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

03 August 2022 Texas Lawyer Publication
Author(s): Brooke C. Bahlinger Davis G. Mosmeyer III

Reprinted with permission from the August 3, 2022, issue of Texas Lawyer © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.

The misclassification of a worker as an independent contractor can have serious repercussions.

The esports industry is a breed apart. The novelty, dynamism and creativity that has spurred its remarkable growth in recent years differentiates it from most other industries. In 2021, the global esports market was valued at just over $1.08 billion (U.S. dollars), an almost 50% increase from the previous year.

From a legal perspective, however, esports faces many of the same legal concerns as other industries. In particular, the esports world must contend with the same labor and employment issues that more established industries have been navigating for years.

Player classifications and employee guidelines from state to state

One of the issues facing the esports industry is the classification of professional players as employees versus independent contractors. This issue is of particular concern for companies operating competitive esports teams and/or using the services of content creators. In particular, the misclassification of a worker as an independent contractor can have serious repercussions.

What makes a worker an employee as opposed to an independent contractor is a complicated question, and the analysis will vary from state to state. Some states, such as Texas, rely on a multi-factor test to answer this question. Under Texas Workforce Commission guidelines, factors such as 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” the work.

Other states, such as California, employ a more mechanical analysis called the “ABC” test. As described by the California Labor & Workforce Development Agency, a worker is considered an employee and not an independent contractor, unless all three of the following conditions are satisfied:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The remarkably divergent approaches to employee/independent contractor classification seen in Texas and California illustrate the many different ways states approach this issue. This fact makes it all the more important for employers to carefully analyze and determine the applicable state law.

The analysis, however, can be complicated—especially considering that this technology-driven industry often results in participants (employers, employees and contractors) being located in different jurisdictions. But getting the answer right is crucial.

Misclassification of a worker 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 laws of each player or content creator.

Issues may arise from the use of non-competes or other restrictive covenant clauses

As with employee/independent contractor classification, states differ dramatically in their treatment of these contractual provisions. For example, several states legislatures and courts (e.g., New JerseyColoradoIllinois) recently made significant changes to the enforceability of non-competition provisions; the interstate and international workforce for esports companies complicates this issue even further. Companies should seek legal counsel to ensure that restrictive covenant provisions are compliant and enforceable.

Many esports leagues have employed a franchise model for their operations

Operating a franchise model can have important “joint employer” implications, where two or more entities have certain control over a specific employee and/or benefit from the employee’s services. A “joint employer” (although not directly controlling the work of an employee) may be liable for unlawful practices or behavior of the direct employer.

While the “joint employer” analysis was previously conducted using nationally applicable Department of Labor guidelines, these guidelines were rescinded last fall and marked a return to state-specific common-law rules. As noted earlier this year, some jurisdictions (like Massachusetts) declined to use the stringent “ABC” test in a joint employer analysis and instead adopted the Fair Labor Standards Act standard, which focuses on the “totality of the circumstances.” As industry participants navigate this return to state-specific “joint employer” regulations, it remains important to consider if an entity: (i) has the power to hire and fire employees, (ii) supervises and controls employee work schedules or employment conditions, (iii) determines the rate and method of payment, or (iv) maintains employment records.

Legal counsel is essential in keeping up with the growing esports industry

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, the novelty of this industry does not immunize it from the same time-tested legal pitfalls that have snared other industries before it. Videogame developers, esports leagues and esports teams should engage legal counsel to avoid disruption in the form of litigation and/or agency audits. After all, nobody likes lag.

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