An introductory guide to the NFL’s salary cap

Published 11 March 2016 By: Tom Cripps

American_Footballer_in_Red_and_Blue

With the National Football League (NFL) Free Agency period beginning this week and the College Draft1 around the corner, a good basic understanding of the NFL’s salary cap rules will enrich any analysis of a team's roster decisions at this intriguing time of the year.

This article provides an introductory guide to the inner workings of the NFL’s salary cap, explaining its objectives, key provisions and how it achieves them. The salary cap rules are found at Articles 12-14 of the NFL Collective Bargaining Agreement (CBA).

 

Why does the NFL have a salary cap?

The NFL salary cap is primarily designed to enable the league to control team spending on players’ salaries in order to limit financial risks and underpin the financial integrity of the league.

The cap is also aimed at maintaining parity of competition within the League, with all teams being subject to the same spending limits. In theory, this creates a leveler playing field.

The salary cap rules aim to achieve these objectives while still providing sufficient flexibility to allow teams to creatively manage their spending. This is how they work.

 

Maximum and Minimum Spend

The cap limits how much each NFL franchise can spend on player salaries per year.2 One point to note is that the cap only applies to players, not coaches, trainers or other personnel.3 In 2014, the salary cap was set at $133 million for each team, $143.28 million in 2015, and for 2016 is $155.27 million.4

The League also sets a minimum salary spend, which applies not annually, but to each of the four-year periods of the current CBA, from 2013 – 2016 and 2017 – 2020.

The "Guaranteed League-Wide Cash Spending"5 provision demands that for each of those periods, at least 95% of the salary cap must be spent across the League. As well as this guaranteed League-wide spending, for each of the same four-year periods, each team must also individually spend at least 89% of their team salary cap for that period.

The "Minimum Team Cash Spending"6 provision states that where a team fails to spend 89% of its Cap over a four-year period, any shortfall shall be paid on or before the next September 15 by the team who fell short. Payment is made directly to any players who were on the team roster at any time during those four years, subject to reasonable allocation instructions from the NFL Player's Association (NFLPA).

Once teams have met their obligations to spend 89%, any remaining shortfall up to the 95% threshold becomes the responsibility of the League, who shall pay the shortfall directly to the players who were on a Club roster at any time during the seasons, again subject to reasonable allocation instructions from the NFLPA.

The maximum and minimum spend provisions demonstrate how the NFL Cap effectively shares wealth between the League, the teams and its players.

 

How is the salary cap calculated?

The provisions relating to the calculation of the salary cap at Article 12 CBA7 are extensive and complex. It is beyond the scope of this article to explain them in depth, but it is worth briefly summarizing them to indicate where the salary cap figure comes from and what it relates to.

The NFL salary cap is calculated by reference to projected annual League and club revenues foreach league year, defined as "All Revenues", or “AR”. Details of how this figure is calculated are set out in Article 12 CBA. In summary, it can be broken down into three categories:

  • League Media AR e.g. television rights sold nationally for entire for entire NFL games and internationally for live and delayed games; radio revenues; Copyright Royalty Tribunal revenues.
  • NFL Ventures/Postseason AR e.g. revenues arising from the operation of postseason games to be received by the NFL and NFL-affiliates such as NFL Network, and revenues arising from the operation of NFL-affiliated entities such as NFL Network.
  • Local AR e.g. all revenues to be received by Clubs or Club affiliates not included in either category above, including the sale or license of preseason television rights

These figures are combined to make total AR. Once the total AR figure is calculated, a percentage of it is set as the "Player Cost Amount", which is the total allowable expenditure on player salary and player benefits across the league. The amount for player benefits is deducted and divided equally among the 32 teams, leaving the total salary cap which is also divided equally among the teams.

Calculating the salary cap by reference to revenues in this way ensures that it operates as a valuable cost control provision; as goes the health of the League and its teams collectively, so goes the size of the salary cap.

This is not always the approach in sports with salary caps. For example, take the wage cap featured in the English Premier League’s (EPL) current handbook. Daniel Geey wrote for LawInSport8 about how the English Premier Leagues’ soft wage cap limits club spending on player services and image contracts but allows clubs to spend over the salary cap, provided the spending is justified by their own commercial revenues during a particular season.

Making the salary cap relative to each club's individual turnover allows for drastic differences in spending between clubs. As Mr Geey noted, “this regulation will continue to provide clubs participating in the Champions League… with a real competitive advantage” due to the additional TV revenue generated. The NFL makes no special allowances for rich or successful clubs, who must ultimately operate within the parameters of the maximum and minimum spend provisions, which apply regardless of a club’s individual wealth.

When does the salary cap apply?

NFL teams are not required to comply with the salary cap until the first day of the League year, which for 2016, began on 9 March.

However, between this date and the first day of the regular playing season, the value of a team’s salary cap is determined by the rule of “Top-51”, meaning only the team’s 51 highest valued player contracts, tenders and offer sheets count.9 After this date, when final squad decisions are made, all of the team’s contracts are included.10 During the offseason, teams are permitted to have "negative cap room", such that they can retain a squad with a higher team salary than the salary cap allows.

What this means in practical terms is that teams can retain larger squads during the offseason, or more to the point, more higher value players, buying them time to make roster decisions before the date for salary cap compliance.

However, this does not equate to wild spending during the off season as players are not actually paid their salary until the regular season begins and the final squads have been chosen. When the time comes for actual spending, is when the salary cap tightens, controlling how much teams spend.

 

Is the NFL’s Salary Cap A “Hard Cap”?

As explained in an article by Christopher Stoner QC, there are three types of salary cap in sport:

  1. a hard cap, defined by a strict financial limit imposed on clubs;
  2. a soft cap, where the limit is calculated by reference to turnover; and
  3. a hybrid cap, where a club is allowed to spend a percentage or fixed sum, whichever is the greater.11

Technically, the NFL salary cap is a “hard” cap, as Art. 13 § 2 states that no team can exceed the annual cap figure.12 Furthermore, no special allowances are made for richer clubs, as opposed to the EPL's soft cap. The above provisions appear tailored to ensure that teams spend firmly within the parameters of the minimum and maximum spend limits.

Procedural provisions in the CBA are also designed to make it difficult to for a team to violate the Cap. All player contracts must go through the NFL League office and be deemed valid and approved by the Commissioner.13 Any contract violating the salary cap will be rejected. If a team suddenly finds itself over the salary cap, it has seven days to realign itself and may not sign any players until it regains cap room.14

Notwithstanding, salary cap violations do occur. The Denver Broncos were fined and penalised with lost draft picks for various non-disclosures that helped them circumvent the Cap between 1996 and 1998 seasons. It is alleged this helped them win the Super Bowl in 1997 and 1998.15 The Dallas Cowboys and Washington Redskins were also penalised by way of cap reductions for heavily frontloading contracts during the uncapped 2010 season.16

However, the salary cap is not completely restrictive. The following briefly explores the provisions in the CBA that allow teams to manipulate their cap figure to a certain extent:

  1. Signing bonuses - allow teams to spend in the present but only count some of that expenditure against the present cap, "pushing out" money onto future caps;
  2. Payment of Salary - teams can backload their players' salaries allowing them to cut the player at a future date before the expensive part of their contract becomes live; and
  3. "Carry-over" – allows teams to transfer cap room from one year to the next, effectively giving them a higher cap figure for the following year.

Ultimately however, these provisions are subject to checks and balances that reinforce the salary cap's primary aim of controlling spending and maintaining parity.

SIGNING BONUSES

The CBA introduces an important cap management tool under Article 13 Section 6(b)22: the signing bonus. It states that the value of a signing bonus will be prorated (divided) over the term of the contract on an equal basis, with a maximum proration of 5 years. For example, a $10m signing bonus, for a 5-year contract, will be credited to the cap at $2m for each year of the contract.

Crucially, the signing bonus is immediately due and therefore constitutes guaranteed money for the player, who would actually receive $10m up front. This offers an approach that works for both the team and the player. It offers the player guaranteed money immediately at his disposal, and allows the team to structure the contract in such a way that they can negate the impact of a particular player on the cap.

The use of signing bonuses comes with an important caveat however. While the player remains under contract to the team, the CBA’s proration mechanism works to their benefit. However, should the team decide to terminate the player's contract at any time prior to the expiry of the term, Article 13 Section 6(b)(ii) states:

For any player removed from the Team’s roster, or whose Contract is assigned to another Club via waivers or trade, on or before June 1 in any League year prior to the Final League Year, or at any time during the Final League Year, any unamortized signing bonus amounts will be included in Team Salary for such League Year.”

The effect of this subsection is that, while cutting a player releases a team from its annual base salary obligations to the player, freeing up salary cap room to that effect, the prorated signing bonus remains on the team’s cap figure as “dead money” and in fact all accelerates into the current league year.

For example, if Barcelona wished to re-sign Lionel Messi, but his salary demands exceeded the team's cap room, Barcelona could offer the sum as signing bonus instead. Thus, the team could spread the amount evenly over the term of the contract. This would work with a player of Messi's calibre, as Barcelona are highly unlikely to cut Messi's contract in his prime and absorb the impact of the acceleration mechanism. However, offering a high signing bonus to an experimental player, who the team may find they wish to cut two years into a five year contract, would mean either absorbing dead money, or keeping an unwanted player on the squad to avoid such a situation.

The signing bonus is an effective tool for teams who wish to mitigate a player's impact on their salary cap. However, it should be used with caution. If a team's cap relies too heavily on the benefits of prorated signing bonus, it will not have the flexibility to cut unwanted players without incurring a heavy impact on their salary cap figure due to the CBA's acceleration mechanism. This also ensures that teams cannot offer enormous signing bonuses that their cap cannot honour, reinforcing the maximum and minimum spend provisions.

Player Salary

Players are paid their annual salary in equal weekly or biweekly installments in arrears over the course of the regular season. Any time that the player spends “inactive”, whether at the beginning or end of the season, and whether due to injury or termination, will not be payable.

The NFL Player Contract, the pro forma of which is found at Appendix A of the CBA, contains an NFL standardtermination clause that states:

…any Player Contract may be terminated if, in the Club’s opinion, the player being terminated is anticipated to make less of a contribution to the Club’s ability to compete on the playing field than another player or players whom the Club intends to sign or attempt to sign, or another player or players who is or are already on the roster of such Club, and for whom the Club needs Room.17

This clause gives Clubs a tremendous amount of freedom in making roster decisions, whether based on playing ability or the cap – the two often go hand in hand. Whilst somewhat draconian from a player's perspective, this allows teams to quickly take control of costs, improve their cash flow or increase their cap room by cutting players.

Crucially, it also allows teams to utilise "backloading", where the greater part of a player's agreed salary is allocated to the latter years of a contract. Remembering that the moment a player is cut, any unearned annual salary no longer counts against the team’s cap figure, backloaded contracts allow a team to cut a player before the backloaded salary becomes due on the cap. This is an easy way to manipulate a team's cap figure, provided a player is willing to negotiate their contract in such a way.

However, in a previous LawInSport article (Part 1; Part 2),18 Ryan Becker explored the pro forma contract, noting its emergence from extensive negotiations for the 2011 CBA between the NFL Franchises, the NFL Player’s Association (NFLPA) and the League Office. Being a negotiated agreement, it readdress the balance of power by introducing the concept of guaranteed consideration. The CBA states:

This subsection shall not affect any Club or Club affiliate’s obligation to pay a player any guaranteed consideration.19

Unlike the NBA and MLB, payment under an NFL player’s contract is not automatically guaranteed. It must be earned by playing time and is paid in instalments, accordingly, as discussed above. As Becker points out however, the majority of contract negotiations therefore focus on addendums to a player’s contract that determine a proportion of the player’s salary that is to be guaranteed.

Guaranteed money thereafter has the same effect on the cap as signing bonus. Once a player is cut, any guaranteed salary accelerates into the year of termination and becomes dead money on that year's cap.

Guaranteed money clauses can be complex, but for present purposes it is simply important to note how the CBA ensures that teams cannot simply evade the cap in perpetuity. In giving NFL players the power to negotiate guaranteed money, it also ensures that money will eventually count against the cap. When that happens is down to each team. It must ultimately choose when it complies with the spending provisions, but it will eventually have to comply.

Carry-over

Finally, the CBA also introduces the concept of "carry-over". Provided teams have met the minimum spend thresholds within each of the CBA's four-year periods, a team may “carry over” Cap Room (the extent to which a team’s total Team Salary is less than the Salary Cap) from one League Year to the next,20 allowing them to effectively increase their cap for that year.

To carry Cap Room over, the Team must submit a written request to the League office no longer than 14 days prior to the start of the next League Year (defined as the period from March [_] of one year through and including March [_] of the following year, or such other one year period to which the NFL and the NFLPA may agree21). The notice should specify how much Room the team desires to carry over and will be adjusted by the League after the final end-of-year reconciliation.

A look at the NFL team salary cap positions here, adjusted after carryover, shows that every single team has carried over Cap Room from the previous year.22 This is another way in which the CBA allows for some flexibility in the management of a team's cap figure. Amounts vary from $11,587 (the Seattle Seahawks) to $32,774,928 (the Jacksonville Jaguars).23 The above examples illustrate how team spending relative to the cap can vary relatively widely from year to year. The teams with less cap room to carryover are generally those saddled with the burden of expensive contracts, or accelerated "dead money" as described above. The teams able to carry over large amounts of room are either those who have assembled a cheaper (often meaning younger) squad, or have pushed money out into future years.

Teams like the Jaguars will have to spend massively over the salary floor in the next 2 years in order to meet the requirements of the CBA’s minimum spending provision. Should that need to spend coincide with a sudden acceleration of "dead money", they could find themselves at risk of exceeding the salary cap and in need of taking drastic decisions to avoid the penalties. Thus, it is easy to see how mismanagement of the salary cap can leave a team's finances and its roster in an ominous position.

 

Comment

The role of salary caps in sports leagues across the world is a prominent topic at present, as financial regulation of sport becomes a bigger issue. The NFL's salary cap provides a blueprint for an effective model that other sports may look to draw upon. It has, by and large, achieved its aims of protecting teams from excessive financial risks and maintaining parity across the league, with a variety of Super Bowl winners in recent times and the sport going from strength to strength.

 

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Author

Tom Cripps

Tom Cripps

Tom is a paralegal who most recently worked in property litigation at Wedlake Bell, assisting on a broad range of matters across the department. He previously spent six months in commercial property and prior to that worked in international litigation.

He is a University College London LLM graduate.

Tom has a passion for sport (particularly tennis and American football) and the legal issues within sport.

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