whether it consists of hard copy or electronic facsimile. This means that responsibility for ensuring timekeeping accuracy is decentralized throughout your organization. As a result, the risks associated with proper recording, distribution and payment of labor are almost always significant. U.S. government auditors expect you to maintain adequate internal control over all labor timekeeping activity.

Advancements in information technology have provided opportunities for U.S. government contractors to establish employee work-at-home programs, also known as telecommuting. Specific controls associated with telecommuting are expected to be documented and considered acceptable for government contract costing.

What Happens in an Audit?

An auditor will first assess the significance of the costs associated with your telecommuting program considering aspects such as the total number of employees, the number covered by the program, the amount of work at home labor and the mix of your company’s government and non-government work. If the program costs are considered significant, the auditor will request a copy of your written policies and procedures. If you do not have telecommuting written policies and procedures, or if such procedures are not considered adequate, you will be cited for a labor accounting system deficiency.

The written policies and procedures for your program should address several key areas. The eligibility and status requirements for working at home should be clearly defined. Adequate policies should include a description of the type of work that may be performed at home.

The auditor will evaluate the reasonableness of performing this work at home. For example, the auditor may not consider employees working at home to be practical, efficient or effective if the work must:

  • Be closely supervised.
  • Requires access to non-portable equipment.
  • Depends on the frequent interaction with others.   

Your telecommuting program policies should also include:

  • The status of employees working at home. For example, full-time, part-time, temporary, etc., and the employee’s eligibility for benefits such as health insurance and leave.
  • Proper advance approval by appropriate management officials.
  • Continuing evaluation of the participating employee’s performance in completing assigned tasks.
  • Written documentation of the specific tasks to be performed, along with expected completion dates. 
  • A requirement that employees attend periodic meetings at your work site to allow the employee and supervisor to discuss work progress, assign new tasks and evaluate work performed.
  • A requirement that employees work a mutually agreeable set of core hours to allow management to have access to the employee at designated times.

Telecommuting employees should be required to submit time cards in accordance with the company-wide timekeeping system (hard copy or electronic). Copies of the time cards should be kept at the company facility.

When an employee selected for a U.S. government floor check is not present at the normal work site due to a work-at-home program, the employee’s supervisor will be interviewed. Discussions with the supervisor will concentrate on obtaining evidence of the employee’s work and documentation of supervisory control over the employee’s telecommuting schedule.

The auditor will also communicate with the employee by telephone to verify that he or she has knowledge of work-at-home procedures. The employee will be questioned about the specific type of work being performed and the related labor charge numbers.

If the employee has a regularly scheduled meeting with the supervisor in the near future, any questionable procedures or practices identified during the audit will be discussed and verified with the supervisor and employee at that time. In addition, the individual’s employment will be verified to the company payroll/personnel records.

If the labor costs associated with telecommuting employees are not considered significant by your company, the auditors will provide notice that if the costs do become significant, the government will require a demonstration that the internal controls are adequate.


  1. Develop quantitative data to enable analysis of the significance of annual telecommuting labor costs, depicting:
  • The absolute dollar value of telecommuting labor.
  • The amount of direct telecommuting labor charged to USG cost-based contracts compared with USG contract amounts.
  • The relationship of telecommuting labor with contracts — direct charges or indirect allocation.
  • The impact on USG funding.
  • The amount of telecommuting labor allocable to government and non-government work.
  1. Regardless of the perceived significance, document your telecommuting policies and procedures.
  2. Address the adequacy attributes and elements delineated in this article.
  3. Ensure your employees know what your written requirements are and that they are following them.
  4. Maintain sufficient audit evidence that your written requirements are being followed. This may include telephone conference notes, email messages, supervisor and employee meeting attendance records and published work schedules.

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