As we’ve noted before, our higher education practice regularly receives inquiries related to incentive compensation plans for recruiters. Late last year, following a series of rulemakings, lawsuits, and court decisions, the Department finally revised its position regarding whether institutions of higher education may pay recruiters completion-based or graduation-based compensation.* We’ve received enough inquiries on this topic that we thought we would address it here in REGucation. As is always the case with incentive compensation matters, the guidance is murky, and institutions should proceed with caution.
Rulemakings and remands
The Department’s regulations addressing incentive compensation, located at 34 C.F.R. 668.14(22)(i), require that as a condition of participation in the federal financial aid programs, an institution must agree:
It will not provide any commission, bonus, or other incentive payment based directly or indirectly upon success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of title IV, HEA program funds….
Effective July 1, 2011, the incentive compensation regulations were revised significantly as part of a “Program Integrity” rulemaking. Among other things, the Department eliminated a safe-harbor in the law that had permitted institutions to compensate admissions personnel based upon “a student’s successfully completing his or her educational program or one academic year of his or her educational program, whichever is shorter.” 34 C.F.R. 668.14(22)(ii)(E)(2009). In the preamble to the final regulations (the “2010 Preamble”), the Department offered the following comments, in relevant part, concerning the decision to remove this safe harbor provision:
"The Department believes that an institution’s resolute and ongoing goal should be for its students to complete their educational programs. Employees should not be rewarded beyond their standard salary or wages for their contributions to this fundamental duty.
"In addition, there is nothing about the making of incentivized payments to recruiters based upon student retention that enhances the quality of a student’s educational experience. If the program of instruction has value and is appropriate for a student’s needs, a student will likely enjoy a positive educational experience regardless of the manner in which the student’s recruiter is compensated.
"Finally, the Department’s experience has shown that some institutions pay incentive compensation to recruiters based upon claims that the students who the recruiter enrolled graduated and received jobs in their fields of study. Yet, included among the abuses the Department has seen, for example, is a circumstance where a student’s field of study was culinary arts, and the so called employed student was working an entry-level position in the fast food industry. Such a position did not require the student to purchase a higher education ‘‘credential.’’ As a result, we believe that paying bonuses to recruiters based upon retention, completion, graduation, or placement remain in violation of the HEA’s prohibition on the payment of incentive compensation." 75 FR 66874 (October 29, 2010).
Subsequent to the implementation of the 2011 regulations, the Association for Private Colleges and Universities (APSCU) filed suit in federal court challenging various aspects of the new laws, including the Department’s position regarding compensation based upon retention, completion, graduation, or placement. In 2012, the U.S. Court of Appeals for the D.C. Circuit issued a decision that, among other things, held that the Department’s position on completion-based and graduation-based compensation lacked both adequate explanation and support in the record. The Court remanded the matter to the District Court, with instructions to remand the matter to the Department “to allow it to explain its decision to eliminate this specific safe harbor.” APSCU v. Duncan, 681 F. 3d 427, 448 (DC Cir. 2012). Consistent with the Court of Appeals instructions, the District Court remanded the matter to the Department for further explanation.
In response to the Court of Appeals decision, the Department offered a slightly expanded discussion of its position in a revised preamble issued in March 2013 (the “2013 Preamble”). 78 FR 17598 (March 22, 2013). APSCU again challenged the Department’s reasoning, arguing that the Department had failed to respond adequately to the D.C. Circuit’s directives. In October 2014, the D.C. District Court agreed with APSCU, opining that the Department still had failed to adequately justify its views. The Court once more remanded the matter to the Department and again directed the agency to explain and support its position regarding completion-based and graduation-based compensation. APSCU v. Duncan, 70 F. Supp. 3d 446, 456 (D.D.C. 2014).
Following a year of consideration, the Department finally responded to the District Court’s opinion. On November 27, 2015, the Department announced in the Federal Register that it had reversed its position on completion-based and graduation-based compensation, acknowledging that it presently “lacks sufficient evidence to demonstrate that schools are using graduation-based or completion-based compensation as a proxy for enrollment-based compensation.” 80 FR 73992 (November 27, 2015). Leaving no room for doubt, the Department stated that it no longer interprets the law “to proscribe compensation for recruiters that is based upon students' graduation from, or completion of, educational programs.” The Department also clarified that it “will not view the references in the regulations to recruiter enrollment activities that may occur “through completion” by a student of an educational program, 34 CFR 668.14(b)(22)(iii)(B) (introduction), and (iii)(B)(2)(ii), as prohibiting graduation-based or completion-based compensation to recruiters.”
Though the Department conceded the right of institutions to compensate recruiters based on student completion or graduation, it also warned institutions that it would carefully examine any such compensation plan to determine whether success in enrollments was being taken into consideration. Specifically, the Department observed:
"In assessing the legality of a compensation structure, the Department will focus on the substance of the structure rather than on the label given the structure by an institution. Thus, although compensation based on students' graduation from, or completion of, educational programs is not per se prohibited, the Department reserves the right to take enforcement action against institutions if compensation labeled by an institution as graduation-based or completion-based compensation is merely a guise for enrollment-based compensation, which is prohibited. Compensation that is based upon success in securing enrollments, even if one or more other permissible factors are also considered, remains prohibited."
A wolf in sheep’s clothing?
Subsequent to the issuance of the guidance discussed above, we have been asked on several occasions whether an institution now may “safely” design and implement a completion-based or graduation-based compensation plan for its recruiters without running afoul of the federal incentive compensation law. We believe that “safely” may be a stretch. In our view, an institution may implement such a plan, but not without some risk.
As an initial matter, we believe that despite the Department’s position reversal on completion-based compensation plans, the agency likely will attempt to restrict such plans on the grounds that they are, in practice, “enrollment-based.” It is clear from the record of correspondence on this matter that the Department believes a completion-based compensation plan should be deemed to violate the law (indeed, the Department only altered its position because it could not provide evidence that such abuse was occurring, as required by the District Court). And the Department took great care to reserve its right to initiate an enforcement action if it concludes that “graduation-based or completion-based compensation is merely a guise for enrollment-based compensation.” It thus established a means by which to restrict completion-based compensation plans without directly offending the opinion of the District Court. The only question is how aggressively the Department will employ this regulatory sleight-of-hand to achieve its policy objective. Of course, we cannot be certain. But in our experience, and particularly in recent years, the Department has not shied away from advancing a policy through enforcement actions, even where the policy does not appear in print.
We also think that an institution that offers shorter programs with higher graduation rates will be more likely to come under scrutiny. In the 2013 Preamble, the Department singled out short programs, noting that the “shorter the program, the more likely the student will complete the program, thus rewarding enrollment and completion notwithstanding the student's academic performance or the quality of the program.” Thus, when considering shorter programs, the Department is particularly inclined to view a completion-based compensation plan as a proxy for enrollment-based compensation. Moreover, and perversely, the shorter the program and stronger the graduation rates, the harder it will be for an institution to demonstrate a distinction between payment based on completion or graduation and payment based on enrollment, as the two metrics likely will result in similar compensation paid on a similar schedule.
With these points in mind, we believe that any institution that decides to compensate its recruiters based on student completion or graduation must carefully document the compensation plan, to include (1) a policy describing how the compensation plan works, (2) a policy describing who will administer the compensation plan and how they will go about doing so, and (3) documentation demonstrating that the compensation plan has indeed been administered in accordance with its policies.
This last element is particularly important, as the Department has made exceedingly clear that it will look past the “label” given a compensation structure and evaluate its legality based on its substance and implementation. And we do not doubt the Department on this point; the agency has for many years evaluated compensation plans based on implementation and practice. Thus, institutions must be prepared to demonstrate that in practice, their compensation plans are based strictly on permissible factors (e.g., completion), and do not tie in any way to success in enrollment.
Compensation plans based on retention or placement
Finally, it bears note that the Department did not concede the permissibility of compensation based on retention (i.e., success in keeping students in school up to the point of completion) or job placement. Recall that both of these concepts were expressly discussed in the 2010 Preamble, with the Department concluding that “paying bonuses to recruiters based upon retention, completion, graduation, or placement remain in violation of the HEA’s prohibition on the payment of incentive compensation regulations.”
The justification for the Department’s position regarding retention-based and placement-based compensation mirrors its justification for banning completion-based compensation: Because a student must enroll before he or she can complete, graduate, or be placed, retention, completion, graduation, and placement are all simply indirect measurements of enrollment success. In its 2014 decision, the District Court rejected this logic outright, observing:
"What the Department stated in the Amended Preamble is the common-sense and irrefutable proposition that “compensation for securing program completion requires the student's enrollment as a necessary preliminary step… If accepted, this rationale would allow the Department to ban all incentive-based compensation in higher education, as enrollment is always a necessary predicate to any assessment of program success or student achievement. Congress specified that postsecondary institutions are prohibited from providing commissions, bonuses, or other incentive payments based “directly or indirectly on success in securing enrollments ....” 20 U.S.C. § 1094(a)(20) (emphasis added). Had Congress intended to proscribe all incentive-based compensation, it would have expressly done so by enacting a general ban on incentive payments, not limited to enrollments. See Heckler v. Chaney, 470 U.S. 821, 829, 105 S.Ct. 1649, 84 L.Ed.2d 714 (1985) (noting “the commonsense principle of statutory construction that sections of a statute generally should be read ‘to give effect, if possible, to every clause’ ” (quoting United States v. Menasche, 348 U.S. 528, 538–39, 75 S.Ct. 513, 99 L.Ed. 615 (1955))). The fact that Congress chose to ban only enrollment-based incentives indicates that any regulatory prohibitions must be reasonably tied to enrollment, without permeating the entire postsecondary education process.APSCU v. Duncan, 70 F. Supp. 3d at 454 (D.D.C. 2014) (emphasis in original)."
The Court’s reasoning strongly suggests that retention-based and placement-based compensation both ought to be permissible, given that both, like completion and graduation, are reasonably divorced from the enrollment process. This is particularly the case with placement, which is even further removed from enrollment than completion or graduation. This having been said, neither the District Court’s 2014 opinion, nor the Department’s 2015 reversal, mentions retention or placement. Consequently, we would caution institutions against developing compensation plans based on these metrics, as doing so ostensibly involves a greater level of risk.
* Though not addressed here, we note that the Department’s 2015 guidance also discussed at length the application of the incentive compensation prohibition to the recruitment of minority students, ultimately affirming that the rule applies equally to the recruitment of all students, without regard to a student’s minority status or institutional efforts to increase student diversity.