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Esports, or video game competition, has burst into the mainstream. Long gone are the days of gamers participating in makeshift weekend tournaments for bragging rights. Today, the average player for the League of Legends Championship Series makes about $400,000 per year. The game publisher Activision Blizzard charges franchise fees in excess of $20 million for teams participating in its Overwatch League. Even at the collegiate level, Harrisburg University recruits students from across the globe with scholarships for its varsity esports program to play League of Legends, Overwatch, and Hearthstone. Major corporate sponsors, venture-capital firms, and even professional sports leagues have joined the fray. Conservative estimates forecast industry revenues for esports—currently at around $1 billion—to double in next few years.

Esports teams, who organize players to compete under their team name, are adapting to this new ecosystem. Significantly, these teams are organized like European sports clubs. While the New York Yankees may play only baseball, a single esports team can be comprised of multiple groups of players, each competing in a different game, yet all under the same team umbrella. And while these nascent teams do not own stadiums or sell broadcast rights (at least not yet), the trend of rising esports viewership has opened the door for new sponsorship and merchandise deals as well as other lucrative opportunities.

While such explosive growth has many perks, it also places esports teams at the forefront of employment law. What may start as a group of friends playing together in their spare time can quickly turn serious as contracts are signed, revenue is divvied up, and individuals “go professional.” For their part, even the best-intentioned teams may find themselves subject to a wrongful-termination or other employment-related lawsuit with purported damages reaching six-figures. Unfortunately, these lawsuits can be complicated and represent a common liability risk. A typical business is actually more likely to have an employment-practices liability claim than a general-liability or property-loss claim. The good news is that teams can significantly mitigate risk by planning ahead. Below are five things every new esports team should consider.

1.  Despite contractual language to the contrary, players may not actually be “independent contractors.”

Esports teams that have negotiated contracts that designate players as “independent contractors” may have a false sense of security, leaving the door open to significant liability. Regardless of what the contracts say, these players can ultimately be found to be employees. It is thus imperative for teams to correctly apply the legal rules for classifying players as employees or independent contractors. Misclassification could implicate unforeseen benefit, tax, workers’ compensation, and wage-and-hour liabilities. A rule of thumb is to consider the degree of control and autonomy that the players have in the relationship.

Esports teams today are operating more like traditional sports teams with players regularly competing in games or tournaments. Teams are also expanding their brands and may be requiring streaming and social-media quotas from their players as well as monthly publicity and promotional services. Adding all these up, it may be difficult for teams to argue that they are not exercising a significant degree of control over their players, just like a typical employer.

Significantly, issues of misclassification may not surface until relationships near their end. One case that has garnered media attention involved Turner Tenney, a Fortnite player professionally known as “Tfue.” In 2019, Tenney sued his team, FaZe Clan, regarding his contract terms, where it was revealed that his contract referred to him as an “independent contractor,” yet required that he play in tournaments, perform promotional services, participate in social-media campaigns, wear clothing bearing team logos, and use items associated with team sponsors. The issues surrounding Tenney’s contract may be a harbinger of misclassification suits.

2.  Esports teams should carefully consider forum-selection and choice-of-law clauses for their contracts.

The world of employment law can vary wildly from jurisdiction to jurisdiction. Given the international status of esports, uncertainty can arise regarding which laws apply. In traditional employment contracts, employers use forum-selection clauses to limit where suits can be brought and a choice-of-law clauses to create certainty in which laws govern the employment relationship.

A forum-selection clause can limit competing litigation in multiple forums and ensure that a lawsuit is not brought in an unexpected jurisdiction. Sticking with Tenney as an example, the player originally brought suit in California, while FaZe Clan brought a suit of its own in New York, which it viewed as a more favorable jurisdiction. On July 10, 2020, the California court sided with FaZe Clan and dismissed Tenney’s California suit, applying the forum-selection provision in Tenney’s contract.

Similar to forum-selection clauses, choice-of-law clauses let both parties know what rules they are playing by when they choose to file suit. Laws can vary from state to state and produce varied outcomes. For example, if a team uses a forum selection clause of California, and wants to determine whether their players are going to be independent contractors or employees, they are required to use the “ABC Test” according to statute as of January 1, 2020. By way of contrast, New York uses the “Common Law Test” which has substantially more factors to consider. Teams should evaluate the pros and cons of different jurisdictions.

3.  Employment contracts should anticipate issues that will arise as teams and players grow in popularity.

A good contract anticipates the unexpected. Due to the novelty of the intersection of esports and employment law, it can be difficult to anticipate every conceivable issue. It is, however, worthwhile for teams to consider the broader implications of their decisions. Teams hoping to attract talent and sponsors need to develop brand loyalty and foster a strong relationship with players, all the while carefully curating the messaging surrounding the brand. And as with most major companies, esports teams must be cognizant of what their players are allowed to do as representatives of the brand. This is where the scope of the agreement becomes increasingly important.

Teams must consider whether their agreements will cover streaming content, public statements, public behavior, and more. To be sure, public gaffes can lead to financial consequences such as loss of sponsorships or bans from competitions.

Sponsorship and endorsement deals generate significant revenue for teams. Companies like Razer, Corsair, and Logitech want the best players using their equipment. Even a mainstream company like Adidas has partnered with “Ninja,” a major Fortnite player, to develop a product line. Given the potential for conflict between brands sponsoring the teams and those sponsoring individual players, teams may have an interest in reserving final approval in what sponsorship deals players are permitted to retain. Additionally, teams and players must hash out the revenue sharing when these sponsorship and endorsement deals come in the door. Things to consider are who originated the agreement, what the revenue split should be, and whether the revenue split should change once certain thresholds are met.

Further, as teams grow, players may carry greater influence, with media outlets seeking comment on various world occurrences. As has been seen in current events, teams should consider the possibility that their players will generate controversy. A statement perceived as offensive to some can subject a player to a league’s competition rules. Take, for example, Ng Wai Chung, also known as Blitzchung. In an interview following his Hearthstone match he stated “Liberate Hong Kong.” Blizzard swiftly banned Blitzchung from its tournament, stating that Blitzchung had forfeited the winnings, and that he would suffer a one-year ban from any other Grandmaster Hearthstone Tournaments. It may be necessary for teams to have provisions in their employment agreements that contemplate such occurrences so that they can jettison a player who suffers a ban to make room for someone else eligible to play.

4.  Implementing handbooks or codes of conduct with pertinent policies for employees or independent contractors, including an up-to-date social-media policy, may significantly mitigate litigation risk.

Esports teams should develop an employee handbook or codes of conduct. It is a valuable communication resource regarding the team’s policies and procedures, helping ensure that they are applied in an even-handed manner. They also memorialize the team’s efforts to comply with the law. Typical provisions in a handbook, for example, will outline the employer’s equal opportunity employer policy and provide mechanisms for players to report concerns of discrimination or harassment without fear of retaliation.

For an esports team, carefully crafted policies can prove useful in unexpected ways, especially when their players are classified as employees. Imagine, for example, a player in the 2nd year of his 3-year contract with a team who has become dissatisfied with the team’s revenue split regarding online streaming. The player then takes to Twitter and calls the CEO an obscenity while complaining about his “onerous” contract terms. Can the team bench the player in an upcoming tournament, cutting off the player’s potential to earn prize money? The provisions within a team’s employee handbook may very well indicate that no, they cannot.

This is because, regardless of whether employees are represented by a union, teams large enough to be subject to the jurisdiction of the National Labor Relations Act will need to be aware that their employees are protected by federal law regarding “protected concerted” activity. This means employees are protected when sharing information with each other regarding pay, benefits, and working conditions. And as the National Labor Relations Board has made clear, posts on Twitter, Facebook, and other social media platforms can all be forms of “protected concerted” activity. A team caught unaware can face costly consequences.

5.  Teams may need to dramatically change the way their players communicate with other gamers once they become members of the organization.

Anyone who has spent substantial time on gaming platforms knows that online communication can be laden with vitriol and insults. While this has resulted in countless memes, it may also result in complications for teams with players who continue to communicate in this manner. Assuming that teams exercise the degree of control to qualify its players as employees, the real-world implications of Title VII of the Civil Rights Act, 42 U.S.C. § 2000e et seq., can bleed into the virtual.

Title VII prohibits employment discrimination based on race, color, religion, sex, and national origin. This discrimination can take the form of a hostile work environment and the constructive discharge that can result. With the online nature of today’s gaming, the term workplace is no longer constrained to the four walls of an office. Instead, the same gaming session that happened pre-contract becomes a team-sponsored practice session where protections apply. Posting to online forums can be considered an outward representations of the team. Therefore, disparate comments and what could otherwise be intended as innocent “joking around” can now give rise to a complaint with the Equal Employment Opportunity Commission, or a similarly situated state entity.

Therefore, teams need to ensure they have a system in place to address any such events and make sure these systems are clearly outlined in the team handbook. Further, a team manager cannot hesitate to address such behavior when it occurs. Allowing these problems to fester within the organization can lead to more liability for the team.

This article was originally featured in the TerraLex Connections Newsletter.