On October 29, 2010, the U.S. Department of Education (ED) issued final regulations changing the parameters of the existing ban on institutions participating in the Title IV programs paying incentive compensation to covered personnel. These changes will become effective on July 1, 2011. See 75 Fed. Reg. 66833 (Oct. 29, 2010). In this memorandum, I provide an overview of the incentive compensation ban and point out provisions with respect to job duties and goals that could result in assertions of non-compliance. In doing so, I have relied upon information provided by ED in the form of the preambles to the proposed and final regulations, the final regulations themselves, and the Dear Colleague Letter-GEN-11-05 (DCL) issued by ED on March 17, 2011.
I am limited by the language of the statue and regulation and the guidance ED has provided in the regulatory preamble and in the March 17, 2011 DCL. Keep in mind that only the statute and the regulation carry the weight of the law. Nevertheless, the preamble and the DCL shed some light on how institutions may expect ED will interpret its regulations. While this guidance is, at times, logically inconsistent, it is the best ancillary information on which I can rely to assess compliance. For these reasons, this memorandum cannot and does not serve to provide legal counsel on the proper interpretation of the new regulations, but to alert institutions to areas of vulnerability that may result in compliance issues.
II. OVERVIEW OF LEGAL COMPENSATION BAN
In 1992 Congress passed a law that prohibits institutions participating in the programs authorized by Title IV of the Higher Education Act of 1965, as amended (Title IV) to provide incentive compensation to “persons or entities” “based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance.” 20 U.S.C. § 1094(a)(20). In 2002, a decade after the enactment of this legislation, as a result of mass confusion regarding the interpretation of this statute, ED promulgated regulations known as the “safe harbors” that itemized twelve (12) activities that it considered appropriate compensation schemes.
These 2002 regulations, among other things, permitted salary adjustments of covered employees as long as they were not based solely on success in securing enrollment or award of financial aid. In other words, if the salary adjustment was based only in part on success in securing enrollment or award of financial aid, it could pass regulatory muster.
Almost another decade passed, and ED came to the conclusion that the safe harbors were resulting in abuses that were inconsistent with the original intent of the legislation. For this reason, ED has eliminated the safe harbors and issued new regulations to take effect July 1, 2011. In this regulation, ED largely echoes the language of the statute, but makes it clear that institutions may not base its compensation to covered persons and entities “in any part” upon success in securing enrollment or award of financial aid.
For this reason, it becomes a crucial task for institutions to sift through all of their criteria for compensating covered employees and entities. These criteria are typically found in:
- evaluation forms
- job descriptions and
- job advertisements and postings
If any of these records show that a criterion of a successful job evaluation can be construed as success in securing enrollment or award of financial aid, institutions will need to consider eliminating that criterion. /p>
The other crucial task is for institutions to identify which persons or entities are covered by ban in the first place. Recall that the ban applies only to “a person or entity who is engaged in any student recruitment or admission activity, or in making decisions regarding the award of title IV, HEA program funds.” See 34 C.F.R. § 668.14*b)(22)(i). How do institutions identify individuals carrying out these activities? To ensure compliance, institutions must review job descriptions and evaluations of personnel to assess whether the individual may be considered by ED to be carrying out a covered activity which triggers the applicability of the ban to that person.
A. Who are covered employees and entities?
ED’s recently-issued DCL essentially sets forth a litmus test for assessing who is a “person or entity engaged in any student recruitment or admission activity, or in making decisions regarding the award of title IV, HEA programs funds.” See 34 C.F.R. § 668.14(b)(22)(i). If an individual a school employs or an entity with which it contracts has responsibility for any of these activities, the incentive compensation ban will apply to him, her, or it regardless of any additional responsibilities the person or entity may have. ED states in this regard: “Consistent with the clear statutory language, the Department considers payments to persons or entities that undertake or have responsibility for recruitment and decisions related to securing financial aid as subject to the incentive compensation ban even if their work also includes other activities.” DCL at 8 (emphasis added).
In the DCL, ED presents a table of activities that it designates as those that it would consider to be engaging in recruitment or admission activities or in making decisions regarding the award of Title IV funds. In addition, the regulations provide minimal guidance regarding who is a covered entity or person.
- Covered Persons
a. Recruitment and Admission Activities
All individuals and entities that have “responsibility for recruitment or admission of students, or making decisions about awarding title IV, HEA program funds” are covered. 75 Fed. Reg. 66874 (Oct. 29, 2010); see also 34 C.F.R. § 668.14(b)(22)(iii)(C). The regulation speaks to what is considered recruitment or admission activities in its definition of “securing enrollment or the award of financial aid.” 34 C.F.R. § 668.14(b)(22)((iii)(B). The activities listed in this definition, together with the activities listed in the DCL as “activities that are always subject to the ban on incentive compensation” form the litmus test that can be used to determine which of your employees are covered by the ban. See DCL at 8 (caps in original). This includes individuals with the following responsibilities:
- “[C]ontact in any form with a prospective student,” such as, but not limited to –
- Contact through pre-admission or advising activities. 34 C.F.R. § 668.14(b)(22)(iii)(B)(1).
- Contacting potential enrollment applicants. DCL at 8.
- Scheduling an appointment to visit the enrollment office or any other office of the institution. 34 C.F.R. § 668.14(b)(22)(iii)(B)(1).
- Attendance at such an appointment. Id.
- Involvement in a prospective student’s signing of an enrollment agreement or financial aid application, including helping student fill out enrollment application. Id., DCL at 8.
- Targeted information dissemination to individuals. DCL at 8
- Solicitation to individuals. Id.
b. Award of Financial Aid Activities
- “Services related to securing financial aid, including:”
- Completing financial aid applications on behalf of prospective applicants (including using FAA Access tool). DCL at 8.
Again, the list above should be considered a litmus test. If your employee is engaged in any of the above-listed activities, ED will consider the employee covered regardless of the other activities in which he or she may be engaged. ED has stated that this list is illustrative and may not be an exhaustive list. The regulation’s language would encompass a broad spectrum of pre-admission contact with prospective students inasmuch as it states that “contact in any form” with a prospective student triggers the incentive compensation ban. See 34 C.F.R. § 668.14(b)(22)(iii)(B). However, if the activity is one listed in ED’s DCL and classified as a covered activity, an institution may be sure that any employee who carries out such an activity will be considered by ED to be an employee covered by the incentive compensation ban regardless of the other activities he or she carries out.
- Employees Not Covered by Ban
ED has listed activities in its DCL which, if the employee refrains from carrying out any of the above-listed litmus test activities, will not trigger the incentive compensation ban. These include:
- The following pre-admission(“marketing”) activities:
- Broad information dissemination. DCL at 8.
- Advertising programs that disseminate information to groups of potential students. Id.
- Collecting contact information. Id.
- Screening pre-enrollment information to determine whether a prospective student meets the requirements that an institution has established for enrollment in an academic program. Id
- Determining whether an enrollment application is materially complete, as long as the enrollment decision remains with the institution. Id.
- The following student support services after the point at which financial aid is allowed to be disbursed for a payment period including:
- General student counseling. Id.
- Career counseling. DCL at 9.
- Financial aid counseling, including loan management. Id.
- Online course support – both professional services and computer hardware and software. Id.
- Academic support services, including tutoring, aimed at student retention, whether that support is provided prior to attendance in classes or after attendance has begun. Id.
- But note that preamble states at 258 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.” (Emphasis added). In addition, the preamble equates payment for retention as payment for securing enrollment because “unless the student enrolls, the student cannot successfully complete an educational program.” Preamble at 256.Thus, under ED’s logic, a person who is not involved in the activities listed in the litmus test may be compensated based on retention efforts even though ED equates retention efforts with enrollment efforts. This, to me, is logically irreconcilable but it is how ED has interpreted its rules.
- The following senior management activities:
- “Policy decisions made by senior executives and managers related to the manner in which recruitment, enrollment, or financial aid will be pursued or provided, such as, e.g., decisions to admit only high school graduates.” DCL at 9. The DCL also states that ” [p]ayments to senior executives with responsibility for the development of policies that affect recruitment, enrollment, or financial aid” are permissible. DCL at 11.Thus, while ED has stated that the incentive compensation ban applies “to all employees regardless of title or position,” ED has also made clear that “[s]enior managers and executive level employees who are only involved in the development of policy and do not engage in individual student contact” or the litmus test activities “will not generally be subject to the ban.” DCL at 13 (emphasis in original).In the APSCU litigation, ED has echoed these principles in its Motion for Summary Judgment stating:Thus, as currently written, the HEA’s incentive compensation ban applies to any person engaged in any recruitment or admission activities or financial aid decisions, not just those directly engaged in such activities. This language does not “unambiguously foreclose” application of the ban to higher level employees with responsibility for these activities.” Nat’l Cable & Telecomm. Assoc. v. FCC, 567 F.3d 659, 663 (D.C. Cir. 2009). Motion at 18. “Furthermore, the “sweeping regulation of executive compensation” plaintiff conjures up is simply not supported by the record. Pl.’s Mot. at 15. The Department has confirmed that the compensation regulations do not preclude a college president from speaking with students about the value of a college education or the virtues of attending a particular institution. 75 Fed. Reg. at 66,874. Further, the Department recently explained that “[s]enior managers and executive level employees who are only involved in the development of policy and do not engage in individual student contact or  other covered activities . . . will not generally be subject to the incentive compensation ban.” Dear Colleague Letter at 13.
Motion at 19-20.
Again, however, note that an individual who carries out these “safe” activities will nonetheless be considered an individual covered by the ban if he or she also carries out any of the activities of a covered employee as set forth in the preceding section.
B. What are the Kinds of Compensation Covered by the Ban?
The final regulations shed little light on what will be considered proper and improper compensation. However, the regulations do define “[c]omission, bonus, or other incentive payment” as:
[A] sum of money or something of value, other than a fixed salary or wages, paid to or given to a person or an entity for services rendered.
34 .F.R. § 668.14(b)(22)(iii)(A).
While the regulations exempt a fixed salary and wages from the definition of incentive payment, it is important to understand that a salaried employee may nonetheless be considered to be receiving inappropriate incentive compensation if a salary adjustment is incentivized by success in securing enrollment or the award of financial aid. Moreover, where a covered employee receives multiple adjustments to compensation in a calendar year, ED will infer that that the payments are improper.
Even a single merit adjustment in one year, however, can be problematic. The final regulations address adjustments in compensation stating that “merit-based adjustments” are permitted as long as they “are not based in any part, directly or indirectly, upon success in securing enrollment or the award of financial aid.” 34 C.F.R. § 668.14(b)(22)(ii)(A). In the DCL, ED elaborates on this principle as it applies to salary adjustments, in particular:
These commenters also requested guidance about allowable salary adjustments, including whether raises (for promotions) would be permitted and whether reductions (for demotions) would be permitted. Some commenters requested clarification on whether a salary could be paid. One commenter asked whether benefits could be paid at differential rates by class of employee or on a sliding scale by salary.
Finally, with respect to the requests for clarification on allowable salary adjustments, we note that individuals may be compensated in any fashion that is consistent with the prohibition identified in section 487(a)(20) of the HEA. Accordingly, while not commenting on any specific compensation structure that an institution may choose to often maintain a hierarchy of recruitment personnel with different amounts of responsibility. As long as an institution complies with section 487(a)(20) of the HEA, it may be appropriate for an institution to have salary scales that reflect an added amount of responsibility. Institutions also remain free to promote and demote recruitment personnel, as long as these decisions are consistent with the HEA’s prohibition on the payment of incentive compensation. Finally, it is appropriate to pay recruitment personnel a fixed salary.
Changes: … In addition, we have redesignated proposed § 668.14(b)(22)(i)(B) as § 668.14(b)(22)(i)(A) and added a new paragraph (b)(22)(i)(B) to provide that, for the purposes of this paragraph, an employee who receives multiple adjustments to compensation in a calendar year and is engaged in any student enrollment or admission activity or in making decisions regarding the award of title IV, HEA program funds is considered to have received such adjustments based upon success in securing enrollments or the award of financial aid if those adjustments create compensation that is based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid.
Finally, we have revised § 668.14(b)(22)(ii) to provide that eligible institutions, organizations that are contractors to eligible institutions, and other entities may make merit-based adjustments to employee compensation provided that such adjustments are not based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid.
75 Fed. Reg. at 66875-876 (emphasis added). Thus, ED has stated that while compensating covered employees with a salary is permissible, if salary increases and decreases, promotions, and demotions based in any part on success in securing enrollment or the award of financial aid, it will be deemed in violation of the incentive compensation ban.
ED echoes this statement in its DCL stating that “[s]alary adjustments that the take the form of incentive payments based directly or indirectly on success in securing enrollments or financial aid” are considered inappropriate payment of incentive compensation. DCL at 10.
What are appropriate factors to be used in evaluating merit increases for covered employees? ED addresses this question in its DCL stating that institutions may base their compensation on “standard evaluative factors” which ED classifies as “qualitative factors.” In this regard ED states:
Institutions may use factors such as seniority or length of employment as a basis for compensating employees covered by the incentive compensation prohibition. Many other qualitative factors may also be used so long as they are not related to the employee’s success in securing student enrollments or the award of financial aid. These factors may include such things as job knowledge and professionalism, skills such as analytic ability, initiative in work improvement, clarity in communications, and use and understanding of technology, and traits such as accuracy, thoroughness, dependability, punctuality, adaptability, peer rankings, student evaluations, and interpersonal relations. (See also 75 FR 66877) (Oct. 29, 2010).)
DCL at 13. Thus, while ED does not list every “standard evaluative factor” upon which covered employees may have their compensation based the “safe” factors include:
- Length of employment
- Job knowledge
- Analytic ability
- Initiative in work improvement
- Clarity in communications
- Use and understanding of technology
- Peer rankings
- Student Evaluations
- Interpersonal relations
- Cost of Living Adjustments
In addition to permitting salary adjustments that are not based on any improper incentives, ED also states in its DCL that cost of living adjustments (COLAs) are expressly permitted. Id
- Profit Sharing Payments
As stated in the final regulations, profit sharing payments are permissible only if they are not made to “any person who is engaged in student recruitment or admission activity or in making decisions regarding the award of title IV, HEA program funds.” 34 C.F.R. § 668.14(b)(22)(ii)(B). In other words, the regulations would not permit profit sharing payments to be made to covered employees.
The DCL, however, calls into question what seemed to be the regulations’ blanket prohibition on providing profit sharing payments to covered employees. Specifically, the DCL seems to permit profit sharing payments to covered employees so long as they are made in a manner that is neutral to the employee’s function with regard to enrollment and financial aid. The DCL states:
Profit sharing plans, including 401(k) type plans, from which distributions are made to individuals on a basis that is neutral with respect to the role the recipient plays in student recruitment or the securing of financial aid.
DCL at 10. In other words, the DCL seems to contemplate that a profit sharing payment may be made to an employee who is involved with student recruitment and financial aid. For this reason, it appears that in the DCL ED is permitting profit-sharing payments to covered employees despite the language of the regulation.
The DCL later elaborates on the point and seems to state the same concept that certain profit-sharing payments to covered employees is permissible. First, the DCL states that profit-sharing payments cannot be made as a “bonus or commission” to covered employees, but also suggests that profit-sharing payments may be made to covered employees as long as covered employees are not singled out for payment. In this regard the DCL states:
As illustrated in Table 2, nothing in the Department’s regulations is intended to limit an institution’s ability to reward its employees with traditional profit sharing payments as long as such payments are not designed to benefit recruitment and financial aid personnel distinct from all other institutional employees. In that regard, section 668.14(b)(22)(ii)(B) was offered to provide assurance that profit sharing within the confines of traditional pension plans is allowed as long as the payments are not a substitute for otherwise impermissible compensation to individuals engaged in recruitment or the provision of financial aid.
DCL at 14. This interpretation in the DCL certainly seems to me to be at odds with the blanket prohibition of profit-sharing payments to covered employees, but it most likely represents ED’s recognition that it needed to back pedal on the regulatory language given the difficulty employers would face, including potential violations of other federal law, in changing its profit-sharing plans to exempt its covered employees.
What all this means is that if an institution compensates its covered employees such as admission representatives and financial aid staff purely with salary or wages, it may nonetheless be classified by ED as violating the incentive compensation ban if the salary or wages are adjusted for success in securing enrollment or award of financial aid. It is for this reason that it is crucial to review the criteria by which salary and wage adjustments are made. If job descriptions or evaluation criteria suggest that employees are positively reviewed based on enrollment or financial aid goals or quotas, an institution can make itself vulnerable to a claim that it is violating the incentive compensation prohibition.
It is important to understand the significant change in perspective on the proper role of admission representatives this interpretation represents. ED takes the view that the proper role of recruitment staff is not to enroll students; it is to counsel them to make an informed decision regarding whether to enroll in an institution. ED elaborates on this point of view in its motion for summary judgment filed in the APSCU litigation stating:
Plaintiff maintains that, because a recruiter’s job is to secure enrollments, any merit-based adjustments made to a recruiter’s salary will necessarily be based, either directly or indirectly, on success in activities aimed at securing enrollments. Pl.’s Mot. at 10. But, as numerous commenters-including associations representing admissions officers-explained, a recruiter’s job is not to enroll as many students as possible. Instead, these are counseling professions that should focus on the needs, interests, and abilities of prospective students and assist those students in determining whether a particular educational program is in their best interest. [Footnote omitted]
Motion for Summary Judgment at 14 (emphasis added).
To ensure compliance with the new incentive compensation regulations, institutions must accept this fundamental shift in what are the proper expectations of institutions of their recruitment staff.