November 25, 2015

U.S. Department of Education Issues New Guidance on Incentive Compensation Regulations

By John Przypyszny and Jonathan Tarnow

On Friday, November 27, 2015, the U.S. Department of Education (the “Department”) will publish guidance in the Federal Register regarding its October 29, 2010 changes to the incentive compensation regulations at 34 C.F.R. § 668.14(b)(22) that took legal effect July 1, 2011. Those revised regulations removed a “safe harbor” that had previously permitted certain graduation-based or completion-based compensation, and further indicated that the Department interpreted its revised regulations to ban such forms of compensation to persons covered by the Higher Education Act’s incentive compensation prohibition.

In light of the federal court decision and subsequent order in APSCU v. Duncan, 70 F. Supp. 3d 446 (D.D.C. 2014), the Department states that it has now reconsidered its interpretation of the statutory prohibition and (subject to the caveats described below) that it does not interpret its July 1, 2011 regulations to proscribe compensation for admissions and recruiting personnel that is based upon students’ graduation from, or completion of, educational programs. Correspondingly, the Department also announced that it will not view references in its regulations to enrollment activities that may occur “through completion” by a student of an educational program as prohibiting graduation-based or completion-based compensation to admissions and recruiting personnel.

Importantly, the Department’s notice explicitly reserves its right to take enforcement action against institutions if compensation labeled as graduation-based or completion-based compensation is merely “a guise for enrollment-based compensation,” which remains prohibited. In assessing the legality of any compensation structure, the Department says it “will focus on the substance of the structure rather than on the label given the structure by an institution.” Thus, the Department further states that while compensation based on students’ graduation from, or completion of, educational programs is not per se prohibited, institutions are still prohibited from providing compensation that is based directly or indirectly, in any part, upon success in securing enrollments (as such activities are broadly defined in the Department’s regulations) even if one or more other permissible factors are also considered.

In this same notice, the Department also responds to the federal court’s order with respect to potential impacts of the regulations, as revised effective July 1, 2011, on the recruitment and enrollment of minority students. The Department acknowledges that its regulations could negatively affect outreach and enrollment generally, as well as student outreach that is specifically targeted at promoting diversity, which could result in fewer minority students recruited and enrolled. However, it states, neither the Higher Education Act nor any information presented by commenters to the regulations when proposed provide a basis for treating a recruitment program directed at minority students differently than an institution’s general or other specific recruitment programs.

A full copy of the Department’s Federal Register guidance is available here. Please do not hesitate to contact us for further information regarding this or other matters.

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