The esports industry recently experienced its first significant (and high-profile) legal dispute when Turner Tenney, known in the gaming community as “Tfue,” sued his gaming organization, FaZe Clan.
The lawsuit alleges that the player contract he signed with FaZe Clan in April 2018 is “grossly oppressive, onerous, and one-sided.” A few days after the lawsuit was filed in California Superior Court, the confidential contract was purportedly leaked on celebrity news site The Blast. If the leaked contract is, in fact, the actual player contract between Tfue and FaZe Clan, there are some questionable provisions in the contract, both in their enforceability and their effect.
This article will focus on employment law considerations, discussing the all-too-common classification of the player as an “independent contractor” and “non-compete” provisions.
Independent contractor or employee?
Thus far, the trend in the esports industry has been to include provisions in player contracts that expressly provide that players are “independent contractors” rather than employees of the organizations for which they play.
The reason for the inclusion of such a provision is simple: Independent contractors are cheaper than employees and are entitled to fewer legal protections. This is because many state and federal laws apply to employees but not to independent contractors. For example, state laws that protect employees include unemployment and worker’s compensation laws. Federal laws include employment discrimination laws (such as the Age Discrimination in Employment Act), wage and hour laws (such as the Fair Labor Standards Act) and tax laws (such as employment taxes and withholding of Social Security and Medicare taxes).
However, simply saying in the contract that the player is an independent contractor does not confer independent contractor status on the player. In fact, the contractual stipulation that the player is an independent contract is hardly a factor in the determination. Instead, courts look to the true nature of the relationship between the employer and worker, focusing on the amount of control exerted by the employer over the worker.
Under Texas law, for example, an independent contractor is one who, in pursuit of an independent business, undertakes specific work for another using his or her own means and methods without submitting to the control of the other person as to the details of the work. In other words, the focus is on who had the right to control the details of the work.
Courts look to several factors to determine if someone is an independent contractor, including:
- the independent nature of the person’s business;
- the person’s obligation to furnish necessary tools, supplies and material to perform the job;
- the right to control the progress of the work, except as to final results;
- the time for which the person is employed; and
- the method of payment, whether by time or by the job.
Most jurisdictions use similar analyses. The analysis is done on a case-by-case basis.
In the case of the Tfue contract, there are additional terms in the contract itself that would indicate the true relationship between FaZe Clan and Tfue was that of an employer and employee. Chief among these is a provision that explicitly provides that the player is subject to the instructions and direction of the company.
Practically speaking, the general relationship between a team and its player also favors employer-employee status, rather than independent contract status. For example, a key factor is the coach-player relationship. Coaches exert significant control over players, instructing them how to play, leading practices and so forth. It is no wonder then that in traditional team sports (such as MLB, NBA, NFL and NHL) players are considered employees.
By attempting to classify players as independent contractors, organizations are opening themselves up to significant potential liability. First, the most obvious risk is potential liability to the IRS for failing to withhold income taxes and pay Social Security and Medicare taxes for the incorrectly classified independent contractor. Again, businesses normally do not have to withhold or pay any taxes on payments to independent contractors, but they are required to for employees.
Second, a less obvious but equally significant risk to organizations that improperly classify players as independent contractors is that they open themselves up to potential class-action lawsuits by the players for minimum wages and overtime pay that was not provided to the players because the organizations classified the players as independent contractors. It is common knowledge that players, at least on the larger teams, often work more than 40 hours in a given workweek. Even players who are on salary are entitled to receive compensation totaling at least the federal minimum wage unless they meet one of the statutory exemptions to minimum wage requirements under the Fair Labor Standards Act. It is not unheard of and, indeed, is quite common for players to work at least 60 hours a week, including practices, streaming, competitions and public appearances. Based on a given salary, this could equate to violations of minimum wage and overtime laws. The other problem is that none of the enumerated exemptions under 29 U.S.C. §213 would seem to apply to esports players.
The baseball player exemption
However, one intriguing exemption is contained in 29 U.S.C. §213(a)(19), which was recently added in 2018 and which applies to minor league baseball players. Specifically, that statute exempts
any employee employed to play baseball who is compensated pursuant to a contract that provides for a weekly salary for services performed during the league’s championship season (but not spring training or the off season) at a rate that is not less than a weekly salary equal to the minimum wage under section 206(a) of this title for a workweek of 40 hours, irrespective of the number of hours the employee devotes to baseball related activities.
Obviously, being narrowly construed, this exemption would not apply to esports organizations as it specifically applies to “employees employed to play baseball.” However, this new exemption could at least serve an illustrative purpose down the road for future arguments when the issue of whether esports players are employees and entitled to minimum wage protections is inevitably dealt with, either through litigation or by the legislature.
Major League Baseball has, for most of its existence and the existence of the minor leagues, deemed minor league players “seasonal workers” exempt from minimum wage requirements. It has long maintained the position that minor league baseball is intended to be a “short-term seasonal apprenticeship” for the major leagues.
With recent pushes for player development systems to, well, develop, this exemption may have more relevance in the esports industry in the very near future. Indeed, the new Overwatch League Academy system, which began in 2018, certainly draws comparisons to baseball’s farm system. League of Legends also has a similar Academy system in the NA LCS Academy League. With more games going to the geographical franchise model, Call of Duty most recently being announced, it is no stretch that this format will continue to catch on for other titles.
The argument would be that a similar exemption should be created to apply to players on the Academy teams, all assuming, of course, that the Academy players’ contracts provide for a weekly salary at a rate less than a weekly salary equal to the minimum wage for a workweek of 40 hours (for example, $290 per week).
Additionally, as employees, the players would be entitled to overtime pay. Again, depending on the actual amount being paid to the player and the hours worked by the player in a given week, the player could be missing out on significant compensation simply because his organization has classified him as an independent contractor.
It should be noted, however, that these issues are not likely to be addressed until a lawsuit is filed challenging the independent contractor status or a complaint is made by a player to the IRS. As it is currently drafted now, the Tfue lawsuit does not challenge the independent contractor classification in the contract.
Non-compete provisions
A related employment law issue involves contractual non-compete provisions. Indeed, this is perhaps the primary focus of the Tfue lawsuit. In his complaint, Tfue specifically argues that Section 5 of the contract’s terms and conditions, entitled Exclusivity and Matching Right, constitutes an unlawful restraint on Tfue’s ability “to compete in the marketplace and lawfully pursue his trade and profession” and that Section 5 is void under Section 16600 of the California Business and Professions Code.
California, and, indeed, most states, treat non-compete agreements as contracts in restraint of trade, which are only enforceable if they meet certain statutory or common law requirements for “reasonableness.” For example, Texas courts will enforce a Texas non-compete agreement as long as it comports with the non-compete statute, Section 15.50 of the Texas Business and Commerce Code. Section 15.50 provides that if the non-compete agreement is ancillary to another enforceable agreement (such as an enforceable confidentiality agreement), the restrained employee is given consideration (for example, access to trade secrets), and the restraint is reasonably limited in scope, duration and geography, then the non-compete agreement is enforceable.
As quoted in the Tfue complaint, Section 5.a. of the Tfue contract provides:
Throughout the Term (the “Exclusivity Period”), unless Gamer has obtained Company’s prior written consent, Gamer shall not: (i) provide services or otherwise work for or be employed by a gaming company or other gaming brands or any companies that already have an agreement with Company; (ii) appear in, sponsor or be sponsored by, or otherwise promote or endorse, directly or indirectly, any brands, products or services other than the brands, products and services approved in writing by Company; (iii) promote, sponsor, endorse (using Gamer’s Name and Likeness or otherwise) or render services for or on behalf of any companies with products or services competitive with a product or service of Company or a sponsor or advertiser of Company. The parties acknowledge and agree that with respect to Company’s prior approval over any sponsorship and/or endorsement opportunity, that Company shall be entitled to negotiate the terms and conditions of any such opportunities presented to Gamer with the goal of increasing the value of such opportunities to Gamer and Company, and that throughout the Exclusivity Period Company will also work to source sponsorship and/or endorsement opportunities on behalf of Gamer.
As stated above, it is unlikely a player would be considered an independent contractor under Texas law, or any other jurisdiction for that matter, and would instead be considered an employee. Under Texas law, and the laws of most if not all other jurisdictions, employees owe various duties to their employers, including a general duty of loyalty. This duty requires employees to act primarily for the benefit of their employer in all matters connected with their employment and prohibits employees from actively competing with their employers during their terms of employment. Section 5.a. of the Tfue contract reads as a memorialization of this duty of loyalty. Indeed, nothing in Section 5.a. purports to attempt to restrict Tfue’s ability to compete in the marketplace after his employment with FaZe Clan terminates.
A hidden provision
However, there is one provision that is hidden in the Tfue contract that does attempt to restrain a player’s ability to compete in the marketplace after employment. Indeed, this type of provision can be seen in other player contracts. Generally, this provision provides that if the contract is terminated due to a material breach of the contract by the player, the player will be prohibited from playing video games publically or professionally for a given period of time (typically several months) from the effective date of the termination of the contract. This type of provision would be subject to interpretation under states’ covenant not to compete rules.
These are just a few of the issues in the employment law context that need to be addressed in the esports industry. Unfortunately, there are really only two ways for these issues to be addressed: through litigation or by proactive contract drafting. While the Tfue lawsuit may be a wake-up call for some organizations to at least revisit their player contracts, at least as relates to the independent contractor classification of players, based on the trend so far in the industry, it is likely that organizations will continue to classify their players as independent contractors until a court rules to the contrary. Luckily, some larger organizations have already started to classify their players as employees, and hopefully this will become standard practice throughout the industry.
About the author
Johnathan Jordan is a litigation attorney with Kane Russell Coleman Logan in Dallas. Johnathan is also a member of the Esports Bar Association and is leading the firm into the rapidly growing Esports industry.