written on behalf of Feigenbaum Law
More than 16 months after filing a formal grievance alleging that NFL owners and teams had colluded to keep him off the field, former San Francisco 49ers quarterback, Colin Kaepernick, has reached a formal (and confidential) settlement with the league.
After the lengthy legal back and forth, Kaepernick has likely walked away with tens of millions of dollars. However, from a tax law perspective, how much of this settlement will he be able to take home and how much will be subject to tax?
Taking a Knee
During a now infamous NFL game back in 2016, Colin Kaepernick refused to stand during the playing of the U.S. national anthem in protest of police shootings of black men. He later told the media, “I am not going to stand up to show pride in a flag for a country that oppresses black people and people of color.”
Notably, while he initially sat when the anthem was played during games, he eventually began to kneel instead after another player, who was also a military veteran, suggested that kneeling would allow Kaepernick to protest while showing respect for the flag.
The move was controversial, sparking outrage on both sides: first among those who completely disagreed with Kaepernick’s actions, calling them unpatriotic and an affront to veterans, and subsequently, among those who later believed that Kaepernick was being blacklisted by the NFL for his actions.
Kaepernick has not played in the NFL since the 2016 when he first began his protests. He became an unrestricted free agent following the protests, opting out of his final year of contract with the 49ers in 2017 before the team had a chance to release him.
Kaepernick filed his formal complaint in October 2017 after he was unable to get on any team’s roster following his take a knee campaign. Fellow NFL player Eric Reid, who had protested alongside him, also filed a grievance. The complaints accused all 32 NFL teams of colluding against them.
Pursuant to the collective bargaining agreement, the burden is on a player alleging collusion to prove that owners actively conspired against him. In this case, Kaepernick and Reid would have to establish that at least two teams, or the league and at least one team, had conspired together to prevent them from playing. Collusion claims can be challenging to prove.
Under the terms of the players’ collective agreement with the league, the grievances were to be heard by an arbitrator appointed by the NFL and the NFL Players Association. In August 2018, that arbitrator, Stephen B. Burbank, ruled that Kaepernick’s lawyers had gathered enough evidence for the matter to proceed further to a full hearing. The NFL adamantly denied any collusion and had asked that the matter be dismissed.
Following Burbank’s ruling, all signs pointed towards the matter proceeding further. Under the terms of the collective agreement, a ruling in Kaepernick’s favour would not entitle him to a spot on an NFL team, but he would be eligible to receive the money he may have earned if he had been signed as a free agent, in addition to about double that amount in punitive damages. In his last year playing with the 49ers, Kaepernick made more than $14 million.
Settlement is Announced
In a brief joint statement issued in February, the NFL noted:
For the past several months, counsel for Mr. Kaepernick and Mr. Reid have engaged in an ongoing dialogue with representatives of the NFL. As a result of those discussions, the parties have decided to resolve the pending grievances. The resolution of this matter is subject to a confidentiality agreement so there will be no further comment by any party.
The players’ lawyer tweeted a similar statement.
The NFL Players Association issued their own statement, saying:
We continuously supported Colin and Eric from the start of their protests, participated with their lawyers throughout their legal proceedings and were prepared to participate in the upcoming trial in pursuit of both truth and justice for what we believe the NFL and its clubs did to them.
The exact details of the settlement are subject to a confidentiality agreement. It remains unclear how much money the settlement involved, or whether the League admitted any wrongdoing.
Earlier this year, Reid signed a three-year contract with the Carolina Panthers. It remains unclear whether Kaepernick will return to playing.
Taxation of Legal Settlements
There are a number of things to keep in mind when considering the potential tax implications of the NFL settlement.
Firstly, judgments and settlements are treated the same- whether a matter proceeds to full hearing or trial, or whether it settles beforehand (as it did in this case), the amount received at the end will be taxed the same.
Secondly, the biggest factor that will determine how a settlement amount will be treated will be the underlying basis for the claim. For example, if an employee is terminated from their job and sue as a result (for wrongful dismissal, discrimination, etc.), any settlement they may receive will be considered wages and will be taxed accordingly. If, however, a business owner sues another business alleging, for instance, lost profits as a result of the other business’ actions, any settlement received would be considered ordinary income, and would be taxed differently.
Another factor to consider would be damages. In general, only damages received for physical injury (i.e. injuries suffered in a car accident, etc.) will be tax-free. This is a much narrower definition than previously when damages received for any personal injury were considered tax-free (the previously existing broader definition could encompass emotional distress, and other non-physical injuries suffered). Punitive damages are always taxable, as is prejudgment or postjudgment interest.
We will continue to monitor developments in this matter and will provide updates as they become available.
At Feigenbaum Law, our highly skilled team provides a range of cross-border tax services to top athletes and entertainers in Canada and the United States. Our experience and extensive knowledge of both countries’ tax systems have made us trusted advisors to professional athletes, as well as agents, coaches, and managers who routinely come to us for assistance with their tax and legal work. Our knowledge of jurisdictional laws and regulations can help lower your overall tax risk and yield sizable tax benefits.
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