No Lag: Ensuring Compliance with Labor and Employment Law in the Esports Industry

The esports industry is a breed apart. The novelty, dynamism, and creativity that have spurred its remarkable growth in recent years differentiate it from most other industries, but the legal landscape that this industry must navigate is, for the most part, the same landscape that other industries have encountered before. Therefore, the esports world must contend with myriad issues in the labor and employment world.

First, as we highlighted in 2019, one of the key labor and employment issues facing the esports industry is the classification of players as either employees or independent contractors. This issue is of particular concern for companies operating competitive esports teams and using the services of content creators. The employee/independent contractor classification (or misclassification) of players and content creators may have serious repercussions.

What makes a worker an employee, as opposed to an independent contractor, is a complicated question, and the answer to that question will vary from state to state. Some states, such as Texas, focus on several factors. Under this approach, factors like the employer’s right to control the work and the manner of payment are considered and weighed against each other, with an emphasis generally on the “right to control.” Other states, such as California, apply a stringent test called the “ABC” test. This test focuses on (1) whether the individual is free from the hiring entity’s control and direction (both as a factual and contractual matter), (2) whether the individual performs work outside the usual course of the hiring entity’s business, and (3) whether the individual is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Given the fact that the employee/independent contractor question can be answered differently depending on the state, esports companies must be careful in determining the applicable state law. This analysis can be complicated, especially given that players and content creators may be located in different jurisdictions. But getting the answer right is crucial. Misclassification of an individual as an independent contractor may have serious consequences, leading to potential tax liabilities, wage-and-hour lawsuits, and civil penalties (in states like California). As a best practice, companies should engage legal counsel, as this analysis can be complex and requires careful evaluation of the individual circumstances (and applicable state law(s)) of each player or content creator.

Second, esports companies must be mindful of issues arising from the use of non-competes or other restrictive covenant clauses. As with employee/independent contractor classification, states differ in their treatment of these contractual provisions. What may be enforceable in one state may not be so in another. Again, the interstate (or international) workforce for esports companies complicates the question of the applicable state law. To adequately protect their business interests, companies should seek legal counsel to ensure that restrictive covenant provisions are compliant and enforceable.

Third, many esports leagues have employed a franchise model for their operations. This choice may have important joint employer implications. A joint employer relationship may arise in a situation where two or more entities have certain control over a specific employee and/or benefit from the employee’s services. The implication of being deemed an employer of a certain employee is that an entity (although not directly controlling the work of an employee) may be liable for unlawful practices or behavior of the direct employer. Effective September 28, 2021, the Department of Labor withdrew certain joint employer regulations, marking a return to common law rules, which vary by jurisdiction. As we noted earlier this year, some jurisdictions (like Massachusetts) have refused to adopt the stringent “ABC” test in a joint employer analysis and instead adopted the FLSA standard, which focuses on the “totality of the circumstances.” As leagues and certain videogame developers continue to navigate these uncharted waters, it is important to consider if an entity (1) has the power to hire and fire employees, (2) supervises and controls employee work schedules or employment conditions, (3) determines the rate and method of payment, and (4) maintains employment records.

The esports industry shows no signs of slowing its meteoric rise. What began as an amateur pursuit has exploded into an array of increasingly sophisticated, international competitions. But as seen in the Tfue / FaZe Clan lawsuit, continued growth requires that esports companies successfully navigate a complex legal landscape. Game developers, leagues, and teams should engage legal counsel to avoid lag in the form of litigation and/or agency audits.