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Head Start grant recipient must repay $1.3M used for employee bonuses

By Brandi O. Brown, J.D.

A Texas program that received grant money from the federal Department of Health and Human Services to provide childcare services for low-income families, of which it used $1.3 million to award performance bonuses to employees, was unable to persuade the D.C. Circuit that the federal department’s appeals board’s ruling was arbitrary and capricious. The problem was not that the grant-recipient used the funds for bonuses, the problem was that it failed to follow its own incentive compensation policies in doing so or, at least, failed to adequately document that it had. The district court’s judgment that no prejudicial error had occurred was affirmed (Texas Neighborhood Services v. United States Department of Health and Human Services, August 8, 2017, Pillard, N.).

Used grant money for bonuses. From 2010 to 2012 Texas Neighborhood Services received Head Start grant money from the federal government to provide childcare services for low-income families. Circular A-122 of the Office of Management and Budget explains to recipients how and when they will be reimbursed for expenses, including employee salaries and performance bonuses. The circular authorizes the use of performance bonuses for incentive purposes, so long as the employee’s overall compensation, including bonuses, is reasonable, the bonuses are paid pursuant to a good faith agreement made prior to their rendering or pursuant to an established plan, and the incentive payments are “adequately documented.” Of the money it received, Texas Neighborhood Services used $1.3 million to award performance bonuses to employees.

Ordered to repay. In 2013, however, the Department of Health and Human Services, which administers the grants, required the employer to repay the bonus money because the bonuses were unreasonable and had not been adequately documented. Although Texas Neighborhood Services had a plan in place for rewarding bonuses, the departments’ review of the use of the funds indicated the employer had issued performance bonuses without ensuring that “overall compensation” was reasonable and without documenting the basis for the amounts awarded. The department’s appeals board sustained the repayment decision, noting that the employer had not established that it was reasonable for such a sizable percentage of employees’ overall compensation to be comprised of performance bonuses, nor had there been any correlation between performance and the size of an employee’s bonus. That lack of correlation, the board explained, created a performance disincentive, rather than an incentive. Texas Neighborhood Services filed suit, arguing that the board’s ruling violated the Administrative Procedure Act. The district court rejected that challenge and the employer appealed.

Acted arbitrarily. Although the appeals court agreed that the appeals board failed to “adequately grapple” with the definition of reasonable compensation found within Circular A-122, it nevertheless concluded that the error was harmless and that there was no additional arbitrariness in the decision. The court agreed that the appeals board failed to fully consider both the reasonable cost and reasonable compensation standards found in the circular. Instead, it looked primarily at the reasonableness of the bonuses payments as a percentage of the total compensation and failed to consider whether the overall compensation itself was reasonable in the relevant market. Therefore, it acted arbitrarily.

No harm, no foul. However, that arbitrary action was harmless, the court concluded. The board reasonably determined that the employer either failed to follow its own incentive policies or, at least, failed to adequately document its actions to show that it had followed those policies. Contrary to Neighborhood Services’ arguments, it was given the opportunity to rebut the argument that it had not consistently followed its own policies. It briefed the issue and, in fact, the employer failed to show that it complied with written policies. Instead, the documents showed that it disregarded its policies on several occasions, including paying all non-management employees the same size bonuses, in violation of its policy of matrixed incentive payments based on performance. In fact, it awarded bonuses to employees receiving low performance grades, which was not consistent with its policy.

Had the chance but blew it. Moreover, the employer’s argument that it provided all the documentation required because it had provided at least as much documentation as the grantee had provided in a similar, but more favorably decided board decision, was unpersuasive. The story told by that grantee’s documentation was quite different than the story told in this case. The employer’s argument that the board had accommodated the department in creating a moving documentation target also failed to sway the appeals court—it behooved the employer to meet those demands, after all, and it was given adequate opportunities to meet each new demand. The employer’s failure to do so “was not for want of opportunity.” It had multiple opportunities to submit performance evaluations, memos, declarations, or other responsive documentation, but it did not. The court, therefore, would not remand the case to give it a chance to take “a third bite at the apple” and, thus, encourage other grantees to respond in a similarly “half-hearted” manner.

Finally, the court rejected the employer’s argument that the board should have applied a piecemeal approach and considered whether bonuses, individually, were consistent with the circular. The employer failed to meet its obligation to provide documentation that payments were made pursuant to an “agreement” or “established plan” and the board reasonably concluded that the documents it provided “raised a strong inference” that it had a functioning agreement or plan in place.