College athletes union raises tax, discrimination questions

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A National Labor Relations Board decision that classified Northwestern football players as university employees could have a lasting impact on the future of amateur sports.

It also could complicate matters for athletes and universities alike. After all, the school-student relationship is far different from the employer-employee relationship — especially in the eyes of the Internal Revenue Service, the Department of Labor, the Department of Justice and the U.S. Congress.

The Northwestern case has a long way to go first — the university has vowed to ask the NLRB’s national office to review the case, and the challenge likely will move to the federal court system after that. It likely will take years to resolve.

But athletic directors, labor lawyers and tax professionals are wondering just what impact this decision could have if it survives appeal. It could change the rules for taxing athletic scholarships, open up universities to hostile work environment claims and burden universities with the administrative costs of inheriting hundreds of employees.

Fight to unionize

The NLRB’s decision, issued by its Chicago office, came out of a petition from a group of Northwestern University football players seeking to join the newly formed College Athlete Players Association. The players, who compose the majority of Northwestern’s team, said they are seeking better representation.

In January, when the players petitioned the NLRB, senior quarterback Kain Colter said athletes’ pleas for concussion overhaul, enhanced health coverage and education change have largely been ignored. The unionization effort marks the newest stage in an effort by student athletes to seek a bigger share of the more than $10 billion generated annually by Division I college athletics.

There are more than 140,000 Division I athletes throughout the United States, and collectively they receive more than $2 billion in athletic scholarships annually, according to the Department of Education.

The United Steelworkers, based Downtown, is advising the players association and covering the legal fees of the Northwestern players. By unionizing, the players could gain the right to collectively bargain for better protection and, perhaps, more compensation.

The case boiled down to one question: Are scholarship college athletes employees?

Peter Sung Ohr, regional director of the NLRB, said, “Yes,” noting the amount of time they spend on athletics compared to academics and the lack of control they have over a lot of their time and decisions.

“[I]t cannot be said the employer’s scholarship players are ‘primarily students,’” Mr. Ohr wrote in his March 26 decision.

“The players spend 50 to 60 hours per week on their football duties during a one-month training camp prior to the start of the academic year and an additional 40 to 50 hours per week on those duties during the three- or four-month football season. Not only is this more hours than many undisputed full-time employees work at their jobs, it is also many more hours than the players spend on their studies.”

The NLRB decision is limited to private universities as public institutions are governed by state labor laws. CAPA is hopeful the NLRB sets a precedent that eventually could extend to the state level, allowing athletes at schools such as the University of Pittsburgh and Penn State University to unionize.

IRS implications

In changing the nature of the relationship between athletes and colleges, it could also change the way in which the IRS classifies scholarship income, said Dan Phillips, a tax shareholder at Schneider Downs & Co. Inc., a Pittsburgh accounting firm.

If athletic scholarships are considered compensation for work, the IRS would at least explore taxing that income.

And for a football player at Northwestern — where tuition, room and board cost $61,000 — that might mean a $15,000 tax bill.

“The IRS is closely watching it to see how that plays out, for sure,” Mr. Phillips said. “The college and universities are watching it, as well.”

The Internal Revenue Service code is not clear on the issue.

Section 117 of the code says scholarships do not qualify as gross income for any individual who is a candidate for a degree at a school or university. But that exclusion does not apply to any amount received as payment for services required as a condition for receiving the scholarship.

Though the NLRB ruling asserts that grant-in-aid athletic scholarships are not financial aid, the IRS ruled in 1986 that athletic scholarships should be treated the same way as academic scholarships in terms of tax liability.

Case law is just as foggy.

In 1969, a Westinghouse employee received a scholarship from the company so he could get his doctorate, with the understanding he return to Westinghouse upon completion. The IRS treated the scholarship as gross income, since it was “compensation” for “employment services."

Eventually, the U.S. Supreme Court ruled in favor of the IRS. But modifications to the tax code in 1986 could limit the scope of that ruling.

And in 2002, the NLRB ruled a group of auxiliary choristers were employees of the Seattle Opera, though their modest income was not deemed taxable by the IRS. Mr. Ohr cited that NLRB case in his decision on the Northwestern case.

Tim Waters, United Steelworkers' political director, said the steelworkers union, its lawyers and the player association’s founders considered the potential tax implications of employment status and ultimately concluded that the NLRB’s decision likely would not change the way IRS classified athletic scholarships.

“I think it’s part smoke and mirrors, and the other part scare tactic,” he said. “They can walk out every way that they want to intimidate, scare, change the subject, cloud the issue, but it’s not going to change the fact that change is knocking on the door of the NCAA.”

Since the Northwestern football players announced their intentions to unionize, several athletic directors have spoken anonymously to reporters at various national media outlets, saying taxation might be an unintended consequence of the athletes’ unionization push.

But even if the IRS decided to treat athletic scholarships as taxable income, it’s unlikely college athletes would be faced with a tax bill, Mr. Phillips said. Most would not be able to afford a five-figure tax bill, especially when the majority of their income from the university goes directly back to the university.

Instead, Mr. Phillips said, universities likely would be forced to “gross up” their compensation, or pay athletes more to cover the tax bills.

“What programs are they going to cut to fund that?” he asked.

The tax issue could prove just as burdensome for the schools as to the athletes themselves, because universities likely would have to withhold income and pay tax bills, he said.

Title VII

As employees, college athletes also would be covered under Title VII of the Civil Rights Act, which prohibits employers from discriminating based on race, religion, gender or national origin.

Richard B. Cohen, a partner at Fox Rothschild LLP in New York, said that by defining college athletes as employees, the NLRB affords them protection under Title VII that they do not currently have. “It’s clear that Title VII applies only to employees,” Mr. Cohen said.

That means universities could be subjected to harassment lawsuits and hostile work environment claims that currently have little merit.

The Equal Employment Opportunity Commission has its own test to determine what qualifies as employment, Mr. Cohen said. But the NLRB findings — particularly its disclosure about the right of head coaches to control athletes’ schedules and off-field activities — could influence how other agencies determine employment.

A wild card

Looming behind all of these efforts is the ability of Congress to nullify any ruling.

Mr. Waters from the steelworkers union joined Mr. Colter and other players association leaders last week in traveling to Washington, D.C., to meet privately with lawmakers and lay the groundwork for lobbying efforts.

Congress has the power to exempt the NCAA and its institutions from following a lot of these labor standards, including the power to exempt college athletes from the definition of employee.

The federal government historically has been prone to protect major sports properties — the NCAA has tax-exempt status, the National Football League does not pay income tax, and Major League Baseball has anti-trust protection.

But in the end, this all could be an academic exercise. Though Mr. Waters and CAPA are confident their case will survive appeal, many legal scholars believe that the unionization fight is ultimately a losing one.

Michael LeRoy, a University of Illinois law professor and author of "Collective Bargaining in Sports & Entertainment," called the initial NLRB decision a "path-breaking" ruling that does not have a lot of basis in precedent. He believes the athletes have a lot to gain by publicizing their plight, but Mr. LeRoy believes the early win ultimately will be overturned, either by the NLRB's national board or by a federal judge.

Michael Sanserino:, 412-263-1969 and Twitter @msanserino.

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