~ A Mediator's Musings ~

May 22, 2014 – College Athletes, the Union and the NLRB: Be Careful What You Wish For

In our last musings, we tried to evaluate the implications of the decision by Peter Ohr, Regional Director of the National Labor Relations Board, that Northwestern University’s football players receiving athletic scholarships are employees of the university and have the right to vote to join a union under federal law. As we noted, only 17 of the 125 universities in the Football Bowl Subdivision of the NCAA’s Division 1 are private universities and would therefore be potentially subject to the jurisdiction of the NLRB regarding the rights of their players to bargain collectively as university employees. But the implications of the ruling could go much farther.

Mr. Ohr found that the football players perform valuable services for Northwestern that generate substantial economic benefit for the university and receive compensation in the form of scholarships. Under the Internal Revenue Code, the federal income tax law, while true scholarships are excluded from the taxable income of the recipient, that is not the case with employee compensation. In fact, the Code specifically provides that the exclusion of scholarships from taxable income does not apply to any amounts received which are payments for “other services” provided by the student as a condition for receiving the scholarship. And Mr. Ohr found that the scholarships awarded these football players are “in exchange for the athletic services being performed”—falling squarely within the tax law’s definition of those scholarships that the recipient must include in his taxable income.

Now, the NLRB’s determination—if Mr. Ohr’s decision is ultimately upheld–that Northwestern’s football players are employees for federal labor law purposes does not necessarily mean that the IRS would determine that they are employees for federal tax purposes. But it’s hard to see why the IRS would not respect a final NLRB (or court) determination that the players get scholarships in exchange for services to the university’s entertainment business. And if the IRS were to make the determination that the players are employees and that determination upheld by the courts, the implications could be staggering. The players would have to pay federal income tax on the value of their scholarships, probably thousands of dollars if, as Mr. Ohr found, the value of the scholarship is at least $61,000 per year and at times as much as $76,000. Players who have graduated could be held liable for federal income taxes on the scholarships they received years ago, subject only to the tax statute of limitations—potentially going as far back as six years. The university would be required to withhold for federal income taxes and social security.

And recall that, as we have discussed, federal labor law does not apply to public universities—and all but 17 of the FBS schools are public universities. That means that even if Northwestern’s football players can unionize under NLRB jurisdiction, Alabama’s and Ohio State’s can’t unless the law of their state allows. And every state law could be different, and different states could produce different outcomes—FBS scholarship players at, for example, Minnesota, might be able to form a union while those at, for example, Tennessee, might not. On the other hand, all universities, public and private, are subject to the federal tax law. So if Northwestern’s football players are employees of the university for federal income tax purposes, so, almost surely, are the football players of all 125 of the FBS universities. If so, while those state universities’ players can’t unionize under federal law, their scholarships would be subject to the same income tax treatment as the scholarships awarded players at Northwestern and other private universities. Like former Northwestern players, a player who graduated from, say, Texas, several years ago could be required to pay federal income taxes on the value of his scholarship. And current and future players would be required to pay taxes on the values of their scholarships, and the university, their employer, would be required to withhold for income taxes and social security. The effects on the “business” of college athletics—at least for those 125 universities in the entertainment business and their football players—are almost unimaginable.

Of course, with Mr. Ohr’s decision subject to review and the IRS not having spoken, we don’t have any idea where all this will come out. But we can say one thing—the players on whose behalf the NLRB case is being pursued should be careful what they wish for. Getting them the ability to form a union may subject them to enormous tax liability. And we don’t know what opportunities any restructuring of college football and the scholarship process to take account of these changes might foreclose for them and future players. We’ll stay tuned.

Your “I’m still not in the entertainment business” mediator