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NFL, NBA, and NHL — Understanding the “Salary Cap”

 

G. Singh*

 

Each of the National Football League (“NFL”), National Baseball Association (“NBA”), and the National Hockey League (“NHL”) have a mechanism—within the corresponding collective bargaining agreement (“CBA”) with the respective players’ union—for setting the maximum amount of collective salary for the team’s roster.  Such maximum salary is referred to as a salary cap.  This article explains each league’s unique formula for calculating the salary cap, and then lists high-level differences between such formulas for the NFL, the NBA and the NHL.

 

  1. Calculation of Salary Cap

 

NFL

 

To calculate the salary cap, the NFL CBA[1] first defines a term called All Revenues, also referred as AR, by specifying the revenues that are included under the AR and the revenues that are excluded from the AR.[2]  Further, the NFL CBA categorizes the AR into three buckets: (1) League Media, (2) NFL VenturesPost Season, and (3) Local.[3]  Prior to every new league year, the NFL calculates and announces a projection of the AR (“Projected AR”) for that league year.[4] 

 

The portion of the AR that is allocated to players is referred to in the NFL CBA as the Player Cost Amount.[5]  The projected Player Cost Amount is calculated as the sum of (1) 55% of projected League Media AR, (2) 45% of projected NFL Ventures/Postseason AR (other than AR from new line of business projects), (3) 40% of projected Local AR, and (4) if applicable, 50% of the net AR for new line of business projects, less (5) 47.5% of Joint Contribution Amount (which is a value that has been set to increase from $55 million at a rate of 5% every league year).[6] 

 

The total amount of money within the Player Cost Amount that is available for the salaries of all the NFL players is the difference between Player Cost Amount and projected benefits across the NFL.[7] 

 

There are no exceptions that allow the salary cap to be increased.

 

NBA

 

The NBA CBA[8] defines the Salary Cap for each Salary Cap Year as 44.74% of projected Basketball Related Income (BRI) for such Salary Cap Year, less projected Benefits for such Salary Cap Year, divided by the number of Teams scheduled to play in the NBA during such Salary Cap Year, other than Expansion Teams during their first 2 Salary Cap Years in the NBA.[9]  To understand this definition, the Salary Cap Year, BRI, Benefits, and Expansion Teams are clarified below.

 

The Salary Cap Year is period from July 1 through the following June 30.[10]  The BRI is defined as income received by the NBA, NBA Properties or NBA Media Ventures as a result of basketball operations.[11]  The Benefits include player pension benefits, player 401(k) benefits, player health and welfare benefits, post-career income plan, labor management cooperation and education trust, and some other benefits.[12]  Expansion Team is a team that becomes a member of the NBA through expansion following the effective date of the NBA CBA and commences play during the term of this NBA CBA.[13] 

 

The NBA CBA lists exceptions that allow teams to exceed the salary cap to sign players.[14]  Some of these exceptions include: (1) an existing contracts exception, (2) veteran free agent exception, (3) disabled player exception, (4) bi-annual exception, (5) non-taxpayer mid-level salary exception, (6) taxpayer mid-level salary exception, (7) mid-level salary exception for room teams, (8) rookie exception, (9) minimum player salary exception, and (10) traded player exception, and (11) reinstatement exception.[15] 

 

NHL

 

The NHL CBA[16] refers to the salary cap as an upper limit of team payroll range.[17] 

 

To calculate the upper limit, a midpoint of the team payroll is first calculated using the following mathematical formula: Midpoint of team payroll range = {(Preliminary Hockey Related Revenues for the prior league year / 2) - Projected Benefits} / Number of clubs playing in the NHL.[18]  The Preliminary Hockey Related Revenues (HRR) is the preliminary HRR for the league year ended June 30, as calculated by an independent accounting firm based on actual or estimated revenues and expenses of the NHL and the teams within the NHL.[19]  The Projected Benefits refer to the entire maximum aggregate amount of Benefits projected to be paid to all NHL players for such league year.[20]  The midpoint is then adjusted upward by 5% every league year to attain an adjusted midpoint.[21]  The upper limit is then calculated by multiplying the adjusted midpoint by 1.15.[22]   

 

NHL’s salary cap currently has two limited exceptions for: (1) bona fide, long-term player injuries or illnesses,[23] and (2) a performance bonus cushion.[24]

 

       II.     Comparison of salary caps of NFL, NBA and NHL

 

The NFL’s salary cap is a hard cap, as it does not allow exceptions for increasing the salary cap.  Having a hard cap can be advantageous, as this generally prevents teams with deeper pockets from outspending others to attract the best players, which usually demand the highest salary.  Therefore, the hard cap creates a level playing field for all teams regardless of the depth of their pockets.  The hard cap can however have some disadvantages as well.  For example, because the hard cap is unlikely to discourage star players from negotiating down their contracts, it may leave little money available for rookies and aging veterans, who are often left with significantly lower salaries.  Moreover, the hard cap can limit the team in spending money on additional salaries when a player gets disabled, and also may discourage trading of players between teams.

 

On the contrary, the NBA’s and NHL’s salary caps are soft caps, as they list exceptions for increasing the salary cap, as noted above.  These exceptions however differ for the NBA and the NHL.  The NBA’s exceptions, which are a lot more in count than the NHL’s exceptions, appear to be encouraging for several entities such as parties to valid contracts who executed a contract prior to the current rules but would now violate the current rules, rookies, veterans, players replacing disabled players, and traded players, and in turn the teams.  The NHL’s exceptions permit giving out at least a reasonable amount of performance bonuses without affecting the salary cap.

 

 

*            The author is a student in the J.D. program at Rutgers Law School.  The opinions expressed herein are those of the author and do not necessarily reflect the views of any other entity.  This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1]             Collective Bargaining Agreement between National Football League and National Football League Players’ Association as entered on Aug. 4, 2011.

[2]             NFL CBA at Article 12, Section 1 (pages 61-70).

[3]             Id. at Article 12, Section 6 (page 79).

[4]             Id. at Article 12, Section 3 (page 75).  

[5]             Id. at Article 12, Section 6 (pages 79-81).

[6]             Id. at Article 12, Section 6 (page 80).

[7]             Id. at Article 12, Section 6 (page 81).

[8]             Collective Bargaining Agreement between National Basketball Association and National Basketball Players’ Association as entered on Jan. 19, 2017.

[9]             NBA CBA at Article VII, Section 2 (page 159).

[10]            Id. at Article I, Section 1 (page 10).

[11]            Id. at Article VII, Section 1 (page 125-39).

[12]            Id. at Article IV, Sections 1-6 (pages 67-105).

[13]            Id. at Article I, Section 1 (page 4).

[14]            Id. at Article VII, Section 6 (page 198).

[15]            Id. at Article VII, Section 6 (pages 198-216).

[16]            Collective Bargaining Agreement between National Hockey League and National Hockey League Players’ Association as entered on Feb. 15, 2013.

[17]            NHL CBA at Article 50, Preamble (page 223).

[18]            Id. at Section 50.5(b) (page 258).

[19]            Id. at Sections 50.1(e) (page 245) and 50.12(c) (page 303).

[20]            Id. at Section 50.3(b) (page 253); for a definition of Benefits, see id. at Section 50.3(a) (pages 251-53). 

[21]            Id. at Section 50.5(b) (page 258).

[22]            Id.

[23]            Id. at Section 50.10(d) (pages 290-94).

[24]            Id. at Section 50.5(h) (pages 280-282).

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