Beyond the NLRB: Navigating Multiple Regulatory Hurdles in Athlete Employment

As collegiate athletics programs prepare to implement revenue sharing models that compensate athletes, they face a complex web of potential employment law risks and regulations. Some early draft legislation on Capitol Hill could specify athletes won’t be considered employees. Until such legislation is passed, however, institutions should prepare to navigate current regulations.

It’s not just the National Labor Relations Board (NLRB) weighing in. The Department of Labor (DOL) and Internal Revenue Service (IRS) also present compliance pitfalls depending on how the compensation programs are structured.

The risk of noncompliance extends beyond the federal sphere. Some states also have strict laws around employee/contractor classification—for example, state unemployment insurance, workers’ compensation and other applicable state laws. Additionally, you still have equity to consider for employees. Discrimination claims could arise under Title VII, Title IX, and the Equal Pay Act.

The Main Issue

The core matter is whether providing compensation and revenue sharing crosses the line into establishing an employee-employer relationship between universities and athletes. Each federal agency has its own multi-factor tests for making this determination, with a common thread being the degree of control exerted over the individual.

The DOL’s Test

The Fair Labor Standards Act (FLSA) establishes the federal requirements for employee minimum wage and overtime pay. The DOL has issued regulations regarding employment status and related protections of the FLSA. Under the FLSA, athletes could potentially be deemed employees entitled to these pay levels based on the “economic realities” of their responsibilities and compensation.

The DOL uses a six-factor test looking at the overall economic dependence of the worker on the potential employer. The analysis looks at two things:

• The totality of the circumstances to assess the economic realities of the working relationship
• Whether the worker is truly in business for themselves (independent contractor) or is economically dependent on the potential employer (employee)

How the IRS Weighs In

In addition to the FLSA requirements, the IRS has specific rules for determining if someone is an employee or an independent contractor. These classifications dictate whether income tax, Social Security tax and Medicare tax must be withheld for them.

The IRS weighs all relevant factors in each situation to determine the overall degree of control and independence in the working relationship. Misclassifying employees as independent contractors can result in liability for employment taxes, interest and penalties.

NLRB in the Spotlight

The potential employment ramifications came into sharper focus with the NLRB’s recent ruling that certain Dartmouth College basketball players are employees under the National Labor Relations Act. This could open the door for those athletes to unionize and collectively bargain.

In the Dartmouth case, the NLRB regional director found the players met the broad definition of employee based on their compensation and the degree of control exerted over their responsibilities by coaches. The director also noted that even though Dartmouth basketball players didn’t receive scholarships, they received other forms of compensation. The ruling cited the time demands of 40-50 hours per week and significant interim rules the players had to follow.

While the ruling only directly applies to the Dartmouth athletes, it establishes a precedent that could extend to other private college athletes deemed to have a similar employment relationship with their institutions.

Similar complaints have been filed with the NLRB against University of Southern California/Pac-12 Conference/NCAA and the University of Notre Dame. These cases highlight the ongoing debate over employment status of college athletes.

FLSA in the Spotlight

Most recently, the U.S. Court of Appeals for the Third Circuit rejected the NCAA’s appeal of the Johnson vs. NCAA case regarding athlete employment under the FLSA. The judge held that college athletes may be employees under the FLSA if they meet certain conditions. This case has been directed back to the district court to perform the economic realities analysis to determine which athletes could be considered employees and which ones would not.

This ruling does not make athletes employees—at least, not yet.  The process to perform this analysis could take years, requiring substantial evidence to support the test. Gathering evidence could be a challenge given the federal privacy protections under the Family Education Rights and Privacy Act (FERPA).

Potential Solutions

Institutions could simply choose to treat all athletes as employees and provide corresponding benefits and protections. However, this comes with significant cost increases that could force cutting other sports.

The alternative is to carefully structure revenue sharing programs in a way that preserves the student-athlete model and avoids falling under the employee classification. This could mean:

• Avoiding exerting excessive control, supervision or training over athletes beyond what is required for participation. This includes allowing athletes more autonomy in their schedules and activities.
• Allowing athletes flexibility to pursue outside business opportunities like self-generated NIL deals, camps, etc. This can help demonstrate that athletes have entrepreneurial opportunities and are not solely dependent on the institution.
• Clearly delineating when athletes are representing the university’s interests versus their own personal brands and business activities. This can help manage the perception of control and independence.
• Utilizing the NCAA transfer portal. This provides athletes with increased flexibility and mobility, which could support arguments for independent contractor status. The ability for athletes to freely transfer schools and seek better opportunities for playing time, NIL deals or other personal reasons can demonstrate a lack of permanence in the work relationship.

It might not have to be all or nothing. Institutions may take a nuanced approach, treating revenue/marquee sports differently than Olympic sports when it comes to employment considerations. You could see institutions loosening control over certain sports to avoid employee designation. Dropping certain sports down to the point of almost being club level could be an option before eliminating a sport entirely.

But are these potential solutions really solving the problem? First, institutions must define what they want to be so they can identify the problem and find the solutions to solve it. Strategic planning, budgeting processes, engaging stakeholders and navigating complex regulations are all critical steps in this journey.

As the era of college athlete compensation takes shape, the employment law and other regulatory ramifications could be just as transformative as the financial impacts. Institutions need to proactively develop policies and processes that mitigate regulatory risks. If they don’t, they could face potentially crippling consequences.

Until any new legislation is passed, athletic departments must navigate the current complex regulatory landscape to ensure compliance and avoid significant legal and financial repercussions. The collegiate athletics CPAs and consultants at James Moore can help.

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