“The Uncapped Year & NFL Player Contracts”
by
Eugene T. Lee, Esq.
THE STICKING POINT IN NEGOTIATIONS BETWEEN THE NFLPA AND NFL
The current NFL salary cap system provides for a certain percentage of football-related revenues to be spent on player salaries and benefits. The revenue included in that calculation minus more than $1.0 billion in agreed upon team operating expenses is defined in the CBA as “Total Revenue.” The current CBA provided that players would receive 58% of Total Revenue during the 2010 and 2011 NFL League Years, if NFL owners had not opted out of the CBA and a salary cap had remained in effect for those two seasons.
The NFL’s current proposal would keep the players’ percentage of Total Revenue at 58%, however, it would reduce the amount of money included in the definition of Total Revenue by 18% to allow for certain additional expense deductions. These additional expenses would be on top of the existing $1.0 billion expense credit NFL teams currently receive and would cover costs such as game day expenses, stadium operating costs, stadium debt service, game travel and post-season expenses. For example, if the 18% expense deduction were applied to the 2008 League Year, it would’ve resulted in an additional expense credit of more than $1.3 billion. Under this proposal, players would receive the same percentage of a much smaller (by $1.3 billion) revenue pie.
In effect, the current proposal would amount to players reducing their percentage of Total Revenue from 58% to 47.56%. Quantified in dollars and cents, this reduction of player revenue allocation would amount to a decrease in the salary cap per club from $116 million (as of the 2009 League Year) to $95.12 million.
NFL teams claim financial distress, decreasing profit margins and the inability to sustain operations under the current revenue allocation, but oddly enough, they refuse to open their books to verify and substantiate their claims. This has been a major sticking point in negotiations between the NFLPA and NFL Management Council.
THE UNCAPPED YEAR AND ITS EFFECT ON FREE AGENCY AND NFL PLAYER CONTRACTS
Although there is no salary cap in effect for the 2010 League Year, there is also no team salary floor. Teams can spend as much as they want on players without being constrained by a salary cap, however, the converse holds true -- they can spend as little as they want on players as well in terms of total team salary. Please note that minimum player salaries are still in effect. Eligibility for unrestricted free agency increases from 4 accrued seasons to 6 accrued seasons. Players with contracts expiring after their third, fourth and fifth accrued seasons are all categorized as restricted free agents.
RESTRICTED FREE AGENCY – KEY POINTS
In order to retain a right of first refusal on a restricted free agent with an expiring contract, teams are required to make their tender or qualifying offer by 4:00pm EST on the final day of the League Year (March 4, 2010). There are different categories of tenders – each with increasing levels of “restriction” as demonstrated in the form of higher paragraph 5 salaries for the upcoming League Year. For example, for a restricted free agent with 3 accrued seasons, if a team wanted to make it as difficult as possible for another team to sign their player, they would make a first and third round tender to that player meaning that if they did not match another team’s offer sheet to that player, the new team would be required to provide a first and third round pick to the original team as compensation for signing that player. Under a restricted free agent tender, in addition to the paragraph 5 salary for the upcoming year, all material contract terms of the prior year are carried forward unchanged. The various categories of restricted free agent tenders can be found below:
| Accrued Seasons | ROFR | ROFR & Original Draft | ROFR & 2nd Round | ROFR & 1st Round | ROFR & 1st & 3rd Round |
|---|---|---|---|---|---|
| Three | $1,101,000 | $1,101,000 | $1,684,000 | $2,396,000 | $3,043,000 |
| Four | $1,176,000 | $1,176,000 | $1,759,000 | $2,521,000 | $3,168,000 |
| Five | $1,226,000 | $1,226,000 | $1,809,000 | $2,621,000 | $3,268,000 |
Even after a restricted free agent is tendered by his previous team, he is still eligible to test the market for potential suitors and interest from other NFL teams. He is free to sign an offer sheet with any other NFL team during the period from the start of the League Year (March 5, 2010) through April 15th. Once an offer sheet with another NFL team is signed, the previous team has seven days to match all material terms (including signing bonus, guaranteed money, performance-based incentives and paragraph 5 salary). If the original team matches the offer sheet, the player must sign with the original team. If the original team does not match the offer sheet, the player is eligible to sign with his new team and the new team may be required to provide draft pick(s) to the original team depending upon the amount and classification of the original tender.
FINAL FOUR AND FINAL EIGHT PLANS
In order to regulate competitive balance, restrictions will be placed on the losing divisional playoff teams and even greater restrictions will be placed on the final four conference finalists during free agency. The final four playoff teams from 2009 (New Orleans, Indianapolis, Minnesota and New York Jets) cannot sign unrestricted free agents (“UFAs”) except: (1) UFAs who achieved that status via waivers; (2) UFAs who ended the season with that team; and (3) one UFA for each UFA lost to another team during free agency who was under contract to Club on the last day of the prior League Year, provided that, the contract for the new UFA has a first year salary of no more than the first year salary of the contract signed by the previous UFA with his new team and an annual increase in future years of no more than 30% of the 1st contract year, excluding signing bonus amounts. The contract may not be renegotiated for one year from the signing date. The other four divisional playoff teams from 2009 (Dallas, San Diego, Baltimore, Arizona) cannot sign unrestricted free agents (“UFAs”) except: (1) UFAs who achieved that status via waivers; (2) UFAs who ended the season with that team; (3) one UFA for each UFA lost to another team during free agency who was under contract to Club on the last day of the prior League Year, provided that, the contract for the new UFA has a first year salary of no more than the first year salary of the contract signed by the previous UFA with his new team and an annual increase in future years of no more than 30% of the 1st contract year, excluding signing bonus amounts. The contract may not be renegotiated for one year from the signing date; and (4) one UFA with a first year salary of $4.925 million or more, and any number of UFAs with a first year salary of no more than $3.275 million and an annual increase in any future year of no more than 30% of first year salary, excluding signing bonus amounts. These contracts may not be renegotiated for one year from the signing date. Finally, no “Final Eight” team, for one League Year, may trade for an unrestricted free agent signed by a “Non-Final Eight” team.
FRANCHISE AND TRANSITION PLAYER DESIGNATIONS PER TEAM
NFL teams will have three tags to “restrict” their own unrestricted free agents and prevent them from leaving – one Franchise and two Transition tags. NFL teams have a two week window during which they can exercise these designations (this year - between February 11th and February 25th). A Franchise player will be tendered a one year salary equivalent to the average of the top 5 salaries at his position or 120% of his prior year salary, whichever is greater, whereas, a Transition player will be tendered a one year salary equivalent to the average of the top 10 salaries at his position or 120% of his prior year salary whichever is greater. If a Franchise or Transition player accepts and signs his one year tender, the entire salary shall be fully guaranteed. A Franchise player is free to negotiate with other teams, however, his current team will retain a right of first refusal on any offer sheet signed with a new team. Upon receipt of an offer sheet, the original team has seven days to match its material terms. If the original team refuses to match an offer sheet and the Franchise player signs with a new team, the new team is required to provide two first round picks as compensation to the original team. A Transition player is free to negotiate with other teams, however, his current team will retain a right of first refusal on any offer sheet signed with a new team. Upon receipt of an offer sheet, the original team has seven days to match its material terms. If the original team refuses to match an offer sheet and the Transition player signs with the new team, the original team receives no draft pick compensation.
ROOKIES
The rookie pool is still in effect. There are no rules on guaranteed salary. All incentive/escalator rules are still in effect. The primary goal during contract negotiations should be to protect second year money – language is extremely important – due to the real threat of a lockout in 2011.
SIGNING BONUS PRORATION
Signing Bonus Proration in the uncapped League Year is six years for purposes of the 2010 rookie pool. Since there is no salary cap in 2010, proration is not necessary for any other purposes. Further, there are no rules on guaranteed contracts in “new” contracts negotiated in 2010.
PLAYER BENEFITS
In the uncapped year, NFL teams are relieved of their obligation to fund numerous player benefit programs. Examples include second career savings (401(k)), player annuity, severance pay and tuition assistance. Total league wide contributions to such plans in 2009 are expected to be in excess of $325 million, or more than $10 million per club.
30% RULE ON 2009 NFL PLAYER CONRACT RENEGOTIATIONS OR EXTENSIONS
Renegotiations or extensions of 2009 NFL player contracts entered into during the uncapped 2010 League Year may not increase from 2009 to 2010 or beyond at a rate greater than 30% of 2009 salary per year. For example, if 2009 salary was $2 million, the maximum salary available in 2010 would be $2.6 million, the maximum salary available in 2011 would be $3.2 million, the maximum salary available in 2012 would be $3.8 million and so on. For purposes of the 30% rule, “salary” does not include amounts treated as signing bonus, but does include extension option bonus prorations.
POSSIBLE EFFECTS OF THE UNCAPPED YEAR
Rich teams with deep pockets and owners willing to spend (i.e., Redskins and Seahawks) may spend freely on free agents (unrestricted and restricted offer sheets), however, the majority of teams will likely sit back and wait. Some teams may decide to even cut payroll to start saving money in case an agreement on a new CBA cannot be reached and there is a work stoppage/lockout in 2011. The fact there is no minimum team salary may help facilitate team payroll cost-cutting. Final Four and Final Eight plans will definitely limit spending for the most successful teams of 2009 (see above). Due to the scarcity of long-term deals, NFL free agents may opt for one-year deals with new teams or sign their tender offers with their current clubs in the hopes of making even more money on long-term deals once a new CBA is put into place. NFL teams will save approximately $10 million per club in benefit costs as a result of not having to fund certain player benefits in the uncapped year (see above). This money can and should be allocated toward player salaries in the uncapped year. There will be hardly any renegotiations or extensions for third year players (playing under four year contracts). Since there is no longer the threat of unrestricted free agency after year four under the expiring CBA, the incentive and urgency to lock up a player long-term before unrestricted free agency no longer applies. The NFLPA recently won a special master decision which will force high revenue teams to share millions of dollars with small market, low revenue teams during the 2010 season. This should hopefully spur increased spending on free agents during the uncapped League Year by making more money available to NFL teams across the board.
PREPARING FOR A LOCKOUT IN 2011
Players should prepare for a potential lockout in 2011 by saving money during the 2010 League Year. Players should allocate a certain percentage from each paycheck (between 20%-25%) toward a “Lockout Savings Fund” which will help them enjoy the same lifestyle if an agreement cannot be reached on a new CBA and NFL owners lock out players in 2011.
Eugene T. Lee, Esq.
Eugene T. Lee is an attorney admitted to the Bars of the State of New York, Southern District of New York, Eastern District of New York and Court of Appeals for the Federal Circuit who specializes in sports, contract and intellectual property law and who serves as CEO and President of ETL Associates, Inc.