The NHL Collective Bargaining Agreement and prospect retention: Part II

By David A. Rainer


This article is Part II of a two part series on the National Hockey League’s current Collective Bargaining Agreement and how it impacts prospects. Part I covered the Entry Draft and the Reserve System and can be read in its entirety here. Part II will cover Entry-Level Compensation and Restricted Free Agency. Let us continue with the analysis of the various provisions of the CBA and how they operate.

Entry-Level Compensation

As the focus of the hockey community turns to the impending impasse between the NHL and the players and the debate over a salary cap, few mention the salary cap that is already included in the NHL’s CBA – the Entry Level Cap (“Entry Level System”).

This cap sets the maximum limit for the base salary on any Entry Level Contract dependent upon the age of the player at the time of signing. The restrictions and conditions on Entry Level contracts fits together with the Reserve System guidelines like a puzzle, as player and owner have made concessions and compromises at the collective bargaining table to create a system that balances the considerations of all involved. This cap is necessary from an NHL team perspective so that they are assured that they will be able to sign new talent without lengthy holdouts. The players’ union has been willing to concede the negotiating power of rookies in exchange for more negotiating power later on.

A maximum base salary for any player signing an Entry Level contract is stipulated in the current CBA in Article IX, § 9.3. The maximum amount gradually increases each year, starting at $850,000 per year for players signed in 1995 up to about $1,100,000 for players signed in 2003. This section effectively caps the amount of base compensation an entry level player may sign for. Sections 9.3(b) and 9.3(c) govern the amount of bonuses that can be included in the contract. All bonuses included in the contract may not exceed 50 percent of the base salary, except for performance based bonuses which are not limited.

These restrictions effectively limit the contract amount to approximately $1,500,000 per year plus performance bonuses per season. The tremendous windfall in value that an organization can derive from a 40-goal scorer making only $1.5 million per season is clear (for an analysis of the benefits of this windfall, please read the Hockey’s Future article: Dollars and Sense).

However, this contractual advantage in favor of the owners is balanced by a limitation in favor of the players. Section 9.1(b) establishes the number of years a player is subject to the Entry Level System and is based upon the age of the player at the time he signs the Entry Level contract (see chart below). This restricts the number of years that an entry level player is subject to the salary cap. A player signing an entry level contract between the ages of 18 and 21 is subject to the Entry Level System for three years. A player between the ages of 22 and 23 is subject to the System for two years. A player age 24 is subject to the System for one year. And a player age 25 or older is not subject to the System at all.

Age at SigningTime in System
18 – 213 seasons
22 -232 seasons
241 season
25 +not subject to system

This age restriction appears to fit together with the Reserve System’s assignment of exclusive negotiating rights. A player from junior hockey can be free from the Reserve System within two years from being drafted. However, for that two-year limitation on his negotiating rights, the player must concede a longer period of time subject to the Entry Level System. Alternately, a player from college hockey may have his exclusive rights assigned for up to five years from being drafted. However, the player, because of his increased age at the time of signing an entry level contract, is only subject to the salary restrictions of the Entry Level System for one or two years. A balance has been struck between junior players and college players.

Further, § 9.5 requires all entry level contracts to be “two-way” contracts. That is, each contract may determine the amount the player will be paid while assigned to the minor league team, which is often well below the NHL compensation level. This allows the organization to demote an entry level player who is not contributing to the NHL team without having to play him top dollar. This is a freedom typically not included in veteran contracts and creates an added incentive for signing entry level players.

These provisions that work to partially cap the salaries of entry level players create enormous incentive to draft and sign entry level prospects. This cap, although a mechanism to suppress salaries and therefore a violation of the Sherman Anti-trust Act, was collectively bargained for and deemed valid. In exchange for the cap on salaries, such provisions that allow free agency or reduce the age for restricted free agency were added or expanded in favor of players.

Restrictions on Free Agency

The last type of provision in the current CBA that affects entry level prospects are the rules governing the Restricted Free Agent status (RFA) of players. RFA players are those who are not under the Entry Level System and who are not yet complete free agents – their freedom to negotiate a new contract is partially “restricted” in some way. These provisions cause a great amount of confusion to the average fan who does not understand what constitutes a restricted player, what makes a “qualifying” offer, and what recourse organizations have for the loss of an RFA. Below is an explanation.

First, what constitutes a Restricted Free Agent? There are two categories of RFAs, called “Groups” – Group II and Group IV. Group II is the most common form of RFA and will be the primary focus of this section. According to Article 10, § 10.2(a)(i)(A), a player emerges from the Entry Level System and into RFA status after fulfilling certain NHL experience requirements. Basically, these experience requirements mirror the limitations to the Entry Level System outlined in § 9.1(b) as a player who is no longer governed by the Entry Level System becomes a restricted free unless granted free agency by the organization (see chart below). A player who signed an Entry Level contract between the ages of 18 and 21 and has since acquired three years NHL playing experience becomes a Group II RFA. A player who signed between the ages of 22 and 23 and has two years NHL experience becomes a Group II RFA. And a player who signed at the age of 24 or older and has one year of NHL experience becomes a Group II RFA. Once a player has obtained RFA status, he remains a restricted free agent at the expiration of each contract until he meets the requirements for becoming an unrestricted free agent (usually at age 31).

Age at SigningSeasons of Experience
18 – 213 seasons
22 -232 seasons
24 +1 season

An NHL organization retains some rights over its RFAs and these rights operate to partially restrict the RFAs ability to negotiate in the labor market. In order to activate its rights over the RFA, the organization must meet one primary requirement – the qualifying offer. A qualifying offer can be for only one year but must be 110 percent of the player’s prior year salary if he was earning below the league average or 100 percent of the player’s prior year salary if he was earning above the league average. If an organization fails to meet this requirement, the player becomes an unrestricted free agent. However, once a qualifying offer is made, the organization activates two rights over the player which restricts the demand for the player’s services in the labor market – the right of first refusal and draft pick compensation.

A RFA who has been made a qualifying offer from his prior team is still free to pursue and negotiate a contract with whatever franchise he chooses. However, the CBA provides incentives to other franchises not to sign the RFA. If a RFA seeks and receives a contract offer from another team, the organization retaining the player’s restricted rights can either match the offer or accept draft choice compensation. If the organization elects to match the offer, the organization must sign the player to an amount no less than the offer from the other franchise and cannot trade the player for one year. If the restricting organization elects to accept draft pick compensation instead, the signing franchise must give up to the restricting organization draft picks in accordance to a scale established in the CBA based on the signing amount. For example, a player that is signed by another team for $1 million per season must concede a second round pick to the organization that lost the player. If he signs for $2 million per season, the cost is a first round and second round pick, and so on.

These two rights retained by the organization – right of first refusal and draft pick compensation – place a disincentive for signing the RFA by another organization. Because there is an added cost to signing that player, the value of that player in the labor market is greatly reduced and the organization retaining the rights over the RFA has added leverage to sign the player at a lower rate. Again, this is a mechanism to partially depress salaries and make it more affordable for an organization to retain their own players. This is often an issue of great concern during the negotiations over the CBA and is passed around like a political football. The players would like to see either a reduction in the severity of the draft pick compensation or enable players to be unrestricted free agents at an earlier age. Owners would like to expand the restrictions so that they can better keep in check the free spending of the wealthier franchises.

Summary

Irrespective of where the line is drawn, Restricted Free Agency, the Entry Draft, the Reserve System and the Entry Level System operate together to create a network of incentives affecting the NHL labor market. This network is an attempt to self-regulate the various member franchises of the league and can either make it affordable for an organization to keep its own assets or make it more difficult for wealthier organizations to leverage smaller organizations out of the labor market.

Absent Labor Law, these restrictions would be a violation of the general prohibitions of the Sherman Anti-trust Act. However, absent Labor Law, labor unions would also be a violation of the Act. As such, any kind of restrictions on competition on either side is made illegal unless it is passed through the collective bargaining process first.

Experience has proven to the judiciary system, owners of industry and the labor force that it is better for the two sides to work out their employment relationship at the bargaining table than it is for them to seek federal intervention. As with any relationship, for each side to get a little, they must be willing to give a little. Such is the nature of the business and such is the nature of the debate. It is up to each side to compromise if any kind of agreement is to be reached. Because the rules governing the distribution of new talent into the league have worked well for many years, it is likely that there will be only minor revisions to them in the next NHL CBA.

Copyright 2004 Hockey’s Future. Do not duplicate without written permission of the editorial staff.