Cost Accounting Standard (CAS) 408 - Accounting for Costs of Compensated Person Absence

Cost Accounting Standard (CAS) 408 was put in place to provide consistency in the measurement and allocation of vacation, sick leave, holiday, and other compensated personal absences. Today, many contractors refer to all paid time off as “PTO.”

What are the Basic Requirements of CAS 408?

There are two fundamental requirements:

1. The cost of paid time off is assigned to the account period the employee earns the time off, and
2. The cost assigned to contracts is based on the annual amount – not a monthly or quarterly calculation.

What Do You Need to Consider When Implementing the Requirements of CAS 408?

You need to make a determination (the CAS wording, not mine) for each type of cost (CAS refers to the types of cost as plans – sick leave plan, etc.). For each type of cost, you must determine when the employee has earned the leave (i.e., the employee is entitled to bank the leave and take it at a later date).

For each type of cost, you must then measure the amount of cost to assign to the earned leave. This measurement is based on:

• When the employer has a liability to pay the employee for the leave:
  • The cost of the leave is determined at this point;
  • The cost then needs to be adjusted for any material amount of unused leave, and
  • The cost can be based on the employee’s current or future pay rate, or an average of all employees can be used if it results in a reasonable accurate amount.
• If the employer’s liability cannot be determined, then the leave will be considered earned when the employee is paid (i.e., takes the leave).

The amount of cost measured must be allocated to contracts based on the annual amount. Yes, you must estimate and then true up the cost at the end of the year – and even during the year if material differences are identified.

I understand this is a high-level introduction to the CAS 408 requirements. However, this standard has not kept up with changes in how paid time off is managed and the various plans in the employment marketplace.

Current Paid Time Off Plans

Many contractors today have a single plan referred to as “PTO.” The employee can use the leave for any reason – vacation, sick leave, taking care of a sick child, mental health day, etc. There are even some contractors that offer unlimited PTO, provided the employees can complete their job functions. The selection of the right PTO plan for a contractor is complex and often impacted by the employment laws of the states in which it operates or, today, the ever-increasing number of states its remote employees work in.

The Takeaway

Once you have a general understanding of the CAS 408 requirements, you will need to collect the details of your contractor’s paid time off plan or plans. You can then establish when the employer is liable to pay the employee and calculate an amount of cost. If a clear point of liability cannot be established, the cost of the paid time off will have to be measured at the time the employee takes the leave and is paid.

Yet another standard is the new CAS board; if and when it becomes active, it should consider updating for current practices.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s requirements, assisting contractors with CAS requirements, and working through complex human resourcing issues. We would be happy to be part of your team.