Will the Star Quarterback Be Sacked by the Taxman?

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

On March 26, 2014, a regional director of the National Labor Relations Board (NLRB) decided scholarship football players at Northwestern University are employees because they “perform services for the benefit of the employer for which they receive compensation.” A main factor in the regional director’s decision was that the monetary value of football scholarships is “as much as $76,000 per calendar year” meaning that the players receive in “total compensation in excess of one quarter of a million dollars throughout the four or five years they perform football duties.” The regional director also found that Northwestern’s scholarship football players are not primarily students but rather are “employees” under the common law definition. He noted that Northwestern has not treated scholarships or stipends as taxable income but held that not to be dispositive, citing a 2002 case decided by the Ninth Circuit Court of Appeals, Seattle Opera v. NLRB.

An employer’s decision to treat payments to employees as nontaxable does not have any bearing on whether the NLRB finds the recipients of the payments to be employees. Seattle Opera held that “auxiliary choristers” who received a flat fee of $214 per production were employees and rejected the opera’s argument that auxiliary choristers were not employees because the $214 payment was called an “honorarium” and later a “transportation expense.”

But what will the Internal Revenue Service (IRS) say about “compensation” for “football services”? Courts might defer to the NLRB’s interpretation of the National Labor Relations Act, but the IRS, not the NLRB, interprets tax laws. Will “compensation” for football services be taxable income under the Internal Revenue Code?

University scholarships have generally benefitted from special tax treatment as falling under § 117(a) of the Internal Revenue Code, which states that any amount received as a “qualified” scholarship by an individual who is a candidate for a degree at an educational institution is not included in gross income subject to taxation. However, § 117(c) limits § 117(a), providing that the § 117(a) exclusion from gross income does not apply to “that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship” (emphasis added).

The NLRB regional director found that “players receiving scholarships to perform football-related services for the Employer under a contract for hire in return for compensation are subject to the Employer’s control and are therefore employees within the meaning of the [National Labor Relations] Act” (emphasis added). If playing football is considered “other services” under § 117(c), scholarship football players might be subject to taxation for the amount that represents payment for playing football.

What about fringe benefits? 

  • Food: The National Collegiate Athletic Association (NCAA) recently revised its rules to allow Division I member institutions to furnish unlimited meals and snacks to athletes in conjunction with their athletics participation. According to the NCAA, the meals and snacks legislation was adopted “to ensure student-athletes get the nutrition they need without jeopardizing Pell Grants or other federal aid received by the neediest student-athletes.” Meals that are provided to employees are sometimes considered to be included in the employee’s taxable income, but sometimes they are not.
  • Housing: Similarly, under some circumstances the Internal Revenue Code includes housing that is provided to employees as taxable income.
  • Clothing: Uniforms are not included in income for the purposes of taxation. However, clothing that is used for general purposes, such as suits and sneakers, may be taxable.
  • Tutoring: Expenses that an employer spends on tutoring services are probably excluded from employees’ income for the purposes of taxation if the services are free to all students, but these expenses may be taxable if they are provided exclusively for athletes.

What about Pell grants and other federal aid received by student-athletes?

Athletes who qualify based on financial need are eligible to receive federal Pell grant funds equaling up to $5,645 per year ($5,730 in the 2014-2015 award year). The U.S. Department of Education awards Pell grants based, at least in part, on the athlete’s annual family income. Will high-value scholarships and other forms of “compensation” affect eligibility for Pell grants? Again, the NLRB does not have the authority to determine students’ eligibility for Pell grants. However, the regional director’s key factual finding that the players were employees based on the compensation they received for football services might be applied to other federal programs as well.

What about areas of state law concern such as workers’ compensation and unemployment compensation?

The NLRB does not have authority over states’ workers’ compensation or unemployment benefits plans, but suppose an athlete is injured in the course of his “employment.” The NCAA’s first and long-time executive director, Walter Byers, explained in his 1995 book that the “student-athlete” concept was created to avoid worker’s compensation liability under state law after the widow of a football player for the Fort Lewis A&M Aggies, Ray Dennison—who had died from a head injury he received while playing football in Colorado—filed for workers’ compensation death benefits.

In the wake of the regional director’s decision, the following injury and unemployment related questions are sure to emerge.

  • Is a player who is medically unable to play entitled to worker’s compensation benefits? If so, how would they be calculated?
  • Is a player who is dropped from the team entitled to unemployment benefits? If so, how would those benefits be calculated?
  • What about a player who is redshirted? A redshirted player practices with the team, participates in training table, and has remaining eligibility, but does not play during the season. Is he or she an employee?

In the new world of student-athlete-employees, in addition to coaches, trainers, nutritionists, and tutors, university athletic departments may need to add athletic accountants, attorneys, and risk managers.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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