An introduction to Major League Baseball’s salary arbitration process

Published 24 April 2018 By: Kevin Cooper

Baseball on desk with pen, glasses and books

The 2018 Major League Baseball (MLB) season is fully underway after what was a rather odd and contentious offseason for MLB players. The “Hot Stove,” as the baseball offseason is colloquially known, was rather cold during the winter of 2017-2018. While there were some big names traded (Giancarlo Stanton1, Andrew McCutchen2, and Marcell Ozuna3) and a big international signing (Shohei Ohtani4), the dearth of big free agent signings, all with talk of potential collusion5 by the owners, turned out to be the biggest story of the winter.

While the free agent market was slow this offseason, there was a notable increase6 in salary arbitrations going to hearing. While salary arbitrations usually don’t generate the same interest and fanfare as mega million-dollar free agent signings, the upward trend most certainly has the attention of the baseball world7. In fact, given the ever-changing economics of baseball, salary arbitration may indeed become the favored way for players to cash in on their talents early in their careers. All the more so if large free agent contracts for veteran players continue to fall out of favor with Major League owners.

This article will focus on baseball’s salary arbitration process, looking at:

  • its history;

  • the technical process as set forth in 2017-2021 Basic Agreement between Major League Baseball and the Major League Baseball Players Association, otherwise known as the Collective Bargaining Agreement (CBA); and

  • the implications of the use of the arbitration process this offseason and into future years.

As one of only two professional sports leagues to utilize salary arbitration as part of its collectively bargained agreement (The National Hockey League is the other8), it is important to understand the role salary arbitration currently plays in baseball’s economic model.

History

Prior to the 1960’s, player movement in Major League Baseball was restrained by what was known as the “Reserve Clause9.” This meant that when a club signed a player, it retained that player’s rights in perpetuity, whether the player was under contract or not. Generally, players signed one-year contracts that were renewed each year at a salary determined by the club owner. While the player could attempt to negotiate with ownership for a higher salary in the next contract, if they wanted to play Major League Baseball, they had to sign for what the club offered. The player could not offer their services to any other team in the league, which is what later became known as “free agency.” As you can imagine, this system gave team owners incredible leverage over the players and depressed MLB salaries for decades10.

In the late 1960’s and early 1970’s, player dissatisfaction with “Reserve Clause” led to the unionization of the players. The newly formed Major League Baseball Players Association11 (MLBPA) set its sights on gaining freedom of movement for the players, increasing player salaries, and generally improving the conditions of employment for all players. After a number of highly contested legal cases12, players gained the right to negotiate higher salaries through free agency after six years of Major League service. Just as important, in 197313 players gained the right to salary arbitration. While the eligibility threshold has varied14 in the intervening years, the current system where players become eligible for arbitration after three to six years of service (and in some cases, those with just two years of service) closely resembles the original iteration. The practical effect of these decisions meant that while clubs could control player wages for the first three seasons of a player’s career, subject to the minimum league-wide salary agreed upon with the union, in years three to six, the player’s salary would indeed rise, albeit it slowly. Once a player became a free agent, then the likelihood of a huge payday for the player became a real possibility.

During the 1980’s and 1990’s, though the arbitration process was used, the number of cases going to hearing was relatively small15. The trend continued through the 2000’s, and even into the 2010’s16. However, the number of cases going to hearing has increased dramatically over the past five years17, especially so in the 2017-2018 offseason.

After MLB and the MLBPA negotiated and signed the most recent CBA in 201618, the question began to be asked as to whether the owners, collectively, are using its provisions to make a concerted effort to reduce overall player wages. The most recent offseason set an all-time low for the number of large free agent signings19, which could indicate that owners no longer desire to spend millions of dollars on long-term contracts for veteran players. The practical effect of this is that if players can no longer count on a potentially large long-term contract after six full seasons of Major League service, they will likely turn to the arbitration process and aggressively use it to seek higher salaries in seasons three through six. If this is to be the case, it is vital to have an understanding of how the arbitration process works.

 

The salary arbitration process

Article VI, Section E20 of the Collective Bargaining Agreement (CBA), sets forth how the salary arbitration process works. It details everything from player eligibility and the responsibilities of both the players and clubs, to the hearing process itself and the timetable for decisions.

 

Eligibility for arbitration

Section E(1) of the CBA21 sets out the parameters of player eligibility for the salary arbitration process. The general rule is that any player with a total of three or more years of Major League service, however accumulated, but with less than six years of Major League service, may submit the issue of the player’s salary to final and binding arbitration without the consent of the club.

In addition, Section E(1)22 allows what are known as “Super Two” players, a player with at least two but less than three years of Major League service to be eligible for arbitration if: (a) he has accumulated at least 86 days of service during the immediately preceding season; and (b) he ranks in the top 22% (rounded to the nearest whole number) in total service in the class of Players who have at least two but less than three years of Major League service.

This “Super Two” provision is routinely abused by the clubs as they purposely manipulate the service time of many young players by keeping them in the minor leagues longer than needed. This ensures that the club will have an extra year of control over a player before potential free agency, and coincidentally costs the club less money over the next three years. The most recent blatant example of this manipulation is Nick Senzel of the Cincinnati Reds23. While it’s a completely legal move by the clubs (i.e., nothing in the CBA prevents the practice), and the clubs always have a “valid” reason for sending the player down (i.e., the player needs to “work on his defense” or something along those lines), in reality the manipulation of service time does nothing but anger young players and their agents, making future cooperation between the parties a little less likely.

 

Submission of demands and selection of arbitrators

MLB and the Players Association exchange salary offers from all clubs and the demands of arbitration-eligible players on or about the second week of January as set forth in Section E(2) of the CBA24. The parties can withdraw from arbitration at any time prior to hearing if the parties agree upon a salary.

When the players and clubs exchange salary numbers, each side provides one single salary figure25 for the upcoming season. Sometimes the amounts differ greatly. Sometimes they are quite close. (An example of this from the most recent off-season: Marcus Stroman of the Toronto Blue Jays26 submitted a figure of $6.9 Million dollars. The Blue Jays submitted a figure of $6.5 Million dollars.) These numbers are then submitted to a panel of three arbitrators27, jointly selected by the MLBPA and MLB’s Labor Relations Department.

Some clubs treat the deadline for submission of the salary figures as a hard deadline for the negotiation of one-year contracts. These teams are known as file and trial28 teams. Not every team takes this approach, but those that do use the tactic in hopes of forcing the players to accept the club’s last offer in order to avoid an arbitration hearing. The tactic is not always successful for the team, and indeed can unnecessarily anger a player willing to further negotiate in good faith prior to a hearing.

 

The hearing process

The arbitration hearings are conducted on a private and confidential basis, with each party limited to one hour for initial presentation and one-half hour for rebuttal and summation. The parties exchange any written materials to be utilized at the outset of a hearing. The arbitration panel assigns such weight to the evidence as appears appropriate under the circumstances. Though neither party carries the burden of proof for the hearing, the player always presents first29.

The criteria30 to be utilized by the arbitration panel consists of the following:

  1. The quality of the Player’s contribution to his Club during the past season (including but not limited to his overall performance, special qualities of leadership and public appeal);

  2. The length and consistency of his career contribution;

  3. The record of the Player’s past compensation;

  4. Comparative baseball salaries (of all comparable players, not just one comparable player or a specific group);

  5. The existence of any physical or mental defects on the part of the Player;

  6. The recent performance record of the Club, including but not limited to its League standing and attendance as an indication of public acceptance.

The player and his representatives will obviously present evidence which places the player in the best possible light, arguing that the player’s substantial contributions to his team’s overall success merits the higher wage. The club, on the other hand, is in the position of having to defend its lower offer by either showing the player’s statements to be untrue, or by presenting evidence that the player has any number of negative attributes which relegate him to lesser importance to the club. In some arbitration cases, these negative statements by the club cause a great deal of harm31 to the long-term relationship with the player. Clearly, this is an unintended byproduct of the arbitration process.

Baseball, more than any other sport, is driven by its statistics. They are the only way to accurately judge one’s capabilities on a year to year basis and compare players across generations. The last dozen years have seen a veritable explosion of statistical categories. Where players used to be judged primarily on statistics such as their batting average, hits, runs batted in; or, in the case of pitchers, their wins, strikeouts, and earned run average, players and clubs now use a myriad of advanced statistics32 to gauge player value. In the arbitration process only publicly available statistics are admissible33. This includes data available through subscription-only websites (of which there are many). Statistics and data generated through the use of performance technology or wearable technology34 (i.e., how fast someone may run, bat speed, exit velocity) are not admissible since the majority of such statistics are highly subjective.

Though the evidence to be utilized by the Player and Club during the hearing is quite broad, there are a number of topics that are not admissible35 at hearing:

  1. The financial position of the Player and the Club;

  2. Press comments, testimonials or similar material bearing on the performance of either the Player or the Club, except that recognized annual Player awards for playing excellence shall not be excluded;

  3. Offers made by either Player or Club prior to arbitration;

  4. The cost to the parties of their representatives, attorneys, etc.;

  5. Salaries in other sports or occupations; and

  6. Reference to the MLB Competitive Balance Tax (also known as the “Luxury Tax”)

 

The arbitration decision

Per Section E(13) of the CBA36, the arbitration hearings are scheduled to be held from February 1 to February 20 absent a contrary agreement of the parties. The arbitration panel may render the decision on the day of the hearing, and make every effort to do so not later than 24 hours following the close of the hearing. The most important facet of the decision37 is that the arbitration panel “shall be limited to awarding only one or the other of the two figures submitted.” ** This means that either the player wins or the club wins. There is no middle ground.

Further, the arbitrators do not issue an opinion38. The determination by the arbitration panel is only released to the Club, the Player, the MLBPA, and MLB’s Labor Relations Department. The figure is eventually released to the public by either the player or the club, generally by the side that prevailed. Once the decision is made, the decided upon amount is entered onto a contract signed by the player prior to the hearing and forwarded to the Commissioner’s office. That will then be the player’s contract and salary amount for the upcoming season.

 

Conclusion

By most accounts, Major League Baseball is in rude health with overall revenue increasing year on year, eclipsing the $10 Billion mark in 201739. Individual team valuations have also increased, with the New York Yankees topping the list at an eye-watering valuation of roughly $4 Billion40. But these successes mask the ever-growing gulf between the owners, who are getting richer, and the players, who are seeing their share of baseball’s revenue decline. In fact, 2018 has seen the first decline in overall player wages41 in ten years, driven primarily by fewer large free agent contracts. Many players42 and union officials43 believe this decline is by design, and they are not pleased44. The next CBA negotiations will not take place for approximately three years, so there is little the players can do to change the current system. Therefore, it is a very likely that salary arbitration will continue to play a prominent role in the years to come, and remains the most immediate and viable option for players to fight against the increasing revenue imbalance.

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Author

Kevin Cooper

Kevin Cooper

Kevin Cooper is a US attorney based in Chicago with a keen interest in sports law. Kevin represents and counsels large and small companies on matters involving employment, workers' compensation, injury, contract/general business, and maritime/admiralty law.