Riot Games fined Origen earlier in the week because its contracts were not in compliance with requirements for operating a business in Germany. The issue seemed complex, and upon further review Riot’s ruling appears a bit more perplexing.
Origen’s failed compliance in itself isn’t astonishing because it’s fairly complicated process to undergo. But the implications of Riot’s ruling are curious because in a little more than a month, the summer split of the European League of Legends Championship Series will start. Fnatic and Misfits both have slots they must sell before then, meaning two new entities will enter the LCS. Esports lawyer Anna Baumann represents teams in the European LCS and said it can take up to two months to attain compliance, meaning it’s possible neither new team would be compliant in time for the start of the summer split. So why would Riot penalize Origen for an offense when the teams entering the league for the summer will likely be non-compliant, at least at the start?
Slingshot’s Vince Nairn conducted a short Q&A with Baumann to help better understand compliance and the potential challenges for whichever teams buy the Fnatic Academy and Misfits Academy LCS spots.
So I’m sure a lot of people probably read that Riot ruling about Origen (Tuesday) and aren’t necessarily sure what it even means to be compliant. What exactly does it entail for a team to reach compliance as far as the EU LCS in Germany?
Having promoted compliance from the very beginning, I am working closely with some of the EU LCS teams to ensure a sophisticated and compliant approach for player employment in Germany.
Teams have to meet very strict statutory requirements operating a business with employees in Germany. Working with the “trias of compliance” (tax advisor, accountant and lawyer), these are the requirements teams have to meet:
(1) Registration of the business with tax, social security and local administrative authorities.
(2) Work eligibility of each foreign player in the German labour market (EU citizen or work permission by the National Labour Agency (“Arbeitsagentur”)).
(3) Signing up all players for statutory or private health insurance and applying for a social security number to allocate social security contributions.
(4) Monthly tax and social security withholdings (health insurance, unemployment insurance, pension fund, sickness fund, etc.) in accordance with pay slip provided by accountant/tax advisor.
(5) Payments of monthly tax and social security contributions (paid 50 percent out of the pocket of the employer) to the respective authorities.
At the same time, the employer is at huge risk in case of non-compliance. Immense administrative and even criminal penalties can be the consequence.
How long does it typically take to complete this process? Is there any chance this could affect the new teams entering the EU LCS in the summer split for Misfits Academy/Fnatic Academy?
Given the complexity of German regulation in the areas of tax and social security, it can take up to two months to set up steps 1-3. In my experience, the learning curve as foreign entity (not already operating in Germany) as well as the coordination with the players can also significantly slow down the entire process.
Compliance with steps 4 and 5 requires professional accounting as well as specific legal and tax knowledge of the German system. Again, as foreign entity, it takes time to learn all necessary requirements and can be very costly.
Given these hard facts, anyone who is interested in the acquisition of an Academy team, is facing very challenging tasks such as performing due diligence in record time, setting up a compliant structure with EU LCS rules and German statutory regulation. However, I would hope that Riot allows for a transitional phase for buyers. Also, professional advisors like me are already on stand-by to join the “compliance marathon” to ensure that buyers have a good start with their esports venture, concentrating on what counts most for the fans — competitive success.
Moving forward, it seems wise to only allow the promotion of teams who are already experienced in operating an esports team in Germany. Learning the ropes in the Challenger league and then applying all lessons learned in the LCS will level the playing field for all teams in the LCS. Therefore, I commend PSG for taking the realistic route of a long-term, sustainable approach starting in challenger league.
Is there something similar for the NA LCS teams? If so, how is/are the process/requirements any different?
As a German lawyer, I am not qualified to assess the situation in California. However, from speaking to NA colleagues, I am under the impression that compliance requirements are similar, both in cost and risk.
What are the main things fans should take away from a ruling like this?
Operating an esports business in Germany requires a sophisticated, knowledgeable approach. Finally, Riot takes the transition into a fully compliant league in Europe very seriously and is not afraid of penalizing shortcomings by teams. Moving forward, this will transform the league into a sustainable system where players are better protected and entitled to statutory benefits such as 70 % of their net salary in case of unemployment. For teams, this means to bear high operating cost while competing with other regions for the best players.