Sports fans have long looked for ways to be a part of the action. The co-owner of the Oakland Raiders developed a fantasy golf game back in the 1950s. In the 1980s, journalist Daniel Okrent created “Rotisserie” League Baseball, named after a New York restaurant, La Rotisserie Francaise, where they met to play.

But the rise of the Internet led to a boom in fantasy sports, and with that boom, a massive rise in workplace gambling. These seemingly mainstream activities can create compliance concerns for in-house counsel.

Workplace Sports Gambling—It’s Not Going Away

Make no mistake about it—your employees are gambling at work. Approximately 70 percent of employees participate in some sort of workplace betting pool; around half of that consists of fantasy sports leagues.

More than 57 million people in the U.S. and Canada play fantasy sports, creating a multi-billion dollar industry that is estimated to grow by at least 10 percent annually. It is estimated that the average player spends more $556 per year on league fees and other fantasy costs.

Daily fantasy is a particularly hot segment of the fantasy sports world. Daily fantasy is an accelerated version of season-long fantasy play in which a contest is decided in a week or even a single day.

Two companies—FanDuel and DraftKings—dominate the daily fantasy industry. It is estimated that daily games will generate $14.4 billion in 2020.

Another common form of workplace gambling started long before the Internet—the March Madness bracket. Every year, offices around the country put together informal pools to see who can predict the next college basketball champion. While many employees don’t even see this as gambling, March Madness accounts for $2 billion in wagers each year. More people fill out brackets than voted in the 2012 Presidential election.

Definitions of “Gambling” Vary from State-to-State

Traditionally, gambling is defined by the three-pronged test of consideration, chance and prize. However, the legal definition of “chance” varies from state to state.

Many states use the “Dominant Factor Test” (sometimes called the “Predominant Purpose Test”) to determine whether or not an activity should be classified as gambling. Applying the Dominant Factor Test, in the 1973 Alaskan case Morrow v. State, the court determined that the following criteria determine a game of skill:

  • Participants must have a distinct possibility of exercising skill and must have sufficient data upon which to calculate an informed judgment.
  • Participants must have the opportunity to exercise the skill, and the general class of participants must possess the skill.
  • Skill or the competitors’ efforts must sufficiently govern the results.
  • The standard of skill must be known to the participants, and this standard must govern the results.

However, some states employ the stricter “Any Chance Test.” This means that if any element of chance affects the outcome, then the game is considered one of chance. Under a literal interpretation of this definition, virtually any sport, game or contest could be considered a game of chance.

Still other states employ the “Gambling Instinct Test.” This test focuses more on the player’s motivations than the actual nature of the activity. If the game or contest is determined to appeal to a player’s “gambling instinct,” then it is determined to be prohibited activity.

Not surprisingly, these different standards lead to radically different rulings from court to court.

So how courts determine skill versus chance often decides whether or not activities such as sports betting, fantasy sports and daily fantasy should be classified as gambling. This often is a gray area. As the Pennsylvania Supreme Court ruled in the 1953 case Commonwealth v. Laniewski, “It is common knowledge that the predictions [of multiple real-world sporting events] even among these so-called ‘experts’ are far from infallible.”

Consideration is another required prong in the traditional test for gambling. That’s why a bona fide promotional sweepstakes, in which no purchase is necessary, is considered a legal activity in most states.

Workplace Gambling Under Federal Law

A number of federal laws potentially impact gambling in the workplace, including the Interstate Wire Act, the Racketeer Influenced and Corrupt Organizations Act (RICO), the Professional and Amateur Sports Protection Act and the Unlawful Internet Gambling Enforcement Act.

The Interstate Wire Act prohibits “engaging in the business of betting or wagering [through the use of] a wire communication [in interstate commerce.]” In this case, “wire communications” include the Internet.

In 2011, the U.S. Department of Justice issued an opinion that the Wire Act applies to sports betting and not other types of online wagering. The opinion was in response to a plan by New York and Illinois to sell state lottery tickets online.

The following year, The Fifth Circuit Court of Appeals ruled that the Wire Act prohibits transmission of information for sports betting, but not for Internet gambling or games of chance.

The Professional and Amateur Sports Protection Act became law in 1992 at the request of professional sports leagues and the NCAA. It prohibits wagering schemes based on competitive games in which professional or amateur athletes participate. The Act is enforceable by U.S. and state Attorneys General and sports organizations.

The Unlawful Internet Gambling Enforcement Act (UIGEA) was enacted in 2006 and was aimed at offshore online gambling/poker sites. It prohibits banks from knowingly accepting funds in connection with unlawful Internet gambling. In this case, “unlawful” is defined based on existing state or federal law.

But there is a specific carve-out in the law for fantasy sports. The UIGEA does not apply to fantasy or simulated sports games in which the following conditions apply

  1. Not based on current membership of actual team;
  2. All prizes are known in advance;
  3. Winning outcomes reflect relative knowledge and skill of participants determined primarily by accumulated statistical results of individuals in multiple real-world sporting events;
  4. No winning outcome is based on the score, point-spread or performance of any single team, or the single performance of an individual athlete.

However, the UIGEA does not preempt state law. States still can ban fantasy sports even if the game falls within the definition of fantasy sports in UIGEA.

Controversy and Uncertainty for Employers

For employers, the patchwork of state laws can be confusing and even contradictory, particularly for companies with operations in multiple states. What’s more, the state laws governing fantasy sports and workplace gambling continue to be in flux across the country. Fantasy sports websites prohibit players from participating in some states, but the list of prohibited states differs from website to website and changes over time as the law evolves and changes.

So while fantasy sports are widespread, they are illegal in many states and uncertain in others. And despite the popularity of NCAA bracket pools, they are illegal in most states if they involve an entry fee and prize.

In the vast majority of cases, such low-level gambling flies under the radar of law enforcement. Marc Edelman, a City University of New York Associate Professor who studies fantasy sports and gaming law, said, “There’s just so much of this going that it would be nearly impossible to detect everyone, and if they did detect everyone that is technically in violation, nearly half of America would be facing criminal charges.”

But there are extreme examples where sports betting led to criminal charges. For example, police in New Jersey arrested the ringleader of a March Madness betting pool in 2010. More than 8,000 participants—including prominent sports broadcasters, police officers, athletes and lawyers—paid $100 to enter.

So what are the best practices employers and their in-house counsel can observe?

Don’t sponsor fantasy sports leagues or March Madness pools. Depending on the state, doing so endorses illegal (or borderline legal) activity.

Also, create technology policies that define the parameters of using company computers. Use Internet firewalls to block fantasy sports sites at the office.

Finally, consistently enforce policies across all departments and locations at all levels of employment.