Six Things Colleges Need to Know About the $2.8 Billion NCAA Settlement

While basketball fans will be focused on what takes place on the court April 7, when the championship game of the NCAA Men’s Final Four takes place in San Antonio, what happens in court eight hours before tip-off could change the college game forever.

There, federal Judge Claudia Wilken will oversee a final approval hearing for the landmark case House v. NCAA. All signs point to Wilken approving a $2.8 billion settlement with select Division I athletic conferences, forcing back payment to former student-athletes and allowing colleges to pay student-athletes directly moving forward beginning as early as summer 2025.

Whether colleges can pay student-athletes directly will be put to rest with the House vs. NCAA settlement. However, how they are paid will ignite an unprecedented chain reaction of tax and legal questions that could impact every NCAA current and former student-athlete in America and leave some colleges gasping for their financial lives.

The employee designation question

Colleges must decide if an athlete has employee or contractor status before any compensation can be distributed from the school directly to the athlete. The NCAA has fought for decades to prevent student-athletes from being designated as employees. That could end with this ruling.

With few exceptions, labor laws require workers to be classified as contractors or employees, with each classification presenting various tax and legal benefits and challenges for both the employer and the worker.

“You are one or the other,” says Joshua Nadreau, regional managing partner and vice chair of the labor relations group at Fisher Phillips, a firm specializing in labor and employment law. “It’s a binary choice.”

Employers use multifactor tests established by state and federal agencies, such as the Internal Revenue Service, to determine whether someone is a contractor or an employee. While the tests have many components, one area impacts the decision of employee or contractor the most. “The principal factor in determining that is the amount of control the employer exercises over an individual,” Nadreau says. “For college athletics to function, a program needs significant control over its players, especially regarding games and practices.  You can’t practice basketball and one person on the team shows up at one o’clock and another person shows up at 11. There has to be some level of control.”

Athletes as student workers

While the House v. NCAA case is close to a settlement, another likely historic case, Johnson v. NCAA, which directly addresses the student-athlete as employee issue, continues to move forward. This litigation focuses on treating student-athletes as student workers, enabling them to receive at least minimum wage and overtime.

“The NCAA has always said they don’t want them to be employees because they want to, quote unquote, keep them students,” says Paul McDonald, the plaintiff’s co-counsel in the Johnson case. “The first thing that people need to understand is that that is, at best, a misdirection and, at worst, a lie, because there have been student employees on campuses in work-study style programs for more than 50 years.”

McDonald argues that student-athletes on the court or field should be paid just as student workers selling popcorn in the stands. While he advocates for the employment designation, he notes that his case is limited. He wants student-athletes to be considered student workers, not staff or faculty. “All we’re talking about is the same treatment as their fellow students in work-study style programs,” McDonald says. “That's it.”

McDonald acknowledged that if colleges classify current athletes as employees, not contractors, this could open the door for his case to reach a quicker settlement.

Health insurance, other benefits

If the courts rule that athletes are employees, determining whether they are student workers or professional employees is the next important decision.

Student workers benefit from specific I.R.S. guidelines, such as being exempt from paying FICA taxes. Professional workers pay FICA and are often eligible for health insurance and other employer benefits. While the student worker designation might seem obvious, another wrinkle is the number of hours a person works per week.

Most schools have policies requiring students to work no more than 20 hours per week. In addition, there are countable athletically related activity (CARA) rules, which set restrictions on how many hours per week (20) and per day (4) a student can devote to athletics while school is in session. Each team tracks these hours and submits them weekly to the school.

Sam Ehrlich, assistant professor in the Department of Management in the College of Business and Economics at Boise State University, thinks that athletes — if classified as employees and assuming no federal exemption regarding their employment status — would fall into the student-employee category. Ehrlich notes, however, that it will come down to IRS interpretation and could still lead to objections by athletes and litigation because of CARA. “I wouldn’t rule out anything being challenged,” Ehrlich says.

If athletes did fight for professional employee status, the impact could introduce complexities. For example, colleges could be required to offer benefits such as retirement contributions, disability insurance and leaves of absence.

Scholarships reworked

McDonald argues in the Johnson case that there is a double standard when comparing athletes to non-athletes.

“People say, well, a lot of these kids are already getting a $60,000 scholarship. Why are you pushing for the minimum wage for 20 hours a week?” McDonald said. “First, not every college athlete gets a scholarship, let alone a full scholarship. Secondly, some of the kids in work-study are on an academic scholarship. So, they’re working, for instance, in the library while the school pays them. The scholarship does not give the school the right to assign them jobs without paying an hourly wage.”

With that in mind, Ehrlich thinks the NCAA-member schools will amend athletic scholarships to be more like employment contracts to address McDonald’s point and, at the same time, prevent situations such as mid-season transfers, address possible tax implications, and ensure compliance with local and federal employment laws. Still, those, too, could be challenged, especially in states like California, where non-compete clauses are unenforceable.

There is another scenario Ehrlich believes that people aren’t discussing and that requires attention — unlimited eligibility.

“People keep challenging the eligibility rules,” he says. “There could be a situation where someone goes to the NFL and then wants to come back and play in college. You can’t keep people out of a lucrative labor market. You can’t restrict them based on arbitrary lines in the sand.”

Congressional action push

NCAA president Charlie Baker has been lobbying Congress to pass legislation preventing athletes from becoming employees, citing financial reasons, potential harm to students, and negative impacts on the colleges and communities in which they reside.

Simultaneously, recognizing that not all colleges can be treated equally, he has proposed a tiered system across the NCAA. For instance, the University of Alabama might face different challenges or enjoy certain advantages than a smaller, private school such as LaSalle University in Philadelphia.

“If you convert all of college sports into employment, there’s simply no doubt based on math you’ll lose an enormous number of student-athlete opportunities across all three divisions, because the money’s just not there,” Baker said in December. “Most schools lose money on sports, even in D-I”

Baker and the NCAA are working with student-athletes and approaching lawmakers to “set a stable and sustainable future for all 500,000 student-athletes.” That would most likely entail either some type of antitrust exemption or special classification of athletes by Congress. “The NCAA would love a blanket antitrust exemption,” Nadreau says. “I don’t think Congress is going to do that. I don’t think Congress has the will to do a ton of stuff right now.”

On March 4, the House Subcommittee on Commerce, Manufacturing, and Trade, led by Rep. Gus Bilirakis (R-Fla.), conducted a hearing on college sports name, image, and likeness. Sen. Ted Cruz (R-Texas) is expected to oversee a similar discussion in the Senate soon. To no one’s surprise, several Democrats, including Rep. Frank Pallone (N.J.) and Rep. Lori Trahan (Mass.), have expressed concern over Republicans’ approach. Even if Congress does act, there could still be legal challenges.

Says McDonald, “Any legislation that singles out college athletes to be denied the same, limited student employee status as students in work study-style programs would violate Equal Protection and be struck down in federal court.”

Financially crippling for colleges

While the NCAA’s tiered approach might help relieve the burden sports are causing some colleges and universities, it’s not just athletics that results in schools experiencing financial hardship. Declining enrollment, loss of federal funding, families unable to pay ever-increasing amounts for tuition, and some potential students choosing alternative career paths have produced an industry that is feeling a seismic shift in how it operates. It’s not only that schools lose money on sports — many lose money, period.

If student-athletes are ultimately determined to be employees, current and former athletes could come forward demanding back pay, arguing that they were entitled to at least minimum wage, overtime and damages. The statute of limitations for filing an unpaid-wages claim varies by state, as do the possible penalties levied against an employer. If the hundreds of thousands of former NCAA athletes seek retribution, schools could face millions in damages, and that’s money some schools might not have. Billboards on highways with lawyers asking, “Have you been in an accident?” could soon say, “Were you a college athlete?”

McDonald is quick to point out, however, that most colleges pay their coaches hundreds of thousands of dollars, and many pay their coaches millions — often with the help of donor organizations. “The money is there,” McDonald says. “Again, if they can pay the person selling popcorn, they can pay the person on the court.”

While Congress, the NCAA, student-athletes, lawyers and college leaders might not agree on how to proceed, they all agree that college athletics is at an inflection point and that something needs to be done.

“If the goals are to acknowledge that athletes should be entitled to some compensation, the question becomes how do we establish a framework that allows for that?” Nadreau says. “Maybe Congress comes short of saying they are employees and therefore entitled to all the benefits and obligations of being an employee. Congress can pass a law that says these people are not employees under federal law, but here’s a framework in which they can achieve many of the same goals.”

Regardless of what path the parties choose, the clock is ticking. Assuming Judge Wilken advances the $2.8 billion settlement April 7, student-athletes arriving at Power Four conference schools this summer (those in the Big Ten, Big 12, Atlantic Coach and Southeastern conferences) will be given their athletic equipment and apparel — and money. What form that compensation takes could alter the landscape of college athletics forever and lead to more challenges, disputes and litigation.

“They’ve opened Pandora’s box,” Nadreau says. “Where does it end?”