Are College Athletes Employees? Third Circuit Urges Using “Economic Realities” Test

On July 11, 2024, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s decision in Johnson v. NCAA, denying the NCAA’s motion to dismiss. Additionally, the Third Circuit remanded the case to the district court and instructed the district court to apply the economic realities test “grounded in common-law agency principles” to determine whether college athletes are employees under the Fair Labor Standards Act (FLSA).

By way of background, in September 2021, the U.S. District Court for the Eastern District of Pennsylvania denied the defendants’ motion to dismiss, thereby allowing college athletes to proceed with a lawsuit against the NCAA under a joint employer theory. The district court found that plaintiffs had pointed to sufficient evidence to establish a joint employer relationship (i.e., both entities exercised “significant control” over an employee) at the motion to dismiss stage. Under the joint employer test, the court determined that the allegations set forth in the case showed that the NCAA exercises significant control with respect to hiring and firing of student athletes, daily supervision of student athletes, setting conditions and creating rules by which the student athletes must abide, and controlling athletic records. The NCAA appealed the district court’s decision to the Third Circuit.

Notably, in its opinion, the Third Circuit indicated that “merely playing sports, even at the college level, cannot always be considered commercial work integral to the employer’s business in the same way that activities performed by independent contractors or interns are assumed to be in previously mentioned multifactor tests.” Accordingly, to yield a comprehensive and proper analysis of whether student athletes are employees under the FLSA, the court called for a test that could identify athletes’ play as work—the economic realities test.

The Third Circuit’s instruction to the lower court to apply the economic realities test will require the district court to consider the totality of the circumstances of the working relationship to determine whether the worker is economically dependent on the employer for work or is instead in business for him/her/themselves. As discussed in precedential opinions relied upon by the Third Circuit, this assessment contemplates several factors, as set forth by the U.S. Department of Labor:

1. Opportunity for profit or loss depending on managerial skill
2. Investments by the worker and the employer
3. Permanence of the work relationship
4. Nature and degree of control
5. Whether the work performed is integral to the employer’s business
6. Skill and initiative

Further, in holding that the economic realities test was the appropriate test to apply, the Third Circuit relied upon Supreme Court precedent, which guides courts to “look to the economic realities of the relationship” to determine whether employment exists under the FLSA. The Third Circuit also compared courts’ interpretations of the National Labor Relations Act (NLRA) and the FLSA and highlighted courts’ use of the economic realities test in the context of NLRA claims. The Third Circuit noted: “[w]e recognize that the NLRA and FLSA have distinct policy goals, but their shared history often inspires courts to draw interchangeably from each statute’s caselaw to answer fundamental questions related to the equitable regulation of the American workplace.”

Colleges and universities should remain cognizant of this matter as the district court contemplates whether college athletes will be deemed employees under the economic realities test. Should the court determine that college athletes are indeed employees, such a decision will yield several implications, including compliance obligations with labor and employment laws for college athletes, as well as wage and hour considerations. Such implications may also include amending current college and university policies and training.

Buchanan’s higher education and labor and employment attorneys are closely monitoring the decision and will continue to keep you informed. For any questions, contact the authors.