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EN H2K Gaming LTD. {attention Richard Wells) Men Zech 6 Daturn 08.01. Recommendations to Riot Addressing the Status of EU LCS Players as Employees Dear Mr. W You have asked me to consider what actions Riot could constructively take to address (1) the additional costs to organizations arising as a result of players’ status as employces under German Law and (2) current inconsistencies between organizations as to whether they recognize tax and other consequences of that status. You have also asked me what | consider to be the most appropriate commercial recommendations based on my current understanding of the industry (3). ly based not only on the contracts which 1 have reviewed in relation to the employee status of EU LCS players but also on my more general understanding Riot’s current role, and existing industry-specific regulation such as the EU LCS rules. My recommendations are further based on the conclusions I draw in the Memorandum “Employee status of LCS players — risk assessment of the current situation and recommendations”, My recommendations are necessé My recommendations are as follows: A. Actions to Be Taken BY Riot Arising from Players Being Treated as Employees 1. Riot should pay any plaver subsidies directly to the players. Teams should not bear the high non-remaneration labor costs on payments by other entities Riot should pay the purse monies directly to the players and the teams based on the percentage sharing contained in the player contracts. Each team will provide Riot with this information by player and this information will be treated confidentially by Riot. The teams will be responsible for any error in payment arising from any inaccurate information provided by them to Riot. 3. Riot should increase the player subsidies and team subsidies to offset the social security payments that the teams and players must absorb for salaries paid by the teams directly to the players 4, Assuming Riot is not prepared to absorb these additional costs, then Riot should move the League to another European country which has substantially lower social security and income tax obligations AND works logistically 5. Should Riot decide to move the League to another European country, then Riot should implement the recommendations for 2016 and thereafter until the change in the European ry has been fully implemented. B. Actions to Be Taken BY Riot in Order to Avoid Inconsistencies 1. Riot should require every team to be compliant with contractual, social security and ineome tax obligetions in order to create an even level playing field and evoid distortion of competition Riot should also have the right to audit teams to the extent that teams document their compliance with German Law Assuming Riot is not prepared to require teams directly to comply, Riot should mandate teams to seek and document professional tax and legal advice with regards to the status of their players under German Law, Riot should alo mandate teams then to seek and document advice by the Association of German Pension Insurance Carriers (Deutsche Rentenversicherung Bund) for clarification on the status of EU LCS players. C. Other Financial Changes 1, Tho player and team substantially increased, bsidies should be increased because player salaries have part, because of the North American League's ability to recruit European players since there is no adequate citizenship requirement for eligibility to play in any league. 2. The subsidies should reflect the new exchange rates for the Euro and the U.S. dollar. Emplovee status of LCS plavers ~ risk assessment of the current situation and recommendations 9) I 102, dite tothe German bar)! This paper has been written for discussion purposes only and aims to provide a summary of the key issues which I have come across affecting EU LCS team organisations and players. It also explores risks which may affect the EU LCS itself and some possible solutions to these. This paper does not provide specific legal advice to any party. A. EU LCS plavers a vs Ww 1, German Law is applicable to any EU LCS player contract Regardless of the choice of law/tationality of a player/place of incorporation of the organisation, having their regular working place in Germany renders German Law applicable to EU LCS player contracts. Although under Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome 1), a choice of law clause ean provide that the law of another jurisdiction applies, such a clause cannot overrule core principles of German employee protection such as general dismissal protection law. 2, _ EU LCS Players fulfil all the criteria to be an employee under German Law German Law distinguishes between employees working under an employment contract and independent contractors. working under a service contract. The assessment of employee'contractor status is based on an overall evaluation taking into aceount a number of factors, The evaluation of these factors leads to the conclusion that an employment relationship typically exists between organisation and players: ©The individual is obliged to perform duties in person: The services a player renders are of special, unique, unusual and extraordinary character which means that the ployer can perform these services only in person. LCS players’ duties entail team training sessions, performance in tournaments (mainly the LCS), and promotional activ ‘+ The employer controls the individual as to performance, working hours and location: Gaming organisations dictate where the players live and work (mainly gaming houses), and their performance is constantly subject to the organisation's evaluation Working hours are also presctived, hence the team organisations exercise fall control ‘over the means by which the player performs his duties. ‘+ The individual is integrated into the employer's working organisation: At LCS level, every orgenisation provides their players with training facilities owned by the ‘organisation where players are integrated in a daily training routine with other staff. + The individual is financially dependent on the employer: Pro playcrs usually work full-time and depend on their income as ¢ professional gamer. + EULCS players can be compared to traditional team sports players: In team sporis, German courts ruled decades ago that soccer players in the Bundesliga are employees. German Courts regularly decide on issues such as termination rights or the possibility ofa fixed term contract in the context of athlete employment contracts. + No exemption for exercising a hobby: In traditional sports, contractor relationships can be shown to exist where « semi-professional activity closer to a hobby takes place inan amateur environment. However, the working conditions of EU LCS players clearly deviate from exercising a hobby. Note: Contractual stipulations to the contrary will not negate the presence of an- employment relationship where, in practice, an employment relationship exists. B. Consequences and risks (contracts/tax/social security contributions 1, EULCS player contracts Certain statutory requirements are triggered by an employment relationship under statutory law including (amongst others): ‘© Regulations on working hours and occupational health and safety. © Minimum wage (€8,50 per hour/ 1,473 € per month) and paid holiday leave. + Protection against unfair dismissal under the Act on Protection against Unfair Dismissal (Kinndigungsschutzgeset2) after siv months! employment. * Continued payments in the case of sickness. # Fixed-term employment cannot last longer than 2 years. Risk: In my experience, many contracts used by teams (including top organisations) are not consistent with these obligations. Many contracts still heavily favour teams? interests over Player interests contradicting German Employment Law. During the course of my work I have seen numerous unlawfill clauses where for example players are not paid minimum wage or could be “benched”, losing all claims for remuneration. Poor, unlawful working conditions can contribute to the exploitation of players. This lack of infrastructure opens up teams to lawsuits by players Moreover, unprofessional contracts contribute to chaotic dealings during the transfer windows. Lastly, non-compliance with legal requirements reveals the work still to be done of professionalizing esports, This bears the risk of bad PR and could have w deterrent elfect for large non-endemie sponsors. income tax/ withholding tax deduction procedure Every employee who has his regular working place in Germany (i.c. more than 183 days per year in Germany) must pay income tax on remuneration (including any benefits in kind), as well as church taxes if a member of an official church. Tax deductions are made from gross salary (in Germany, parties usually agree on a gross salary). It is for the employer to calculate, deduct, and document income tax from the ‘employee's gross salary (withholding tax deduction procedure). If the employer does not withhold tax, the employee is liable for that amount as well, Risk: During my course of work, I have come across many contracts where players were falsely classified as independent contractors, False declarations of self-emplovment can have severe consequences for the organisation as well as the plaver, including the obligation to pay tax in arrears as well as fines and potentially criminal prosecution, This puts an immense risle onthe players who are usually not familiar with German statutory regulation. The organisations and players could be liable for tax withholdings for up to the last four years in respect of their activities in the EU LCS. Taking into account the risk that some organisations exit the industry dve to insolvency, German authorities could pursue players individually. This would seem likely to lead to personal bankruptey in some eases. 3. Social Security Contributions Employees belong to a mandatory social security system comprising old age pension insurance including reduction in capacity benefits, unemployment insurance, health (statutory or private) and nursing care insurance, The premium for these insurances is divided equally between ‘employee and employer and subject to the withholding procedure as well. Therefore, Germany has verv high non-remuneration labour costs (~20 % on top of the remuneration). Exemptions to payment obligations in Germany: ‘+ Inthe event of short-term work stays (i.e. under two yeats), EU citizens may remain in their previous national social sceurity systsm according to Social Security Coordination Regulation if an “Al form” is provided, © Under certain circumstances, the premium to the old age pension insurance can be after 5 years iftno claim to a pension was acquired, Many organisations do not provide the infrastructure to set up payrolls meeting these requirements. Moreover, similar to the tax context, players are liable for the social contributions. as well with the same risks explained above. High non-remuneration labour costs not only for player salaries but also money distributed by Riot per split and other prize money (worlds) create an environment where Some team owners question whether their involvement in the ELLLCS is financialiv viahle. IIL. Consequences for the EU LCS/ Recommendations 1, Consistency should be mandated by Riot Only if every team of the LCS complies with statutory regulation can the LCS exist as sustainable business. A competitive field where teams gain advantages because of non- compliance must be prevented. Teams paying higher salaries because of non-compliance puts he players at risk and distorts competition. A more hands-on approzch by Riot is indispensable. ‘The negative PR impact from non-compliant teams could tarnish the image of the EU LCS which would in turn impact those teams who are compliant. This negative PR could overall lead to Jess opportunities with big non-endemic sponsors. 2. Educating players shout their rights and duties ‘Most players are nat aware of the complex requirements with regards to tax and social sceurity. However, in the event that tex euthorities cudit an organisation, the player would be just as liable as the company for all additional payment obligations, If the organisation becomes insolvent, the player would generally have to pay any outstanding tax arrears. Riot should ‘educate players about their possible risks and duties. 3. Compensating organisations for high non-remuneration labour cost Additional payment obligations not only for player salaries but also money distributed by Riot per split and other prize money (works) create an environment where some team owners question whether their involvement in the EU LCS is viable. Possible solutions could involve direct payment of the “purse money” from Rict to the players’ raising the Riot stipend or even (as long-term solution) moving the EU LCS to a country where teams and players enjoy more favourable business conditions.