Uncompensated Overtime: Managing Fair Labor Standards in GovCon
Your company discovered that salaried engineers routinely worked fifty to sixty hours weekly but recorded only forty hours on timesheets because “that’s what management expects from exempt employees.” During DCAA’s incurred cost audit, investigators found systematic underreporting of actual hours worked, concluded your labor distribution didn’t reflect reality, and questioned $1.3 million in direct labor costs across multiple contracts. The finding wasn’t about unpaid overtime—it was about timesheets failing to capture actual effort distribution, making your cost accounting unreliable regardless of compensation practices. Here’s what contractors miss about uncompensated overtime: exempt employee status under Fair Labor Standards Act doesn’t eliminate timekeeping requirements for government contractors—you must record all hours worked regardless of compensation method because labor distribution determines cost allocation to contracts, and recording only forty hours when employees work sixty creates the systematic labor mischarging that invalidates your entire cost accounting system. Understanding how to manage exempt employee timekeeping isn’t about changing compensation structures—it’s about capturing actual effort enabling accurate cost allocation, demonstrating that labor charged to contracts reflects work performed, and maintaining the cost accounting integrity that cost-reimbursement contracting demands through truthful time recording regardless of payroll implications.
The Legal Framework Governing Exempt Employee Timekeeping
Federal cost accounting standards require contractors to distribute labor costs based on actual work performed regardless of employee exempt status or compensation methods. FAR 31.201-4 establishes that costs must be allocable to contracts based on relative benefits received or causal relationships with cost objectives, meaning labor distribution must reflect actual effort on contracts versus other activities rather than arbitrary forty-hour allocations disconnected from reality. Exempt status affecting overtime pay obligations doesn’t modify cost allocation requirements demanding accurate effort tracking.
The timekeeping adequacy criteria under DFARS 252.242-7006(c)(2) require accounting systems to establish accurate labor distribution based on actual activities performed by employees, with “actual activities” meaning real work effort rather than theoretical full-time equivalent assumptions. When exempt employees work more than standard hours, timesheets must capture total hours and distribute them across contracts and activities proportionally reflecting actual effort rather than arbitrarily recording forty hours regardless of reality. Understanding DCAA compliance requirements means recognizing that labor distribution accuracy applies to all employees including exempt personnel whose compensation doesn’t vary with hours worked.
Cost Accounting Standard 402 governs consistency in allocating costs incurred for the same purpose, requiring contractors to treat similar costs consistently across all cost objectives. This means exempt employee labor must be distributed using actual effort just like non-exempt employee labor, with consistent treatment preventing arbitrary classification where some employees charge based on actual hours while others use theoretical allocations. When your engineers working sixty hours charge forty to contracts while technicians working forty hours charge their actual time, you’ve violated CAS 402 consistency requirements through differential treatment of similar labor costs.
The critical consideration involves FAR 31.201-2(d), requiring adequate accounting systems for accumulating and billing costs, with adequacy encompassing labor distribution reflecting actual work rather than compensation-driven approximations. Timekeeping systems failing to capture exempt employee actual effort produce unreliable cost data regardless of payroll accuracy, because contract costs depend on effort distribution not compensation amounts. This fundamental disconnect—that Fair Labor Standards Act governs pay while cost accounting standards govern cost allocation—creates the confusion leading contractors to implement compensation-compliant but cost-accounting-deficient timekeeping practices.
What Contractors Must Understand About Exempt Employee Timekeeping Challenges
Here’s what contractors miss about uncompensated overtime: the issue isn’t whether you must pay overtime to exempt employees—it’s whether your timesheets accurately reflect effort enabling proper cost allocation to government contracts. DCAA compliance explained emphasizes that DCAA doesn’t enforce wage and hour laws—auditors evaluate whether labor distribution supports reliable cost accumulation. Your compensation practices remain your business decision, but timekeeping must capture reality regardless of how you structure pay.
The forty-hour ceiling problem emerges when contractors implement informal policies requiring exempt employees to record exactly forty hours regardless of actual effort, creating systematic underreporting of hours worked. This is where audits go sideways—management communicates expectations that salaried employees should “get the job done” without recording extra hours, employees internalize the message and self-censor timesheets to forty hours, and systematic underreporting becomes embedded culture rather than documented policy. When DCAA interviews employees who explain “we’re expected to work however long it takes but only record forty hours,” auditors conclude that timesheets don’t reflect reality and therefore cannot support reliable cost allocation.
The effort distribution distortion surfaces when exempt employees working extended hours record forty hours but distribute those forty hours across contracts and indirect activities, creating mathematical impossibility where timesheet allocations don’t match actual effort patterns. Your engineer working sixty hours might spend forty hours on Contract A and twenty hours on Contract B, but recording only forty total hours forces artificial allocation—perhaps thirty hours to Contract A and ten to Contract B—that undercharges both contracts while maintaining forty-hour appearance. This distortion cascades through your cost accounting creating systematic mischarging that affects every contract these employees support.
The indirect rate impact complicates analysis when unrecorded exempt employee hours represent indirect activities like business development, proposal preparation, or administrative work. When employees work fifty hours charging forty to direct contracts but perform ten hours of indirect work they don’t record, your indirect rates understate true indirect cost levels because unrecorded effort isn’t captured in indirect pools. This creates the paradox where recording actual hours might increase indirect rates affecting competitive pricing, tempting contractors to maintain underreporting despite compliance violations. However, artificially suppressed rates built on unreliable cost data create pricing risks and audit exposure exceeding any competitive advantages.
The CAS consistency violation appears when contractors treat exempt and non-exempt employee timekeeping differently—requiring non-exempt employees to record all hours including overtime while exempt employees record maximum forty hours regardless of actual effort. DCAA timekeeping requirements mandate consistent labor distribution methodology across employee categories, with differential treatment violating CAS 402 consistency standards. When compensation classification determines timekeeping methodology rather than work type or business purpose, you’ve created the inconsistency that CAS prohibits.
The materiality misconception leads contractors to argue that exempt employee underreporting doesn’t significantly affect costs because compensation remains constant regardless of hours recorded. However, materiality for cost allocation purposes depends on effort distribution accuracy, not dollar impact. When your senior engineers’ forty-hour timesheets represent sixty hours of actual work, the twenty-hour weekly underreporting across multiple employees creates substantial effort distribution error materially affecting contract cost allocations even when total compensation costs remain unchanged. DCAA evaluates labor distribution reliability, not just cost magnitude.
The documentation void emerges when contractors lack policies addressing exempt employee timekeeping, creating ambiguity about whether employees should record actual hours or limit entries to standard workweek. Absent clear written guidance, employees develop informal practices—often the path of least resistance recording forty hours—that become embedded operational norms DCAA discovers through employee interviews revealing systematic deviation from accurate effort tracking. Written policies establishing that all employees record actual hours regardless of compensation method eliminate this ambiguity while demonstrating organizational commitment to accurate labor distribution.
Five Essential Steps for Compliant Exempt Employee Timekeeping
Step 1: Establish Clear Written Policies Requiring Actual Hour Recording
Develop comprehensive timekeeping policies explicitly requiring all employees—exempt and non-exempt—to record all hours worked on a daily basis regardless of compensation method or overtime pay eligibility. State clearly that exempt status affects pay practices but doesn’t modify timekeeping obligations, with actual effort recording mandatory for labor distribution accuracy supporting government contract cost accounting. Address common misconceptions directly in policy language: “Salaried exempt employees must record all hours worked including hours beyond standard forty-hour workweek. Exempt status means overtime pay is not required under Fair Labor Standards Act; it does not mean hours should not be recorded. Accurate labor distribution requires capturing all effort regardless of compensation implications.”
Communicate policies to all employees through training, written acknowledgments, and regular reinforcement from management. Include specific examples showing proper recording of extended hours: “Engineer works Monday-Thursday 9 hours each day and Friday 6 hours = 42 hours recorded. Engineer works five 12-hour days = 60 hours recorded.” Concrete examples eliminate ambiguity about expectations while demonstrating that recording actual hours is required practice, not discretionary choice.
Implement management messaging consistently supporting actual hour recording, with executives and supervisors explicitly encouraging rather than discouraging accurate timesheet completion. Management statements like “record your actual time even if it exceeds forty hours” and “we need accurate labor distribution for cost accounting” counteract informal cultures pressuring employees to limit timesheet hours. This messaging alignment between written policy and operational culture prevents the policy-practice disconnections that floor checks expose.
Step 2: Configure Timekeeping Systems Supporting Extended Hour Recording
Modify timekeeping platforms to accept and accommodate hours exceeding standard forty-hour workweek without generating errors, warnings, or approval barriers that discourage accurate reporting. Some systems flag “excessive hours” or require special justification for entries exceeding thresholds, inadvertently creating psychological barriers to honest reporting when employees perceive that recording actual extended hours triggers unwanted attention. Configure systems to accept actual hours as normal business practice rather than exceptional events requiring explanation.
Implement timekeeping system reporting showing actual hours worked by exempt employees, enabling management visibility into work patterns, workload distribution, and potential burnout risks. These reports serve dual purposes: supporting labor distribution verification for cost accounting while providing workforce management data identifying employees with unsustainable workloads requiring redistribution or additional resources. Management using actual hour data for workforce planning reinforces that hour recording serves legitimate business purposes beyond compliance obligation.
Deploy system validation controls preventing common recording errors while avoiding controls that inadvertently enforce forty-hour ceilings. Validate that hours distribute across valid charge codes and that daily entries occur, but don’t impose maximum hour limits or forced allocation rules that prevent accurate effort recording. Controls should ensure timesheet quality without constraining honest reporting of actual work performed.
Step 3: Train Employees and Supervisors on Exempt Employee Recording Requirements
Develop training programs specifically addressing exempt employee timekeeping including: legal distinction between FLSA overtime pay requirements and government contract cost accounting requirements, policy requirements mandating actual hour recording regardless of exempt status, effort distribution importance for accurate contract cost allocation, system procedures for recording extended hours, and supervisor approval expectations for timesheets showing varying weekly totals. Address the psychological barriers preventing accurate reporting including concerns about appearing inefficient, fear of management criticism, or misconceptions about salary compensation implying fixed hour recording.
Create supervisor training emphasizing that timesheet approval for exempt employees should focus on effort distribution accuracy and charge code appropriateness rather than total hour magnitude. Train supervisors to approve timesheets showing realistic hour patterns including weekly variation based on project demands, with approval questions focusing on “does this distribution reflect your employee’s actual work?” rather than “why did they work more than forty hours?” This approval focus reinforces that actual hour recording is expected and appropriate.
Implement periodic refresher training addressing compliance drift when employees gradually revert to forty-hour ceiling recording despite initial training establishing actual hour requirements. Annual training reinforcement, targeted retraining when monitoring identifies potential underreporting patterns, and new supervisor training when leadership changes occurs prevent the gradual erosion of compliant practices back toward convenient but inaccurate forty-hour defaults.
Step 4: Deploy Monitoring and Quality Review Procedures
Establish systematic monitoring identifying potential exempt employee hour underreporting including: analysis of timesheet patterns showing excessive consistency in weekly totals suggesting formulaic recording rather than actual effort, comparison of exempt versus non-exempt employee hour patterns identifying suspicious differences, supervisor interviews about employee workload and hour expectations, and employee surveys anonymously gathering information about actual work hours and timesheet recording practices. These monitoring procedures detect underreporting requiring investigation and corrective action.
Implement quarterly timesheet quality reviews examining sample exempt employee timesheets and interviewing employees about recording practices, actual work hours, and any pressures to limit recorded time. Quality reviews provide ongoing verification that policies operate as intended while demonstrating organizational commitment to timekeeping accuracy that DCAA recognizes during audits. Document review findings, identified issues, and corrective actions taken, creating evidence of systematic labor distribution oversight.
Deploy statistical analysis identifying outlier patterns warranting investigation such as employees consistently recording exactly forty hours despite project deadline pressures, departments showing uniform timesheet patterns across all employees suggesting coordinated underreporting, or individuals whose timesheet distributions remain constant despite changing project assignments indicating formulaic allocation rather than actual effort tracking. Statistical monitoring efficiently identifies potential issues within large employee populations requiring targeted investigation rather than comprehensive review of all timesheets.
Step 5: Address Workload Management and Indirect Rate Implications
Conduct workload analysis using actual hour data to identify employees with chronic overwork requiring workload redistribution, additional resource allocation, or project schedule adjustments. Demonstrating that actual hour recording serves legitimate workforce management purposes—preventing employee burnout, optimizing resource allocation, identifying staffing needs—reinforces organizational commitment to accurate timekeeping beyond bare compliance obligation. Employees seeing management use hour data for supportive resource decisions rather than punitive performance evaluation become more willing to record hours honestly.
Analyze indirect rate implications of accurate exempt employee timekeeping, calculating how recording all hours affects indirect rate calculations, pricing competitiveness, and cost recovery. While accurate hour recording might increase apparent indirect rates when previously unrecorded indirect effort enters pools, the resulting rates reflect actual cost structures supporting sustainable pricing rather than artificially suppressed rates built on unreliable data. Develop pricing strategies accommodating accurate indirect rates rather than maintaining underreporting to suppress rate calculations.
Implement internal cost estimation procedures using actual hour patterns from timekeeping data to improve proposal accuracy, resource planning, and project profitability analysis. Accurate effort data enables better business decisions including realistic project scheduling, appropriate staffing plans, and informed pricing supporting profitability rather than the guesswork that formulaic forty-hour timesheets produce. Demonstrating business value from accurate timekeeping beyond compliance obligation creates organizational culture supporting honest effort recording.
The Investment in Compliant Exempt Employee Timekeeping
Implementing compliant exempt employee timekeeping costs between $8,000 and $25,000 for small to mid-sized contractors including policy development, system configuration, training delivery, and monitoring establishment. These costs represent minimal investment compared to questioned cost risks from labor distribution deficiencies. Indirect rate increases from accurate hour recording might affect pricing competitiveness but reflect actual cost structures that sustainable pricing requires rather than artificial rate suppression that audits eventually expose and correct.
Let me show you the value: contractors with accurate exempt employee timekeeping maintain reliable labor distribution supporting efficient DCAA audits, avoid the substantial questioned costs from systematic effort underreporting, and gain workforce management insights supporting better resource allocation and employee retention. They demonstrate cost accounting system adequacy through consistent treatment of all employee labor regardless of compensation classification.
Contractors with inaccurate exempt employee timekeeping face massive questioned costs when DCAA discovers systematic hour underreporting invalidating labor distribution reliability, experience accounting system disapproval requiring corrective action before contract awards, and make poor business decisions based on distorted cost data masking actual resource consumption and profitability patterns. They discover that convenience of forty-hour timesheets costs far more than implementing accurate recording practices.
Understanding Exempt Employee Requirements Across Contract Types
Exempt employee actual hour recording requirements apply uniformly to cost-reimbursement contracts where accurate labor distribution directly determines government reimbursement and to time-and-materials contracts where labor hours determine billing even when compensation doesn’t vary with hours. Fixed-price contracts face lighter requirements since labor distribution doesn’t determine payment, though contractors maintaining multiple contract types must implement consistent practices satisfying requirements for cost-reimbursement work across all employees regardless of specific contract assignments.
Fair Labor Standards Act overtime exemptions apply consistently across industries including government contracting, meaning contractors face identical wage-hour obligations as commercial employers. However, government contractor cost accounting obligations exceed commercial requirements through labor distribution accuracy mandates that FLSA doesn’t address, creating the dual compliance framework where contractors must satisfy both wage-hour law and cost accounting standards governing different aspects of employment and financial management.
Your Path to Exempt Employee Timekeeping Compliance
The exempt employee timekeeping landscape rewards contractors who recognize that compensation practices and cost accounting requirements address different business obligations requiring separate compliance approaches. DCAA evaluates labor distribution accuracy through operational testing including employee interviews about recording practices, with compliance depending on actual hour recording regardless of exempt status or compensation implications.
For contractors seeking exempt employee timekeeping compliance, Hour Timesheet provides platforms accommodating actual hour recording without artificial constraints, enabling accurate effort distribution while supporting workforce management through reliable work hour visibility. Our systems document labor distribution supporting both cost accounting requirements and business decision-making.
Your compensation structures can maintain exempt classifications while timekeeping captures actual effort enabling accurate cost allocation. Implement practices ensuring labor distribution reflects reality regardless of pay implications, building cost accounting integrity supporting sustainable government contracting.