The Ultimate Fighting Championship’s roster is in a state of change. UFC President Dana White recently announced that the promotion has too many fighters and that some of them would be released by the company over the next few months.
This reduction in head count has already begun to take shape, with many lesser-known fighters exiting the promotion following losses, along with UFC mainstays, including former welterweight title contender Jon Fitch. The UFC has taken the position that fighters are independent contractors, and their contracts stipulate the process for their promotional advancement or termination. While much has been discussed regarding fighters leaving the promotion, little has been said in regards to what it means to fight for the UFC as an independent contractor and how an independent contractor differs from an employee.
An independent contractor is a worker who contracts with an entity or individuals to provide services. Unlike an employee, an independent contractor generally does not work regularly for a single company but is able to contract with various other groups to provide services when desired. Independent contractors are engaged only for the term required to perform a specific service. From a financial perspective, independent contractors are paid fees for their services rather than a salary, and they pay their own employment taxes to the government. Most federal, state and local laws are aimed at protecting employees and not independent contractors.
Because UFC fighters are independent contractors, the Internal Revenue Service views them as self-employed. Instead of having their wages stated on pay stubs like an employee, fighters are issued an IRS Form 1099-MISC to report their earnings. Since the UFC hires fighters on an independent contractor basis, it has no obligation to provide benefits or pay employment taxes to the IRS. Other examples of financial obligations that are typically owed to employees and not independent contractors include:
• Federal Unemployment Insurance Taxes, as owed under the Federal Unemployment Tax Act
• Social Security and Medicare Taxes, as owed under the Federal Insurance Contributions Act
• Workers compensation insurance
• State unemployment insurance taxes
The actual classification as an independent contractor is significant. The IRS can impose penalties against entities for misclassifying an employee as an independent contractor. In a copy of the UFC contract obtained from the current Eddie Alvarez-Bellator MMA litigation, the relevant section defining the employment status of UFC fighters is found in Article XX:
20.1 Nothing contained in this Agreement shall be construed to make Fighter an employee of ZUFFA or to appoint ZUFFA as Fighter’s agent, and ZUFFA shall have no financial interest (other than offset rights) in compensation payable to Fighter for engaging in any Bout hereunder. It is intended that Fighter shall remain an independent contractor, responsible for his own actions, expenses and any local, state, federal or international taxes, including, but not limited to, the engagement, discharge, benefits and costs of all of Fighter’s Affiliates, and training facilities, equipment, professional memberships, sanctioning fees, medical expenses, social security taxes, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes.
The IRS will view the contractual relationship between the parties as one factor in determining that an independent contractor relationship exists, but it is not conclusive. There are other methods used by the IRS to determine whether a worker is an employee or an independent contractor. Historically, the IRS used what was known as the “20 Factor Test,” which grouped 20 factors that helped determine the relationship of the worker. More recently, however, the IRS has grouped these 20 factors into three main categories: behavioral control, financial control and the type of relationship.
“Behavioral control” refers to whether the company has the right to direct or control what the worker does and how the worker does it. In the UFC, fighters are able to fight in a manner they see fit. Some fighters are mostly standup fighters; some fighters grapple or wrestle; and many fighters use a combination of fighting styles. Although the UFC may attempt to incentivize a more exciting fighting style, it does not control what method a fighter uses in the Octagon. Because of this freedom for the fighter to employ whatever method he or she chooses to execute his or her craft, this category of the independent contractor test is satisfied.
“Financial control” tests whether the company has the right to control economic aspects of the worker’s job. The IRS expects that independent contractors will have a significant personal investment in their training and tools, as well as the following:
• Paying their own expenses. UFC fighters are responsible for the costs of their own training, which coincides with this expectation. While an employee is often reimbursed for work-related expenses, independent contractors have fixed ongoing costs for which they are responsible. This element is further illustrated by fighters paying to train year-round even when they do not have a fight scheduled.
• Ability to sustain a profit or loss for a project. Although much has been said about John Cholish’s payday for his recent fight in Brazil, independent contractors are viewed as such if they have the opportunity to make a profit or sustain a loss for a project. This differs from an employee, which typically receives his or her income through a recurring salary regardless of the performance of the employer. The nature of being an independent contractor means that there is some element of risk in regards to the upside or downside for a project’s compensation.
• The payment is based on the task and not by the duration. UFC fighters are typically paid after completing a fight. Fighters that win their bouts make an additional win bonus with regards to their fight, yet the win bonus is the same if the fight goes 25 minutes or 25 seconds. This basis of payment is indicative of an independent contractor relationship.
The “type of relationship” between the worker and the company is the final category the IRS uses in its determination. Independent contractors should be hired for a fixed period of time and not indefinitely. UFC fighters are not signed for indefinite periods since their contracts contain fixed bout lengths, as well as options for termination. Independent contractors typically do not receive company benefits. However, as noted below, the UFC has made a notable exception to this rule.
Additionally, independent contractors should not be performing a key aspect of the regular business of the company. Fighters may appear to perform a key aspect for the UFC, but the IRS primarily uses this distinction to differentiate between members of the company that provide services on a constant basis versus contracted workers or vendors. For example, the UFC’s internal accountants or web designers do work for the company on a broad, daily basis and thus are a key aspect of the regular business of the company. Since individual UFC fighters are performing their tasks at most three to four times a year, they may not be viewed as a key aspect of the regular business of the company; although, the importance and prominence of UFC fighters could make this an arguable point.
With these tests in mind, it is important to note that most contracts will contain clauses that modify these general concepts. For instance, although independent contractors are generally thought to offer their services to many entities rather than a single company, the UFC contract contains an exclusivity provision within the realm of combat sports:
3.5 During the Term, ZUFFA shall have the exclusive right to promote all of Fighter’s bouts and Fighter shall not participate in or render his services as a professional fighter or in any other capacity to any other mixed martial art, martial art, boxing, professional wrestling, or any other fighting competition or exhibition, except as otherwise expressly permitted by this Agreement.
Although the UFC does maintain this exclusivity with regards to the fighter’s services within the realm of combat sports, the UFC does include a clause that stipulates the general freedoms that independent contractors enjoy:
OTHER ACTIVITIES OF ZUFFA
18.2 Nothing herein shall prevent Fighter from engaging in any other business, trade, profession or other activity; provided that such other business, trade, profession or other activity does not involve the Fighter engaging in mixed martial arts contests or any other activity prohibited under this Agreement, and does not interfere with the Fighter's training or performance.
The most unique aspect of fighting as an independent contractor for the UFC is that the UFC provides health insurance. Independent contractors do not typically receive benefits that employees commonly receive. Until 2011, fighters in the UFC were provided health insurance for injuries sustained during their actual fights but not for injuries sustained in training. A significant amount of injuries occur during the training period since fighters often train for weeks at a time to prepare for a fight. In May 2011, the UFC announced that all its fighters under contract would have medical and dental insurance coverage for injuries that occurred both in competition and during everyday life. While providing benefits such as health insurance is not exactly the hallmark of most independent contractor relationships, it is certainly a welcome step toward the most laudable goal of any mixed martial arts promotion -- fighter safety.
Jeffrey Aris is an attorney at the global law firm Hogan Lovells, and is experienced in matters relating to the business of MMA. This article does not provide legal advice, and any opinions expressed in this article are solely those of the author and do not reflect the views of his law firm. He can be contacted at [email protected]