The unlimited utilization of ff miles by government employees has been run up the legal flagpole. The specific State Department employees who flaunted the open, personal use of miles had their legal flag ripped from the flagpole and stuffed in their mouths (they had to payback the open market value of the miles and received reprimands (read in give up hopes of being promoted; or "the price you pay for being a smartass")). That having been said.

I assure you that government employees can accrue miles and use them for upgrades. While I did not retain the official mandate from Congress, I have memorized the gist of it (my specific job position entails three weeks of travel per month forever). In short,

Government employees can accrue miles under any circumstances, assuming that the ticket code allows for miles (almost all do). The specific agency can allow the employee to use the miles FOR WORK RELATED UPGRADES ONLY. These upgrades can be from coach to first on a two-class aircraft, or from coach to business, or business to first on three-class aircraft.

An agency CAN forbid the above utilization of miles, although most do permit the utilization of miles for upgrades. For those agencies that forbid the utilization of miles, most employees accrue the miles until they leave government service, and use the miles at that time.