Tuesday, January 16, 2024

NEW INC. MAGAZINE COLUMN BY HOWARD TULLMAN


Why College Jocks and Uber Drivers Are on the Same Team

A recent Labor Department ruling regarding gig workers may also bounce into college football, where players are getting money from "collectives." For businesses and colleges, the definition of "employee" could be a game changer. 

 

EXPERT OPINION BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS@HOWARDTULLMAN1

 

Last week, the Department of Labor issued a final rule, sure to be challenged by multiple parties, that revisits the employee versus independent contractor classification.  Battles over this issue have raged for years, since having “employees” can cost a business 20%-to-30% more than using freelancers. This is a serious and often existential concern for start-ups, small businesses, and millions of workers in a variety of industries.

Most of the world is already familiar with this debate because Uber and Lyft, along with the very vocal mayors of some major cities, have made such a big deal out of the issue. There are also thousands of new and smaller “gig” businesses that would also be adversely impacted. To me, it looks like another case of the feds trying to “save” a lot of folks (management and labor) from themselves. We’re seeing more and more of these kinds of regulatory intrusions.

In typical federal legalese, the new rule requires workers to be treated as employees if they are “economically dependent” on a company. No one really knows what that means, but there’s a handy list of equally obtuse factors provided by the Labor Dept. that will be considered by the regulators in arriving at their “gotcha” conclusions. None of these metrics is clear or obvious, so it’s going to be a guessing game for the next year or two. It’s like Conan the Librarian -- lots of arbitrary rules and utterly no mercy.00:0001:23

 This feels to me like another case of rampant, manufactured confusion, where the government will be trying to “help” a bunch of people who are perfectly happy with the status quo, especially because their workers will tell anyone who asks that being independent provides them with degrees of freedom, choice, and flexibility that are increasingly valued in the post-pandemic world. Management obviously likes the cost savings, but what it values even more is certainty and stability. And when the government keeps changing the ground rules, that’s very hard to come by.

Another group that would greatly appreciate the government and particularly the IRS butting out of their business is the newly wealthy college athletes, mainly football and basketball players, as well as their schools, who are the latest beneficiaries of the new “collectives” scam created by tax lawyers and state legislators. Belatedly and grudgingly aided and abetted by the NCAA, and lovingly adopted by more than 150 of the colluding schools, these collectives are funded by donors and sponsors who are always looking for crooked ways to pay under-the-table bucks to recruit, retain, and compensate the best players for dear alma mater’s teams.

 The advent of the NIL system (name, image and likeness) approved by the NCAA in July, 2021 after losing a number of court cases filed by student athletes, opened the door to this mischief. It created from whole cloth the concept that each player had a virtual series of personal and salable assets that could be monetized and exploited by, or on behalf of, the player by sponsors and other interested parties. The almost instantaneous creation of the new college collectives brought the donor and alumni class to the party. Donors dump millions into these new college collectives and the collectives pay salaries, bonuses, and other “fees” directly to the recruits, transferees, and rostered players, payments that were long barred by the NCAA because the jocks were considered amateur student athletes. This modest NIL gesture also headed off increasingly aggressive demands by the athletes to participate financially in the huge broadcast and streaming rights payments being shared by the schools. The value of these rights are expected to explode as the big tech companies like Amazon also began bidding on them.  

Much like the scummy Super PACs in politics, which are allegedly required to operate entirely independently of any given candidate but rarely do, the schools are supposed to have nothing to do with the choices, plans, and payments being made to key players, prospects, and transfer portal targets and, more recently, or with the latest programs, which guarantee salaries to entire football teams. That’s in addition to any scholarships as long as the student athletes are still in school and, of course, on the right team.  

 Somehow, the management of these collectives mystically divines exactly what amounts the athletic directors and coaches have to pay which players to make sure that each season dear old Faber College has the best possible football team that money can buy. In the early days, a few of the older and less astute donors didn’t get the memo and admitted that the schools absolutely worked hand-in-hand with these new entities. But those guys were quickly told to sit down and shut up and changed their stories accordingly.

Another verboten topic is that fact that most of the other teams and sports at any given school are completely out of luck and out of the money. It’s a man’s world and, with the exception of a very few female basketball players who have developed NIL values, it’s likely to set back most of the recent Title VII and Title IX progress made at schools across the country. All the talk about the government and the schools acting to benefit all their student athletes reminds me of the main difference between golf and government. In government, as Trump constantly shows us, you can always change your lie.

 This whole sick and destructive system is guaranteed to kill any remaining vestige of amateur college athletics and calculated to ensure that the richest schools will buy their way to the top while hundreds of others will no longer be remotely competitive. The kicker atop this pile of funny money is that the greedy tax guys really overshot the mark.  Many of the new collectives were created as tax-exempt 501(c)(3) charitable organizations. This means that all the donations are tax deductible regardless of how the funds are then used and utterly without regard to whether there is any public value or benefit. Donors get all the strokes and good times, and a tax break as well.  

But just when it looked like things couldn’t get rosier, along comes the IRS and-- no surprise here--reversed its initial approval of these scams. IRS is now telling the collectives that since their basic model has little or nothing to do with charity and everything to do with paying players to pump up the home team, there’s no real reason or justification for any tax exemption. Even more importantly, given the new DOL employee rule, there are discussions beginning about whether student athletes might fall under some of the same definitions and regulations.

Truthfully, in addition to being a tax scam, the whole collectives structure is also a very clear way to help the schools dodge the much bigger bullet of having the government decide, once and for all, that if student athletes are being paid to play ball, then they should be treated as employees with all the associated benefits. By sticking the collectives in the middle of the process and tacking on the fig leaf of charitable work, the schools are insulating themselves from these exposures and from such realistic future prospects as player unionization and major player demands for revenue and profit sharing.

As much as the players think they’re getting a great deal, in reality they’re just getting crumbs from the multi-billion-dollar business that college football represents for their schools.

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