A few weeks ago Dylan Walker of Yahoo eSports spoke a bit about the distinction between independent contractors and employees in eSports. As the world of eSports has slowly become more legitimate and professional, teams and companies have started to contract with their workers. Some teams have unwittingly been classifying their workers as independent contractors, and not employees, without considering or simply ignoring the significant legal consequences and penalties they might face.
For tax purposes it is undoubtedly more favorable for teams to classify their players as independent contractors. Employers must withhold federal and state income taxes and match payments to the government for Social Security, Medicare and unemployment taxes on wages paid to an employee. Assuming a professional player makes $70,000 per year; the employer will have to pay approximately $5,300 to the government in addition to withholding the same amount plus the applicable income and state taxes.
Some teams in eSports have simply ignored this legal requirement because of the high cost of compliance. In other words, teams have made a calculated risk assessment that they would rather risk misclassifying their players than establish an employment relationship. Unfortunately for them, if and when they are audited by the government or sued by their workers they will be in serious trouble. The government will impose back taxes and penalties on them and players may recover wages they are owed in the form of overtime depending on the nature of their relationship. Some teams will not have the finances to overcome the harsh taxes and will be forced to fold their businesses.
The damage this would do to the eSports ecosystem cannot be understated. The industry would come under heavy scrutiny if a high profile team’s noncompliance were ever revealed. As eSports continues to grow, professionalism must grow with it. This is no longer an industry run by a niche group of 20 year old gamers. It is now a billion dollar industry with some of the biggest investors in the world. Start-ups and well established teams should do everything in their power, even if they have been misclassifying, to ensure compliance going forward. The US government will look favorably on those organizations that take corrective actions.
IS THE WORKER AN INDEPENDENT CONTRACTOR OR EMPLOYEE?
To determine whether a player is an independent contractor or an employee courts have historically looked at the degree of control the employer exercises over his worker. However, recently the U.S. Department of Labor Wage and Hour Division issued an opinion rejecting the heavy emphasis on control and decided to use what has come to be known as the multi-factorial Economic Realities Test when determining classification under the Fair Labor Standards Act. The Economic Realities test focuses more on whether the worker is economically dependent on the employer. “A worker who is economically dependent on an employer is [employed].” The factors of the Economic Realities test typically include:
- The extent to which the work performed is an integral part of the employer’s business
- The worker’s opportunity for profit or loss depending on his or her managerial skill
- The extent of the relative investments of the employer and the worker
- Whether the work performed requires special skills and initiative
- The permanency of the relationship
- The degree of control exercised or retained by the employer.
The IRS, which is responsible for the collection of taxes, continues to use the Common Law test which places a higher degree of focus on the level of control the company exerts on the worker.
WORKER STATUS IN ESPORTS
Regardless of which test is used to make the assessment, it is clear that under both tests eSports workers are employees.
Players are an integral part of the employer’s business as eSports teams would cease to exist without players and players would cease to be players without a team. In that sense, there is a high level of economic reliance between both parties. Further, player contracts almost always last the entire length of a season or tournament circuit making the relationship less temporary. In some instances, players have even signed multi-year deals. Finally, players often have their entire livelihoods controlled by an organization. They practice or watch video on other teams for an average of nine hours a day. They may be asked to stream their gameplay on a specific streaming platform the organization is partnered with for x amount of hours per week. Beyond that, in order to maintain a competitive edge, players living in a gaming house have scheduled lunch breaks, dinner breaks, curfews and dress codes among other things.
Of course not all professional players live this type of life. Players who are just entering the professional scene may practice less and play remotely. Nevertheless, all classifications of this nature should be answered only after seeking legal advice; categorizing a player as an independent contractor and failing to pay the required taxes or provide the proper forms could have disastrous consequences for the organization.
CONSEQUENCES FOR NONCOMPLIANCE
As an example, over the past several months Uber, the taxi service, has been in the news for their misclassifications. Professionals have speculated that Uber may owe billions of dollars to the government. Failure to make the correct classification will subject the organization to back taxes of approximately 41.5% of the employee’s wages for the previous three years of his engagement. Thinking back to the professional player who was paid $70,000 a year for three years, if he was classified as an independent contractor as opposed to an employee, the organization would owe up to $87,150 in back taxes for that one player alone. For a team of five players the organization could owe up to $435,750 in back taxes. Organizations might also be forced to pay penalties, fines and interest on the taxes.
THE NEXT STEPS
Even though organizations have been misclassifying their players for years the government may find it difficult to recover money from them. Most organizations likely do not have enough cash to pay off the balance of what they owe. The government may choose to work out a deal with the organization in the form of a payment plan or they may choose to go after the leagues and tournaments that the teams participate in. The doctrine of joint-employment may subject these league and tournament organizers to the liabilities of the organizations which participate in their events.