The future of regulations enacted pursuant to Governor Cuomo's Executive Order #38 remains unclear after New York Nassau County trial court declared Executive Order #38 and Department of Health ("DOH") regulations invalid on April 8, 2014 in Agencies for Children's Therapy Services v. Cuomo.  The Executive Order and these exact same DOH regulations were upheld in July 2013 by another New York trial court in Suffolk County in Concerned Home Care Providers v. New York State Department of Health

The crux of the difference between the decisions in Agencies for Children's Therapy Servicesand Concerned Home Care Providers seems to stem from:

  1. the courts' varying interpretations of which branch of government has the authority to enact the regulations and policies underlying Executive Order #38; and
  2. the for-profit or not-for-profit nature of the affected organization.    

At the direction of the Governor's Executive Order #38, the DOH regulations restrict certain organizations from using state funds for executive compensation in excess of $199,000 and for more than 25% of an organization's administrative expenses.  In addition to the DOH, Governor Cuomo directed other agencies to enact similar regulations, including:  

  • Office for People with Developmental Disabilities
  • Office of Mental Health
  • Office of Alcoholism and Substance Abuse Services
  • Office of Children and Family Services
  • Office of Temporary and Disability Assistance
  • Office for the Aging Division of Criminal Justice Services
  • Office of Victim Services
  • Department of Corrections and Community Supervision
  • Department of Agriculture and Markets
  • Division of Housing and Community Renewal
  • Department of State

The agencies' regulations took effect July 1, 2013. 

Authority to Enact the Regulations

In Agencies for Children's Therapy Services, the court held that the Governor and the DOH lacked authority because the Executive Order and the subsequent regulations infringed on the policy-making function of the Legislature.  The court stated that the State Legislature could have enacted legislation to create the restrictions, but the Legislature rejected similar regulations previously included in the Governor's proposed 2012 State Budget.  By contrast, in Concerned Home Care Providers, the court held that the Governor and DOH were well within their powers under the Public Health Law to regulate financial assistance granted by the State for health-related activities. 

Because many not-for-profits receive state funds from agencies like the DOH , not-for-profits have been particularly affected by these regulations.  In fact, the cases in both Nassau and Suffolk County were brought by not-for-profit corporations.  However, it should be noted that the Executive Order and the regulations of each agency do not apply strictly to not-for profits -- any individual and entity, whether for-profit or not-for-profit, that receives "State funds" and "State-authorized payments" above certain financial thresholds are presently subject to the restrictions of the various agencies.

However, the decisions in Concerned Home Care Providers and Agencies for Children's Therapy Services suggest that the validity of the regulations may in fact depend upon whether the affected organization is for-profit or not-for-profit.  In Concerned Home Care Providers, among other things, the court cited to the Not-For-Profit Corporation Law in its holding that the Governor did not exceed his authority in Executive Order #38.  Specifically, the court stated that Not-For-Profit Corporation Law Section 508 permits not-for-profit corporations to receive income, but any incidental profit must be applied to the organization's operations and cannot benefit the organization's executives.   The court stated that Executive Order #38 conforms with the policy of Section 508 by similarly limiting not-for-profit corporations from using funds for the non-operational portion of executive compensation and administrative expenses.   However, this rationale raises the question  as to the validity of Executive Order #38 as applied to for-profit entities, which do not have any statutory limitation on the use of profits, and yet may also be subject to the agencies' restrictions. 

The court in Agencies for Children's Therapy Services seemed to address this point in its holding.  There, as in Concerned Home Care Providers, the State specifically referred to the same Not-For-Profit Corporation Law Section 508.   However, although the plaintiff organization was a not-for-profit corporation, its members were all for-profit entities.  Ultimately, in holding the DOH regulations and Executive Order #38 invalid, the court stated that none of the statutes cited by the State give it the authority to determine how much a for-profit organization pays its executives and spends on administrative expenses. 

Ultimately, these  conflicting rulings create uncertainty with respect to the validity and future of the DOH regulations and similar regulations enacted by other state agencies pursuant to Executive Order #38.  This uncertainty will likely only be resolved through further litigation at the Appellate Division and Court of Appeals levels.  Organizations subject to the regulations should continue to comply with the applicable restrictions until the conflict is resolved.