Higher Education Report

Higher Education Report

New York Institutions: Department of Financial Services Cybersecurity Regulations Likely to Impose Significant Obligations on Many Colleges and Universities

Posted in Cybersecurity, Higher Education
Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Following a public comment period, the New York State Department of Financial Services (“DFS”) has published a modified version of new regulations, previously issued on September 13, 2016, aimed at creating higher cybersecurity standards within the banking, insurance and financial services industries.  The regulations go into effect on March 1, 2017 with phased implementation thereafter, and will likely require significant capital expenditures and operational changes by colleges and universities covered by the regulations.  The public comment period for the proposed modified regulations will be open until January 27, 2017.

Colleges and universities must already comply with a panoply of laws, regulations and standards relating to data security:  the Gramm-Leach-Bliley Act, the United States Department of Education guidance applicable to student loan information, the Red Flags Rule, PCI standards for credit card information, and, for some institutions, the Health Insurance Portability and Accountability Act.  The DFS proposed cybersecurity regulations would impose operational requirements and expenditures that are far more burdensome than these existing obligations in many respects, including but not limited to standards for: penetration testing and vulnerability assessments, audit trails, cybersecurity personnel, due diligence, risk assessment, and contracting with third parties, use of multi-factor authentication and annual certification of compliance by the board of directors.  For information on the specific requirements of the proposed cybersecurity regulations, please review our Client Information Memoranda dated September 16, 2016 and January 5, 2017.

The new cybersecurity regulations apply to “Covered Entities”, which are defined broadly as “any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the banking law, the insurance law or the financial services law.”  Among the 3,800 entities regulated by DFS is a subset of institutions and organizations that are engaged in bona fide charitable, religious, missionary, educational or philanthropic activities and are permitted under N.Y. Insurance Law § 1110 to issue charitable gift annuities to donors.  Therefore, unless the new regulations are further modified, such entities (including many colleges and universities) will be required to comply. (To determine if your entity is supervised by DFS, you can perform a search here.)

Certain covered entities are exempt from a subset of the new cybersecurity regulations.  Exempt entities include those with fewer than 10 employees, less than $5 million gross annual revenue for three years, or less than $10 million in year-end total assets.  Additional exemptions exist for covered entities that do not operate, maintain, utilize or control any Information Systems and do not control, own, access, generate, receive or possess Nonpublic Information as those terms are defined by the regulations.  Covered entities that qualify for exemptions must file a “Notice of Exemption” with DFS affirming the basis for the exemption.  Unfortunately, due to their size, few colleges and universities will qualify for exemption.

It is not immediately clear that DFS intended to include entities regulated solely under Insurance Law § 1110 as covered entities alongside traditional insurance companies.  In fact, according to the Report on Cyber Security in the Insurance Sector, which was conducted as part of the regulation drafting process, DFS surveyed 21 health insurers, 12 property and casualty insurance providers, and 10 life insurance providers, but no colleges, universities, or charitable or religious organizations.  Statements made by the Superintendent of Department of Financial Services, Maria T. Vullo, and Governor Andrew Cuomo in connection with the announcement of the regulations make no mention of not-for-profit organizations or higher education institutions as targets of the regulations.

Notwithstanding the apparent primary focus of the regulations, in connection with its reissuance of the regulations on December 28, DFS acknowledged that many of the comments it received concerned the broad definition of “Covered Entity”, but that it opted not to amend that definition at this time.  Institutions issued permits under N.Y. Insurance Law § 1110 to issue charitable gift annuities may wish to submit public comments about the impact of the regulations during the current public comment period, but should proceed on the assumption that the regulations will apply unless and until DFS provides definitive guidance to the contrary.

New York Institutions: New Amendments to the Nonprofit Revitalization Act of 2013 Signed into Law by Governor Cuomo

Posted in Higher Education

university archOn November 28, 2016, New York State Governor Andrew Cuomo signed legislation enacting another round of amendments to the Nonprofit Revitalization Act of 2013.  The amendments should ease compliance with the NPRA’s related party transaction rules by incorporating express exceptions, allowing for committee approval, authorizing ratification of past transactions, and narrowing the universe of persons subject to the rules. Private colleges and universities in New York State would be well advised to update their governance documents to incorporate these changes so that their governance documents do not prevent them from taking advantage of these provisions.  In addition, New York institutions should review their governing documents for compliance with other changes made by the amendments, including changes relating to (1) the definition of interested directors (trustees); (2) the formation, composition and authority of Board committees; (3) the role of audit committees; and (4) certain procedural aspects of conflict of interest.

U.S. District Court in Texas Issues Nationwide Injunction Preventing New Overtime Rule From Taking Effect

Posted in Higher Education, Labor

Yesterday, the U.S. District Court for the Eastern District of Texas issued a nationwide injunction preventing the U.S. Department of Labor from implementing its regulations revising the white collar exemptions.  Therefore, the increase in the minimum salary level to $913.00 per week that was expected to go into effect on December 1 will not occur on that date.

In granting the injunction, the Court held that Congress intended the executive, administrative, and professional exemptions to be based on an employee’s duties — not on an employee’s salary level.  Specifically, the Court stated:  “After reading the plain meanings together with the statute, it is clear Congress intended the EAP [executive, administrative, professional] exemption to apply to employees doing actual executive, administrative, and professional duties.  In other words, Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level.”  Although the USDOL has imposed a minimum salary level requirement to qualify for the white collar exemptions since the 1940s, the Court nevertheless determined that the increase in the minimum salary level from $455.00 per week to $913.00 per week was so large that “it supplants the duties test.”  The Court stated:  “If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.”

So, what does this mean for the future of these regulations?  Although this is only a preliminary injunction that prevents the implementation of the regulations until a final determination is made, this could very well be a permanent end to the regulations.  A final determination is unlikely to be issued before the inauguration of President Trump, and it seems less likely that the USDOL under the Trump administration will be inclined to continue to vigorously defend the regulations in this litigation.  A more likely outcome is that the USDOL may rescind and reissue the regulations with a less drastic salary increase, or perhaps even not reissue the regulations at all.

This development leaves many employers wondering what to do about the employees who have already been told that they will be reclassified from exempt status to non-exempt status beginning next week and the employees who have been told that they will receive salary increases beginning next week in order to maintain their exempt status.  The employees who have been told that they will be reclassified from exempt to non-exempt status can certainly be told at this point that they will remain exempt employees (assuming, of course, that their duties continue to qualify them for one of the white collar exemptions).  In addition, from a legal standpoint, nothing would preclude an employer from rescinding the salary increases that were scheduled to go into effect next week for employees who were told that they would receive a salary increase to maintain their exempt status (unless the employer has entered into an employment contract that binds the employer to providing the salary increase).  Obviously, from a human resources standpoint, this will require clear and prompt communication regarding the reason why the salary increase is being rescinded.

Employers in New York should also keep in mind that the New York State Department of Labor has proposed a gradual increase to the minimum salary levels to qualify for the executive and administrative exemptions.  If these proposed regulations are adopted, the first salary increase will occur on December 31, 2016.  Employers outside of New York City, Nassau, Suffolk, and Westchester Counties will be required to pay a minimum salary of $727.50 per week to executive and administrative employees.  Employers in New York City who employ 11 or more employees will be required to pay a minimum salary of $825.00 per week to executive and administrative employees.  Employers in New York City who employ 10 or fewer employees will be required to pay a minimum salary of $787.50 per week to executive and administrative employees.  Employers in Nassau, Suffolk, and Westchester Counties will be required to pay a minimum salary of $750.00 per week to executive and administrative employees.  These amounts will increase each year.  There is still no minimum salary under New York law to qualify for the professional exemption even under the new proposed regulations.  We will provide an update regarding whether these proposed regulations become final regulations.

Supreme Court Will Review Fourth Circuit Decision in Transgender Student’s Rights Case

Posted in Discrimination, Student Affairs, Title IX

title ixOn October 28, 2016 the United States Supreme Court agreed to review the Fourth Circuit’s decision in Gloucester County School Board v. G.G. This case is about whether a Virginia School Board’s policy limiting students’ bathroom access to facilities that correspond to students’ biological gender is discriminatory. The case was brought by the ACLU, on behalf of transgender student G.G., alleging the School Board’s policy violates G.G.’s rights under the Constitution’s Equal Protection Clause and Title IX of the Education Amendments of 1972, and is inconsistent with U.S. Department of Education Office for Civil Rights (OCR) guidance stating that school districts should treat students consistent with their gender identities. While the Fourth Circuit held that OCR guidance, while not law, deserved deference on this issue it stopped short of holding that the School Board’s policy violates Title IX’s protections against sex discrimination.  On August 29, 2016, the School Board petitioned the Supreme Court for review. In response the Supreme Court stayed the Fourth Circuit’s decision, thus keeping the School Board’s policy in place while it considered whether it would review the case.

A decision by the Supreme Court here will not just determine whether this Virginia school board’s policy violates federal civil rights laws. A decision will impact similar transgender policies, laws, and cases under scrutiny in North Carolina, Texas, and elsewhere. This case is further meaningful for the education community as it may provide clarity on the scope of Title IX’s sex discrimination protections and the appropriate weight to afford OCR interpretation of Title IX and other statutes.

For more background on Gloucester County School Board v. G.G. see our previous post here.

Recent IRS Audit is a Reminder to Check Whether Your Employment Agreements and Appointment Letters Comply With the Applicable Tax and Benefit Requirements

Posted in Higher Education

university building5The Internal Revenue Service (“IRS”) recently notified a major university that it is being audited, and as part of that audit requested copies of the employment agreements of the president of the university, the provost of the university, and the head coaches of the University’s football team, men’s basketball team, and women’s basketball team. This audit is a reminder to higher education institutions of the importance of making sure that all of their employment agreements and appointment letters fully comply with all of the tax and benefit requirements that apply to such agreements and letters. A failure to comply with these requirements could result in serious adverse tax and benefit consequences for the higher education institution, and for the employees covered by such agreements and letters.

What Are Some of the More Important Tax and Benefit Issues That Should Be Reviewed in the Employment Agreements and Appointment Letters of Higher Education Institutions?

Among the more important tax and benefit issues that should be reviewed in the employment agreements and appointment letters of higher education institutions are the following:

  • Compliance With the Deferred Compensation Requirements – The deferred compensation requirements in Sections 409A and 457(f) of the Internal Revenue Code (“Deferred Compensation Requirements”) have a very broad scope, and affect numerous provisions in employment agreements and appointment letters that often are not considered to be deferred compensation. If an employment agreement or an appointment letter provides for any taxable payment to be made or any taxable benefit to be provided in a future calendar year, that taxable payment or benefit generally should be structured to be exempt from the Deferred Compensation Requirements when reasonably possible (if that is not reasonably possible, it should then be structured to comply with the Deferred Compensation Requirements). A failure to satisfy the Deferred Compensation Requirements could result in serious adverse tax consequences, including (1) possible taxation in the year an employment agreement or appointment letter is signed, including income that is scheduled to be paid or provided in a later calendar year, (2) a possible 20 percent tax on the applicable employee, (3) interest penalties in certain circumstances, and (4) corrected IRS Forms W-2 and Forms 990 in certain circumstances.
  • Benefit Issues – If an employment agreement or an appointment letter provides any benefit that is in addition to, or exceeds, the benefits that generally are available to other eligible employees on campus, it is important to verify if (1) such benefit is allowed by the terms of the applicable benefit plan, and (2) whether offering such benefit will violate any nondiscrimination requirements under the Internal Revenue Code (“Code”). A violation of a plan’s terms or a Code nondiscrimination requirement could, in certain circumstances, result in coverage issues for the applicable employee, serious adverse tax consequences for the employee, and/or loss of a plan’s tax-favored status.
  • Compliance With the “Reasonable Compensation” Requirements – The Code has excess benefit transaction provisions that require that no more than “reasonable compensation” be paid to certain persons who are in a position to exercise substantial influence over a covered tax-exempt organization. A failure to satisfy these requirements could result in excise taxes on the persons receiving “unreasonable” compensation, and on any officer, trustee or director who knowingly and willfully approved the “unreasonable” compensation. In egregious circumstances, the tax-exempt status of an organization could be revoked. Some states also have separate “reasonable compensation” requirements.

What Are Examples of Provisions In Employment Agreements and Appointment Letters That Are Subject To the Deferred Compensation Requirements? Continue Reading

U.S. SUPREME COURT DENIES CERTIORARI IN O’BANNON

Posted in Antitrust, College Athletics, NCAA, Student-Athletes

The Supreme Court of the United States has denied both the NCAA’s and plaintiffs’ petitions for certiorari in the O’Bannon case.  The parties had petitioned for review of the United States Court of Appeals for the Ninth Circuit’s decision issued in September 2015.

In that decision, the Ninth Circuit sided with the NCAA by vacating that portion of the District Court’s decision that would have required the NCAA to allow member institutions to pay limited deferred compensation to student-athletes for the use of their names, images and likenesses. At the same time, the Ninth Circuit also partly favored plaintiffs by upholding that part of the District Court’s ruling that enjoined the NCAA from enforcing its rules precluding member institutions from providing athletic scholarships up to the full cost of attendance.

The Supreme Court’s denial, which signifies only that it declined to review the case and not that it agreed with the Ninth Circuit’s decision, means that the Ninth Circuit’s decision will stand unchanged.

Department of Education Issues Guidance on Campus Policing

Posted in Campus Safety, Higher Education

university pillarCiting the ongoing nationwide dialogue on law enforcement-community relations, racial justice and officer and public safety, on September 8 the U.S. Department of Education (in coordination with the Justice Department) released a Dear Colleague  Letter providing guidance to colleges and universities with respect to its expectations for campus policing.   In the main, the guidance encourages institutions to adopt and implement “applicable” recommendations from the Final Report of the President’s Task Force on 21st Century Policing .   As noted by the Department, the Task Force Report covers topics including  “changing the culture of policing, embracing community policing concepts, ensuring fair and impartial policing, focusing on officer wellness and safety, implementing new technologies, and building community capital.”

The Department encourages institutions to use the Task Force Report as a “template for self-assessment and organizational change,” with adjustments appropriate to context (for example, suggesting that in the campus environment, community engagement efforts should include diverse members of an institution’s campus community such as students, faculty, staff, and administrators, as well as community advocacy groups with relevant expertise).

The Department’s guidance also reiterates institutions’ security-oriented obligations under the Clery Act and applicable federal civil rights statutes.

NLRB Rules that Graduate (and Undergraduate!) Students are Employees and May Unionize

Posted in Employment

The National Labor Relations Board (Board), in Columbia University , has issued a 3-1 decision holding that graduate, and undergraduate, student assistants are common law employees within the meaning of the National Labor Relations Act and therefore are eligible to organize and bargain collectively under federal labor law.  In so doing, the Board overruled its 2004 determination in Brown University.    Board Member Miscimarra wrote a lengthy dissent, arguing that the educational nature of the relationship between student and educational institution should dictate that student assistants are not employees and therefore they should not be eligible to organize and bargain collectively.

After much speculation, and following an invitation for briefing in December 2015, the NLRB rejected the Brown holding that graduate assistants cannot be statutory employees because they are “primarily students and have a primarily educational, not economic, relationship with their university.”  The Board first noted that it has the statutory authority to treat student assistants as statutory employees.  The Board applied a common law test and indicated that when student assistants perform “work,” at the direction of a college or university, for which they are compensated, a common law employment relationship will be deemed to exist and the students will be eligible to organize and bargain collectively.

The Board indicated that the new test will apply to all student assistants, including graduate assistants engaged in research funded by external grants (and subject to the conditions of those grants). The Board also determined that the petitioned for bargaining unit at Columbia — which included graduate students, terminal Master’s degree students, and undergraduate students — constituted an appropriate unit and that none of the petitioned for classifications consisted of temporary employees who should be excluded from the unit.  Finally, the Board remanded the case to the Regional Director for consideration of whether student assistants not currently performing their assistant duties should be eligible to vote based upon a continuing expectation of future common law employment.

The Board’s decision was long the subject of speculation and has been anticipated by many commentators. In the wake of the decision, colleges and universities should anticipate increased organizing activity on their campuses and will have the obligation to bargain with units comprised of student assistants if they are recognized after an NLRB election.  Given the breadth of the Board’s decision, and the potential units that could be petitioned for by unions, this decision has the potential to represent a significant challenge if broad units of student assistants are voted in and certified under NLRB procedures.

United States District Court Enjoins Enforcement of Dear Colleague Letter on Transgender Students; Decision May Impact OCR Guidance on Sexual Violence

Posted in Sexual Assault, Sexual Violence, Title IX

On August 21, 2016, in a case entitled State of Texas et al. v. United States of America et al ., Judge Reed O’Connor of the United States District Court for the Northern District of Texas issued a nationwide preliminary injunction prohibiting the United States government (specifically, the Office for Civil Rights of the Department of Education (“OCR”), the Department of Justice (“DOJ”), the Department of Labor and the Equal Employment Opportunity Commission) from enforcing the terms of the May 13, 2016 Dear Colleague Letter issued by OCR and DOJ. As institutions are aware , the Dear Colleague Letter articulated OCR’s and DOJ’s interpretation of Title IX and its implementing regulations as requiring K-12 schools, colleges and universities to treat a student’s gender identity as the student’s “sex” for purposes of Title IX’s prohibition against discrimination based on sex, and described several areas where schools and institutions must provide transgender students with equal access to education programs and activities “even in circumstances in which other students, parents and community members raise objections or concerns.”

In reaching its decision, the Court found that there was a likelihood that the plaintiffs (13 states and two school districts) would prevail on their claim that the Departments’ interpretation of Title IX is contrary to the plain language of the statute and its implementing regulations, and is therefore incorrect as a matter of law. Specifically, the Court determined that the term “sex,” as understood at the time that the statute and regulations were initially adopted, was understood to refer to an individual’s biological sex, rather than the individual’s gender identity.

Perhaps more significantly, in an aspect of the decision that could impact OCR’s enforcement strategy in other areas, the Court also determined that OCR and DOJ were required to comply with the federal Administrative Procedure Act (the “APA”) prior to issuing the Dear Colleague Letter, and that their failure to do so rendered the Dear Colleague Letter invalid. By way of background, the APA requires federal agencies to publish proposed rules in the Federal Register, and to provide the public a period of time to comment on them (this is commonly referred to as the “notice and comment” process). The purpose of this requirement is to enable an agency to consider the perspectives of persons or entities that would be impacted by proposed rules before they are finalized.  However, not every action an agency takes is required to go through the notice and comment process, and the APA specifically excludes from its ambit agency pronouncements that amount merely to interpretations of existing rules (rather than the imposition of new substantive requirements).

In concluding that OCR and DOJ were required (and failed) to comply with the APA prior to issuing the Dear Colleague Letter, the Court noted that OCR and DOJ have applied the guidance contained in the Dear Colleague Letter as if it were binding law in a manner different than the underlying regulation had previously been applied, and that the guidance is “compulsory in nature” in that schools must comply with the guidance or be deemed in breach of their Title IX obligations.

This decision is obviously significant insofar as it impacts the enforceability of the May 13, 2016 Dear Colleague Letter. However, colleges and universities that have voluntarily implemented measures consistent with the Dear Colleague Letter may certainly continue to do so, unless they are located in states that have adopted legislation prohibiting such action.   Where the decision (or, at a minimum, the reasoning underlying the decision) may have a greater impact is in its potential effect on OCR’s subregulatory guidance with respect to institutions’ obligations to prevent and address sexual violence (e.g., OCR’s April 3, 2011 Dear Colleague Letter  and its April 29, 2014 Questions and Answers on Title IX and Sexual Violence). Although the arguments for and against the validity of OCR’s substantive interpretation of Title IX are different as between these two subject areas, there are certainly parallels between OCR’s use of purported subregulatory guidance on both issues.  Indeed, the District Court noted the impact of the May 13, 2016 Dear Colleague Letter on institutions, as evidenced by the government’s efforts to enforce its requirements, as a significant factor in characterizing it as legislative (and thus subject to the APA) rather than interpretive in nature, and OCR’s enforcement of its guidance on sexual violence is undeniable, with over 250 active investigations at more than 200 institutions currently pending.

It is certainly possible, and perhaps even likely, that the federal government will appeal the Court’s decision in State of Texas, and in any event OCR can be expected to assert that the Court’s rationale does not apply to its guidance on sexual violence.  However, the Court’s decision will certainly be used in support of pending litigation challenging the validity of OCR’s guidance on sexual violence, and in connection with congressional efforts to overturn that guidance.  Needless to say, the situation merits further watching.

IRS Issues New Management Agreement Safe Harbor Provisions, Providing Enhanced Flexibility for College and University Food Service, Facilities Management and Similar Relationships

Posted in Higher Education

New management agreement guidelines were issued by the IRS today in a new Revenue Procedure (Rev. Proc.) 2016-44.  Rev_Proc_2016-44 provides revised safe harbors under which a private management contract does not result in impermissible private business use of projects financed with tax-exempt bonds.  The former limits on fixed and variable compensation in management contracts involving tax-exempt bond financed facilities have been eliminated.

Rev. Proc. 2016-44 will be published in Internal Revenue Bulletin Number 2016-36, dated September 6, 2016.

These revised safe harbors give colleges and universities the ability to enter into management contracts with private entities to manage or operate tax-exempt bond financed projects with more flexibility for incentives in reasonable compensation arrangements and longer terms of up to 30 years (subject to an economic life limit). The revised safe harbors also remove the previous requirements for prescribed percentages of fixed compensation for management contracts for different time periods.

The revised safe harbors continue a longstanding existing prohibition against sharing of net profits, and add certain new principles-based constraints (governmental control, governmental risk of loss, and no inconsistent tax positions by private service providers).

The revised safe harbors are effective for any management contract that is entered into on or after August 22, 2016.