Guaranteed Contracts In Professional Team Sports: How Does The NFL Compare?

Much is said, but very little generally understood, about players having or not having “guaranteed contracts” in professional team sports.

Sportswriters will write as if they know all about them, and will often generalize that one sport (e.g. baseball or basketball) has them and another (e.g. football) does not. And if the sport is considered to have guaranteed contracts, the union is commended for the achievement.
If the sport in questions does not, the union is criticized for failing to provide them. But in reality, there can be no valid generalizations about guaranteed contracts in any sport without analyzing what is meant by the term guarantee and how a guarantee clause finds its way into a player’s contract.

We therefore provide the following as a hopefully helpful resource to understand the issue of guaranteed contracts in professional team sports.

1. What exactly is a “guaranteed contract”?

The general perception is that a player in pro team sports that has a guaranteed contract is “guaranteed” to receive the salary specified in that contract once he signs it, no matter what may happen thereafter. If he gets hurt and can not play, he will still get his money. If his skills decline and he can’t perform as well, he still gets his money. But does his “guaranteed contract” mean he still gets his salary if he suffers a debilitating illness, or if he is hurt while skydiving or as a result of abusing alcohol or drugs? Does it mean that he still gets his money if he doesn’t like the offensive or defensive system used by the club and refuses to play? Does he still get paid if he commits a crime and gets incarcerated, or if he decides to go back to college or graduate school rather than continue playing?

These are obviously relevant questions, but they can only be answered by looking at the actual guarantee language that the club and the player have negotiated into the contract. Most guarantee clauses will cover injuries (some both on and off the field) and a general diminution in skills, but rarely will they cover deliberate, willful, or reckless conduct which results in the player’s inability or unavailability to play. Put another way, there is no standard definition of the term guaranteed contract. No team or player will ever just insert a clause saying “this contract is guaranteed,” and leave it at that. They will instead negotiate over all of the possible circumstances.

2. What role do the pro sports unions typically play in negotiating guaranteed contracts for players?

The union’s role in negotiating guaranteed contracts is typically quite limited. No Collective Bargaining Agreement (“CBA”) in any of the four major sports requires all contracts to be fully guaranteed, and the job of negotiating guarantees is instead typically left to the agents in the individual negotiation process. For example, Article XXXVIII of the NFL CBA states that, subject to the minimum salary levels set therein, “A player shall be entitled to receive a signing or reporting bonus, additional salary payments, incentive bonuses and such other provisions as may be negotiated between his Club . . . and the player or his . . . agent.”

That said, there are some CBA provisions in pro sports which provide basic, although limited, “guarantees” of player salaries. For example, the NFL CBA provides that a player with four prior credited seasons under the pension plan will be paid his full season’s salary even if he is released by the team in a given year, so long as the release comes after the beginning of the regular season (see CBA Article XXIII, “Termination Pay Benefit”). (The CBA’s in Major League Baseball and the NBA have similar provisions.) This is a form of “guarantee” for the player who qualifies, but it is limited to one year’s salary and does not cover subsequent years of the player’s contract. Similarly, the standard NFL Player Contract (paragraph 9) provides that a player injured while performing services is entitled to continue receiving that year’s salary so long as he remains injured. The NFL CBA also provides that a player who is injured in one year of his contract will be entitled to one-half of his following season’s salary (to a maximum of $275,000) if the injury causes him to be unable to play that following year (see CBA Article XII, “Injury Protection Benefit”).

Some of the major sports also have a CBA-provided form of guarantee applying to players as a collective group rather than as individuals. For example, the NFL CBA provides that the clubs collectively must spend at least 50% of all club and league revenues on player salaries and benefits in a given year. Within that guarantee, each club is also required to spend a certain percentage of each year’s salary cap amount (in 2007, for example, 85.2% of $109 million). Similarly, in the NHL, clubs collectively must spend no less (and no more) than a specified percentage of “hockey-related revenues” on player salaries and benefits in a given season, and the NBA has a similar provision. Major League Baseball, on the other hand, has no such collective guarantees in its CBA with the players.

3. Why do players in some sports typically get guarantees while others do not?

A player’s (or agent’s) ability to negotiate a guaranteed contract in a given sport is subject to a number of factors, which can vary widely from sport to sport. For example, the player’s expected career longevity is a vital consideration for any club considering a guarantee for the full length of the player’s contract. In sports like Major League Baseball, where career-ending injuries are a rarity, a club can sign a 25 year old player to a ten-year, guaranteed contract without any significant concern that an injury will cause his career to end prematurely (and even then, the club can easily insure that risk to protect itself). The same is true to a somewhat lesser extent in the NBA and the NHL. The same can not be said, however, in the NFL, where the sport is different and a player’s career can (and often does) end with his next block or tackle.

The presence of a salary cap and the specific rules of that cap can also be a significant factor. In the NFL, the salary cap rules require that any salary paid in a given year must count against the cap for that year even if the player is no longer playing. If a team has a large number of guaranteed contracts, a rash of injuries to players covered by those contracts could cause severe cap problems for the team and diminish its ability to compete with healthy players on the field.

Even more significantly, the NFL cap rules also allow clubs to exceed the cap by paying signing bonuses to players in lieu of increased annual salary. Under these unique rules, the signing bonus is generally allocated for cap purposes over the full length of the contract, rather than being counted 100% in the year paid. For example, a player can receive a $10 million signing bonus in year one of a five-year contract which also pays him $500,000 per year in salary. Even though he receives the entire $10 million in year one, only one-fifth of that amount counts in the cap for that year, and the player’s “cap count” for the first year is only $2.5 million (one-fifth of the $10 million signing bonus plus the $500,000 salary). The result is that clubs have a clear incentive to maximize signing bonuses and contract lengths, and to minimize yearly salaries, making the salary (“guaranteed” or not) far less significant. In this example, the player’s annual salaries in the early years, if not guaranteed by his contract, are certainly secure, since a club will rarely cut a player after paying such a high signing bonus. And to the player, the salaries in the later years are far less significant, since he has received the bulk of his money, some 84% of his total contract ($10.5 million of the $12.5 million), in the first year. If he receives a career-ending injury in the first year of the contract, he still keeps his signing bonus plus that year’s salary, and his contract is effectively “guaranteed” to some 84% of its total.

4. To what extent are NFL players’ contracts “guaranteed”?

Again, it depends on how one defines the term guaranteed. If that term is defined as an individually negotiated clause in a player’s contract that assures that he will receive all or most of his salary for the term of the contract, even if he is unable to play due to injury or declining skills, only about 6 per cent of all NFL player contracts are “guaranteed.” As discussed above, however, the discussion of “guarantees” in the NFL cannot end there, since the prevalence of signing bonuses in NFL contracts must be considered.

To an NFL player, a signing bonus is far more preferable to a salary guarantee for a number of reasons. First, the player gets his signing bonus “up front,” even before he renders his services to the club. Unlike a guarantee of future salary, which stays in the hands of the club until the salary is earned, a signing bonus goes into the player’s bank account and it is his to invest or spend before it is earned by playing.

Second, although subject to partial forfeiture if the player later fails or refuses to perform, the money from a signing bonus is in his hands from the beginning, and the club must legally prove its entitlement to a return of any of that money if he later fails or refuses to perform. If in lieu of a signing bonus his contract is instead “guaranteed,” the club controls the money and the player must legally prove his entitlement to it in the event of a dispute over whether he has failed or refused to perform his services or otherwise breached his guarantee clause.

Third, the player rather than the club benefits from the “time value” of the money, since the player can invest all or part of his signing bonus from the date he receives it and thereby get even more value from it. Rather than waiting to receive periodic salary payments over the life of his contract, the player gets a lump sum to use and invest as a “nest egg” for his eventual retirement from football.

It should therefore be clear that signing bonuses, representing a more secure form of compensation than the typical “guaranteed contracts” in professional baseball and basketball, more than qualify as “guaranteed” compensation under any definition of that term. In 2006, approximately 52% of all compensation paid to players in the NFL was paid in the form of signing or similar bonuses (see footnote 2) or guaranteed salary. In a very real sense, it can therefore be said that at least 52% of all compensation in the NFL is, in fact, “guaranteed” to players.

5. Large signing bonuses for NFL players represent an obvious benefit, but what about those players who are not considered valuable enough to get them? What happens when their careers end prematurely because of injury or some other factor?

The NFLPA recognizes better than anyone that not all players can negotiate large signing bonuses or otherwise lucrative contracts. That is why we have tried to negotiate the best benefit package in professional sports. This year, for example, each club’s salary cap is reduced by a benefit package costing over $21 million. That package includes workers compensation benefits, the Injury Protection Benefit, Termination Pay, severance pay, a 401(k) plan, a player annuity plan, a generous pension, and a medical reimbursement account which puts aside $25,000 per year (to a maximum of $300,000) for players to use for medical expenses after their post-career coverage runs out (typically after five years out of football for vested players). It also provides the disability benefits for former players which have been discussed extensively in the past year. These benefits are the same for all players with the same number of years of seniority, whether they are the highest or lowest paid at their position.

CONCLUSION

It is obviously difficult to cover all aspects of the guaranteed contract issue in one brief memo. At the very least, however, the above discussion can be a basis for understanding the issue, and a basis for drawing the following conclusions:

1. The term “guaranteed contract” in professional team sports has no generally accepted definition, and the financial security a player receives from a guarantee clause is strictly a function of what contract language is used in his contract to describe the guarantee.

2. In the four major professional team sports in the U.S., it is largely the individual player and his agent, and not the union in each sport, who is responsible for negotiating what is referred to as a “guaranteed contract.”

3. The incidence of career-ending injuries in a given sport is a strong determinant in a player’s ability to negotiate a guaranteed contract, especially in a salary cap system which requires clubs to continue counting the salaries of players who are no longer playing.

4. Although guarantee clauses in NFL player contracts are not common, the fact that over 52% of all player compensation in the NFL is paid in the form of signing or similar bonuses means that a like percentage should be considered “guaranteed” for NFL players generally.

5. For those NFL players who do not receive large signing or similar bonuses, the generous benefit package for players in the current CBA provides an extremely valuable source of financial support after their careers end.