Alert: ED Issues New Incentive Compensation Guidance

Compensation based on student completions now permissible, while compensation based on diversity recruitment still not allowed

At the end of November, the US Department of Education ("ED") issued important new guidance regarding its incentive compensation regulations, which ED says "clarifies and provides additional information" about part of the rules.¹ The new guidance makes two key points: (1) ED has reversed its prior position under its 2010 regulations and announced that compensating employees based on students who complete their educational programs is no longer a prohibited practice, and (2) ED confirmed its earlier guidance that compensating employees for success in enrolling minority students is still not permitted.

ED issued this new guidance in response to the continuing lawsuits filed by the Association of Private Sector Colleges and Universities ("APSCU") challenging various aspects of the "Program Integrity" regulations ED issued in October 2010, of which incentive compensation was one part. As a result of the lawsuit APSCU filed in 2011, the US Court of Appeals for the DC Circuit in 2012 issued a decision that criticized the portion of ED's new incentive compensation regulations that disallowed graduation-based and completion-based compensation, and remanded that issue back to ED, directing ED to justify its expansion of the statutory restrictions on enrollment-based compensation to student completions. The Court of Appeals also ordered ED to further explain the impact of the revised incentive compensation regulations on minority recruitment and enrollment.²

ED responded to the remand in March 2013 by updating the preamble to the regulations, offering some explanations but largely just repeating its previously stated justification. APSCU subsequently challenged ED's revised explanations as still being legally inadequate in light of the Court of Appeals' order.

In October 2014, the DC District Court once again remanded (but did not invalidate) those same portions of the regulations and ED's revised guidance, requiring ED to "provide record evidence in support of its graduation-based compensation ban," as well as to "address the potential effect on minority recruitment, i.e., whether minority enrollment could decline under the new regulations."³ More than a year after the Court remanded those two items for the second time, ED has now responded with the guidance discussed here.

Since 2010, when ED revised its incentive compensation regulations to eliminate all the pre-existing "safe harbors" and significantly constrict compensation...