Earlier this week, I published an article entitled "The Challenges of Securing Investment as an eSports Business." In the article, I discuss the challenges of eSports businesses (and non-eSports businesses) to receive funding. The article can be accessed here.
I'll be writing for that website, which is pretty new, every so often on legal topics in eSports. I will post all of my work for that site here as well to keep you all updated. Stay tuned.
At the beginning of any relationship between an eSports player and their team, a contract should be entered into that describes the services the player is to perform, compensation, and the duration of the agreement, amongst other clauses. Depending upon how this contract is drafted, a player will either be considered an employee of the team or an independent contractor. This distinction is critical in establishing the obligations that a team has to a player and the rights that the player holds. In the eSports business, the trend has been to attempt to classify players as independent contractors.
ESports teams, like many other businesses, would prefer to employ independent contractors instead of employees for several reasons, including:
How Courts Determine Independent Contractor Status
However, what eSports teams may be unaware of is that calling players independent contractors is not enough to actually be considered such. In fact, many of these contracts, if challenged in Court, would be found to create an employee/employer relationship. Due to the overwhelming benefits to a business using independent contractors, Courts have scrutinized independent contractor agreements by utilizing tests to determine whether such a relationship is sufficiently established, or if the agreement instead creates an employee/employer relationship. New York Courts utilize two tests, the first being the Economic Realities Test, which is as follows:
The second test is the Common Law Test, which is as follows:
In both of these tests, the totality of the answers of the above questions will be examined to determine how to classify the parties' working relationship. It is worth noting that these factors are not exhaustive, and the Court may undertake additional inquiry. An example of an additional factor in the eSports context would be whether the player is required to wear a uniform.
Analyzing Player Contracts: Economic Realities Test
Teams typically exert a great amount of control over their players in a variety of ways. This could include booking player travel, requiring players to use equipment provided by team sponsors, requiring players to promote team sponsors, requiring players to be active on social media/Youtube/streaming services, requiring players to live in a team house, and more. This factor is extremely important, as independent contractors are supposed to maintain a great deal of control over their work and environment.
Secondly, players are very invested in the team. Their actions and cooperation with other players are how the players (and team) can profit by winning matches and tournaments. This factor may also weigh against eSports players being found to be independent contractors by a Court. However, the third factor supports the notion that players can be independent contractors, as the work requires highly skilled individuals who may work at their own initiative (in some circumstances).
The fourth factor is completely determined by the contract itself. Generally speaking, the longer or more permanent a contract seems, the more likely it is that they are not an independent contractor.
The fifth and final factor strongly holds in favor of finding an employee/employer relationship, as the players are a crucial component of the team's business. From the totality of the factors within the Economic Realities Test, it appears likely that a professional team would be found to create an employer/employee relationship with its players.
Analyzing Player Contracts: The Common Law Test
The Common Law Test is unclear in this scenario. An argument could be made that the first factor, whether the worker works at his/her convenience, could go either way in Court. Certainly there are things the player must do at certain times (matches, tournaments, etc.) but they may not be on a strict timetable for content creation. This factor would be determinate upon each individual team's practices.
The second factor, whether the worker is free to engage in other employment, slightly holds in favor of an employee/employer relationship. Players can be free to partake in tournaments without their team should the team not participate, but players cannot play for multiple teams in the same events. By default, in those situations a player cannot work for multiple teams.
Fringe benefits is an interesting factor in this analysis, as it can arguably be in favor of or against a finding of an employee relationship, depending upon the specific team's actions. Independent contractors technically should receive no fringe benefits (meals, company car, benefits, etc.). However, if a team allows a player to keep items that were provided by third parties, namely sponsors, or allows the player to live in team subsidized housing, then the player can be said to have received fringe benefits. In those examples, this factor would lean towards the finding of an employee/employer relationship. However, any benefits are team specific.
The fourth factor, whether the player was on the team's payroll is also team dependent, as some teams pay salaries and some do not. Generally, a salaried worker is much more likely to be found to be an employee and not an independent contractor.
The last factor in this test, whether the worker was on a fixed schedule, is very similar to the first factor. As stated in analyzing the applicability of the first factor to the eSports team/player relationship, this factor can go either way.
Importantly, the Court can examine additional factors to each test. A factor that has been employed by New York Courts was whether the worker is required to wear a uniform. In the eSports context, a uniform can be said to be a team's jersey. This factor could realistically go either way in determining whether an employee/employer relationship exists. Although players are largely required to wear team jerseys at events, many, if not most, are not required to do so when creating content.
Effectively, players who are classified by a team as being independent contractors may not be held to be independent contractors by the Court, if their contract is challenged. Should the Court find that an employee/employer relationship exists, then a team loses all benefits of hiring the player at independent contractor status and is then subject to the totality of laws involving employee/employer relations. Therefore, the team would incur increased costs and liability. Although each State's law will differ as to how these contracts are analyzed, it appears that there are strong arguments to be made under New York law that eSports players are actually employees of their teams and entitled to benefits as such.
What is one thing that all eSports players, teams, and organizations have in common? Their need for sponsorships. But once a sponsor is interested in a sponsorship opportunity, which may be difficult to achieve, a sponsorship agreement must be carefully drafted that identifies the terms of the sponsorship. This can be tricky if you have never drafted and negotiated such an agreement before. Below are 10 important elements to every eSports sponsorship agreement. This list is not meant to be all inclusive, but is an introduction to the bulk of the provisions which should be included in a sponsorship agreement.
1. Identify the parties
For clarity, identify the parties right away in the contract. That includes both the Sponsor and Sponsee (the organization/team being sponsored) and their respective addresses.
2. Length of Agreement
How long is the sponsorship agreement to last for? If the sponsorship is for an event, you want to make sure that the term of the agreement lasts through the expected duration of the event, and perhaps also leaving some additional days for timely rescheduling.
3. Identify what is being sponsored
Is this an event sponsorship? A team sponsorship? Whatever the case may be, you want to specify what is being sponsored. If you’re a team, then briefly discuss the team, what you play, and maybe even some recent accomplishments to remind the Sponsor why they want to align with your brand. If you are putting on an event, then discuss the details of the event (i.e. if it’s a tournament, how it’s structured), and how it is broadcasted (if at all).
4. Sponsor Responsibilities
This is where sponsorship agreements begin to get tricky. In this portion, you want to clearly define what the Sponsor’s responsibilities are. If the Sponsor is providing money, as many do, then specify how much, and the dates by which payment must be made.
If the Sponsor is providing products, defining the Sponsor’s responsibilities can be difficult. The Team would want this clause to be as broad as possible, allowing it greater access to products (in terms of amount or frequency). However, the Sponsor would want this clause to be narrow and tightly defined in order to limit its obligations to the team. Like with the cash sponsorships, time frames should be established when the products are to be provided. If the sponsorship is for a period of time where it would be expected that multiple rounds of products would be provided to the team, then it should also be defined how additional product requests will be made and handled. This contentious point must be negotiated thoroughly.
5. Team/Organization Responsibilities
Conversely, the Sponsee’s responsibilities must be defined. Effectively, this section describes what the team or organization will be offering the Sponsor in exchange for the sponsorship. It can also be used to retain some exclusive rights (i.e. control over certain aspects of a tournament). The team or organization would want this provision to be drafted as narrowly as possible, to limit their exposure and obligations to the Sponsor, while Sponsors could seek to broaden this provision.
This provision is especially important, as it defines the exclusivity, or lack thereof, of a Sponsor. Teams and organizations obviously want to have more than one sponsor, so exclusivity provisions must be carefully drafted. Sponsees should seek to categorize the sponsorship narrowly, that way it can offer exclusive sponsorships in many categories. However, sponsors may seek to broaden any category they feel is too narrow. For example, a team would want to categorize a prospective soda sponsorship as an exclusive soft drink sponsorship, specifically excluding energy drinks (as there are some soda alternatives to energy drinks). This would allow the team to offer exclusive sponsorships for soft drinks and energy drinks, respectively, thus potentially increasing its sponsorship dollars.
7. Sponsor’s promotional entitlement
This section describes what promotions the Sponsor is entitled to in exchange for their sponsorship. This section can be drafted broadly or narrowly, depending upon the specifics the Sponsor requires. Some examples of narrow provisions are specifying the size of the Sponsor’s name and logo that will be used on a stream, how often the stream’s casters mention the Sponsor, and the specifics of website promotion (banner size, placement, etc.). An example of a broad provision would be limited social media promotion at the discretion of the Sponsee.
8. Intellectual Property
Promotion of the Sponsor necessarily entails that intellectual property will be used, including the Sponsor’s name, and possibly logos. It is necessary to include a provision stating that the Sponsee can use such intellectual property to further the goals of the sponsorship agreement. Also worth including is a provision allowing for the limited use of the Sponsor’s intellectual property in the future, as it pertains to recordings or repackagings of the event or team during the sponsorship term. This gives Sponsees the flexibility to use old content without having to blur any names or logos.
9. Cancellation provisions
These provisions are extremely important, as they define when the Sponsor and Sponsee may cancel the agreement. Such provisions are very context dependent, and as a result, vary from contract to contract. One such example would be the cancellation of a sponsorship if a certain number of teams withdraw from the event being organized by a Sponsee.
10. Miscellaneous provisions
Several miscellaneous provisions should be added to the end of the contract, including, but not limited to, choice of law, arbitration, indeminity, waivers of liability, warranties, notice, and severability.
Drafting sponsorship agreements is no easy task, but the above should serve as a basic intro guide to drafting the meat of the agreement. It is important to remember that the strength of any contractual relationship is equal to the strength of the contract itself. If you need any assistance drafting or negotiating sponsorship agreements, contact me at Roger@RRQlaw.com or (917) 477-7942.
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