I have been using %username% in the path of DFS shares since Windows Server 2000 came out. Back then each volume could only have one DFS root share so it was a lengthy \\domain\share\userhome\%username%. In short the environment variable is resolved at the workstation and then sent to the server, so the server would get \\domain\share\userhome\stephen and not ever be aware that it was a variable in the original script or group policy.
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