Universities Face New Whistleblower Liability Over Pay Rule

Colleges and universities could be exposed to greater risk of whistleblower lawsuits under the False Claims Act, thanks to a new rule adopted by the Department of Education this summer meant to restrict employee incentives for boosting enrollment and financial aid recipients. 

All higher-education institutions, for-profit and non-profit alike, should conduct a “top-to-bottom review of their compensation practices and processes to make sure they don't get trapped by these new rules,” says Greg Ferenbach, a member of the higher-education practice of law firm Dow Lohnes.

Under the FCA, private citizens can file “qui tam” civil lawsuits on behalf of the government against organizations that make false or fraudulent claims to receive government funds. As an incentive, the whistleblower may receive up to 25 percent of the proceeds in any settlement. Frauds in Medicare and defense contracting are the most well-known examples, but in the last 10 years many higher education institutions have faced FCA lawsuits as well, based on accusations that they violated the incentive compensation provision under Title IV of the Higher Education Act. That provision prohibits colleges and universities that receive federal financial aid from paying employees commissions, bonuses, or other incentives based on the number of enrollments secured or the amount of financial aid awarded.

New regulations issued by the Education Department, which went into effect July 1, broadly expand the scope and coverage of that incentive compensation ban—and, consequently, the liability risks for colleges and universities—by eliminating the 12 “safe harbor” payment practices established by the department under previous rules.

Under the prior rules, for example, the incentive payment ban did not apply to managers or supervisors of employees who were not directly involved in recruiting or admissions activities or the awarding of financial aid. Under today's rules, the incentive payment cannot be provided to “any person based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid.” This ban further extends all the way up to senior-level employees.

The prior rules further allowed institutions to adjust an individual's salary up to two times per year, as long as it wasn't based solely on his or her success in student recruitment. Under the new rules, salary adjustments that occur more than once a year will be presumed by the department to be illegal. “That's a pretty big change,” Ferenbach says.

Another big change is the prohibition of any incentive payments to “any entity, institution, or organization” that undertakes the recruiting or the admitting of students, or who make decisions about program funds. Under the old rules, schools could pay third parties “as long as the individuals performing the covered activities are not compensated in a way that is prohibited by the incentive payment compensation rule.”

Industry Reaction

At least some university representatives welcome the stricter rules, with the idea that they add clarity to the restrictions. The National Association for College Admission Counseling, for example, applauded the end of the safe harbors. “Our view on the final regulations is that they are a much needed improvement over the previous regulations,” says David Hawkins, director of public policy and research at NACAC. “We feel the final regulations provide a much clearer and much more consistent view of what the statute was written to prohibit.”

For many more in the education sector, however, the end of the safe harbors conflicts with how most colleges and universities conduct compensation evaluations. Even in non-profit institutions, evaluations of senior-level admissions officers are often based (at least broadly) on the institution's number of students.

Hawkins warns that common university personnel practices may now be forbidden by the Education Department rules. For example, if a dean of admissions is evaluated based on under-enrollment or over-enrollment, particularly if the school can only fill a certain number of seats, that could be a violation. Or if a school has a five-year strategic plan to increase enrollment by 10 percent, and evaluates employees based partially on meeting that goal, that might be a violation of Title IV—and all the employees could pursue whistleblower claims.

All higher higher-education institutions, for-profit and non-profit alike, should conduct a “top-to-bottom review of their compensation practices and processes to make sure they don't get trapped by these new rules.”

—Greg Ferenbach,

Member, Higher-Education Practice,

Dow Lohnes

“To not look in some way numerically at how someone does the job they've been hired to do is kind of strange,” says Sharon Thomas Parrott, chief regulatory compliance officer of DeVry Inc., a $2.18 billion for-profit higher-education business. During the rulemaking period, Devry submitted nearly 50 pages of comment, criticizing the decision to eliminate the safe harbors.

Responding to concerns by some in the higher-education community that the rules are still too ambiguous to guide both non-profit and for-profit institutions going forward, the Education Department published additional guidance that clarifies three areas of the final rules: state authorization, incentive compensation, and misrepresentation. The guidance further provides examples of covered and exempt individuals and activities.

But even the guidance doesn't clear up all unanswered questions, says Blain Butner, co-leader of the education practice group at law firm Dow Lohnes. For example, what employees are covered by these restrictions, especially at the higher levels? “It's a complex question, because one answer does not fit all schools,” he says.

To complicate matters, the Education Department has said it will not answer individual questions about incentive compensation, as it has with other Title IV matters. “Everybody is very frustrated about that,” says Butner.

Legal Exposure

Compliance with the regulations is especially important since other federal agencies and state attorneys general are expressing greater interest in schools' recruitment and financial aid practices. In one notable case, the federal government filed a joint complaint with the states of California, Florida, Illinois, and Indiana on Aug. 8 in U.S. district court intervening in a qui tam lawsuit against Education Management Corp.

Butner says the complaint against EDMC is notable because the federal government has never before intervened in a qui tam lawsuit against a post-secondary institution relating to employee compensation, even though the allegations mirror those against other schools in qui tam cases where the government declined to intervene.

UNITED STATES V. EMC

Below is the Justice Department press release concerning the United States' case against EMC:

The United States has intervened and filed a complaint in a whistleblower suit pending under the False Claims Act against Education Management Corp. (EDMC) and several affiliated entities, the Justice Department announced today.   In its complaint, the government alleges that EDMC falsely certified compliance with provisions of federal law that prohibit a university from paying incentive-based compensation to its admissions recruiters that is tied to the number of students they recruit.   Congress enacted the incentive compensation prohibition to curtail the practice of paying bonuses and commissions to recruiters, which resulted in the enrollment of unqualified students, high student loan default rates and the waste of program funds.

“Colleges should not misuse federal education funds by paying improper incentives to admissions recruiters,” said Tony West, Assistant Attorney General for the Civil Division of the Department of Justice. “Working with the Department of Education, we will protect both students and taxpayers from arrangements that emphasize profits over education.”

“Federal tax dollars must be protected from abuse,” said David J. Hickton, U.S. Attorney for the Western District of Pennsylvania. “This action against EDMC seeks to recover a portion of the $11 billion in federal student aid which EDMC allegedly obtained through false statements and which enriched the company, its shareholders and executives at the expense of innocent individuals seeking a quality education.”

The False Claims Act allows for private citizens to file whistleblower suits to provide the government information about wrongdoing.   The government then has a period of time to investigate and decide whether to take over the prosecution of the allegations or decline to pursue them and allow the whistleblower to proceed.   If the United States proves that a defendant has knowingly submitted false claims, it is entitled to recover three times the damage that resulted and a penalty of $5,500 to $11,000 per claim.   When the government intervenes, the whistleblower can collect a share of 15 to 25 percent of the United States' recovery.

The suit was originally filed by Lynntoya Washington, a former EDMC admissions recruiter, who later filed an amended complaint, jointly with Michael T. Mahoney, a former director of training for EDMC's Online Higher Education Division.   The states of California, Florida, Illinois and Indiana have also intervened as plaintiffs.

The suit is United States ex rel. Washington et al. v. Education Management Corp. et al., Civil No. 07-461 (W.D. Pa.).  

This matter was investigated by the Commercial Litigation Branch of the Justice Department's Civil Division; the U.S. Attorney's Office for the Western District of Pennsylvania; and the Department of Education, Office of Inspector General.

Source: Justice Department Press Release.

The complaint, originally filed by two former EDMC employees in 2007, alleges that EDMC knowingly made false claims and statements to the Education Department and the four state governments, claiming to be in compliance with the incentive compensation prohibition to be eligible for Title IV and state financial aid programs. As a result of these false claims, EDMC received more than $11 billion in Title IV funds and more than $100 million in state financial aid funds from July 2003 to June 30, 2011.

In a statement responding to the complaint, EDMC said its “compensation plan—in design and in implementation—complied with the law, and that the pursuit of this legal action by the federal government and a handful of states is flat-out wrong.”

Nonetheless, some legal experts say the Justice Department's decision to intervene in the case may be a sign of things to come on the heels of the final rules. In the past, Butner says, the Justice Department may have chosen not to get involved because it assumed most schools were staying within the safe-harbor limits, making these cases hard to prove on the facts. With the elimination of the safe harbors and many of these cases being reinstated, “my view is that it's likely they'll be intervening some more,” Butner adds.

The new rules also clear a path for whistleblowers and the government to seek damages for false claims by colleges and universities, “because the factual threshold is so much lower,” Ferenbach says. “It's a cash cow for the government to prosecute these cases.”

The Justice Department declined to comment on whether it will get involved in more Title IV cases. A report published last year by the Government Accountability Office, however, further highlights just how vulnerable not-for-profit higher education institutions can be to qui tam lawsuits: From 1998 to 2009, a total of 32 schools had violated the “incentive compensation” ban.

Conditions also are ripe for an increasing number of non-profit institutions to be subjected to qui tam suits based on their employee pay and incentive practices, legal experts say. Because pay practices at higher-education institutions have got a lot more attention, “I think that's going to lead naturally to people looking at the activities of non-profit colleges more aggressively,” says Butner.