NBA, NBPA Agree to Additional Withholding from Player Paychecks

The NBA and the players association announced last Friday that they’ve reached an agreement to withhold 25% of players’ remaining paychecks starting May 15, while the league continues to evaluate when, or even if, the 2019-20 season can be resumed.

While no determination has been made as to whether all or part of the season can be saved, the agreement was constructed with a focus on a worst-case scenario – in which some or all remaining games would need to be canceled – and was very much connected to a provision of the collective bargaining agreement that has never before been invoked: the “force majeure” provision. The provision allows teams to automatically deduct 1/92.6, or approximately 1.08%, of their players’ salaries for each preseason, regular season or playoff game canceled due to certain forces beyond their control. Included on the list: pandemics.

Had the NBA and NBPA not reached an agreement, the league would have been required to continue paying players their paychecks in full. However, players would have run the risk of having their paychecks stop entirely (and in some cases even having to cut the league a check), without warning, at some unspecified point in the future, if games are ultimately canceled. Instead, the agreement ensures that funds will be set aside – without requiring the league to first cancel games (which it remains hesitant to do at this early stage), and without disrupting the consistent flow of income for players – and available to be collected by teams in the event force majeure needs to be invoked.

What Could Have Happened to Player Paychecks Without an Agreement?

NBA teams have between 15 and 19 regular season games remaining and, for purposes of the force majeure provision, the assumption is that each team would play another 5.6 playoff games. That’s up to between 20.6 and 24.6 total games at risk if the rest of the season is canceled. At a rate of 1.08% per canceled game, force majeure could ultimately cost each player up to between 22.2% and 26.6% of his 2019-20 salary. Taking that from each of the 442 players in the league would add up to about $650 million if only the regular season were canceled, and to about $850 million if the playoffs were canceled too.

The vast majority of players get paid in 24 semi-monthly installments, beginning on Nov. 15 of each year and ending on Nov. 1 of the following year. For these players, losing up to between 22.2% and 26.6% of their total salary could have meant losing six consecutive paychecks over three consecutive months, at some unknown point the future, if the rest of the season is canceled.

The CBA also allows for 12 or 36 semi-monthly payment cycles, and a select few players have negotiated for 12. These players will collect their last paycheck for the season on May 1. Therefore, for these players, losing between 22.2% and 26.6% of their salary would have effectively meant needing to cut their teams a very large check, at some unknown point in the future, if the rest of the season is canceled.

Players can also negotiate to have up to 50% of their base salaries paid in advance, which leaves even less remaining money from which to withhold. These players faced the prospect of having even more of their paychecks withheld and/or having to write an even larger reimbursement check to their teams.

These are the types of scenarios the players association wanted to avoid.

Does This Agreement Impact What Portion of NBA Revenues Players Will Ultimately Get?   

No.

The most fundamental principle of the CBA remains intact: However much they generate, the NBA and its teams are required to give between 49% and 51% of it to players, in the form of salaries and benefits. Some teams end up giving more than others but, as a whole, they need to give the players the exact amount to which they are entitled, right down to the dollar, every season.

Exactly what percentage of revenue teams must give to players depends upon how much is generated – players would get 49% at or below $5.302 billion, 50% at $5.307 billion, and 51% at or above $6.418 billion.

The integrity of the revenue split is typically maintained via the escrow system. Teams subtract 10% of each player’s annual salary from his first 12 semi-monthly paychecks, and put the money into an escrow account. If players wind up making too much, the league gives the necessary portion of the escrow funds to its member teams, and returns the rest to the players. If players wind up making too little, the entire escrow is returned to the players and league cuts them a check for the difference.

Prior to the coronavirus outbreak, the NBA was projecting 2019-20 revenue of about $8.0 billion.

At that level, players would’ve been entitled to exactly 51% of it, or $4.08 billion.

If you add up all of the gross salaries of all players across the league as of right now, you’ll get to about $3.8 billion (of which 10%, or $380 million, has been set aside in escrow). They’re making another $320 million or so in benefits. That’s $4.12 billion total.

So if players are making $4.12 billion but are only entitled to $4.08 billion of it, they would’ve made $40 million too much. So the league would’ve simply taken that extra $40 million from escrow account, and returned the remaining $340 million to the players. Done!

As a result of the pandemic, however, things aren’t so simple. Revenues are falling dramatically, while player salaries and benefits are remaining almost identical. And it’s throwing the system into shock.

If you’re really careful, you’ll notice that this agreement makes clear just how severe the revenue losses could be: It would appear that the NBA is suggesting that league-wide revenues could drop by at least $1.0 billion even if the rest of the season can be saved, and by at least $2.0 billion if the rest of the season is canceled.

If revenue drops to $6.0 billion, players would only be entitled to 50.34% of it, or $3.02 billion. But they’re still making $4.1 billion in salaries and benefits right now.

So if players are making $4.1 billion and are only entitled to $3.02 billion, they’d be making $1.08 billion too much. And there’s only $380 million in the escrow account to bring it back down. The league would still be $700 million short.

Simply put, if revenues are falling and player salaries are staying the same, players will wind up making way too much, and there may not enough money in escrow to take it all back.

So, this agreement effectively does two things: (i) it helps to ensure that teams will be able to collect the necessary funds if force majeure is invoked, but, more fundamentally, (ii) it helps to ensure the integrity of the overall revenue split is maintained.

What Will Happen to Player Paychecks as a Result of the Agreement?

It’s no coincidence that the NBPA negotiated for the special withholding to begin with the May 15 paycheck.

Normal escrow withholding is subtracted from players’ first 12 paychecks, which ends with the May 1 paycheck. So, starting this special 25% withholding with the May 15 payment cycle avoids double withholding.

For the vast majority of players who are being paid in 24 installments, withholding 10% of their total salary from their first 12 paychecks effectively means they’re getting 20% subtracted from each of those 12 paychecks though May 1. Therefore, as a result of this agreement, they will go from having 20% withheld from their first 12 paychecks to having 25% withheld starting with their 13th paycheck.

For the select few players who are being paid in 12 installments, withholding 10% of their total salary from their first 12 paychecks means they’re getting 10% subtracted from each of those 12 paychecks through May 1. It also means that by the time May 15 rolls around, they will have been paid their entire 2019-20 salary; there’d be no more paychecks from which to withhold as a result of this new agreement. So, instead, their salary reductions will come from their 2020-21 salary, either from their salary advances that are paid by October 1 or from their first four paychecks starting November 15. How much they will need to withhold will be calculated the exact same as for everyone else — they would take their 2019-20 salary, divide it by 24 to arrive at what each paycheck would have paid have been had they been paid in 24 installments, and multiply each of these theoretical paychecks by the same percentage as everyone else. Add up the withholding from each theoretical paycheck and that’s how much salary will need to be withheld from their 2020-21 paychecks. And if they’re not back in the NBA next season, and there are therefore no paychecks from which to take it, the players would instead need to cut their teams a check for the full amount by December 31.

A simpler way to think about it: Players are agreeing to have 25% withheld from the last 50% of their paychecks; that’s 12.5% of their total 2019-20 salary. For most players, that 12.5% comes out of thier 2019-20 salary directly. For the select few who have already been paid their entire 2019-20 salary, it comes from their 2020-21 salary.

With a total of $3.8 billion in salaries outstanding, each 25% withholding cycle equates to a bit under $40 million collected. And with 12 cycles left, thad adds up to about $475 million total. These mechanisms ensure that all of this $475 million in special escrow money will be collected by December 31, to ensure that players don’t suffer any adverse state or federal income tax complications.

What Does the Withholding Actually Mean? Is it Enough? Too Much?

Adding the $380 million normal escrow withholding to the $475 million in special withholding provides the league a total of $855 million in combined escrow. That’s enough to maintain the integrity of the revenue split, even if revenues drop by up to $1.75 billion.

But the agreement isn’t only about protecting the integrity of the revenue split. It’s also about setting aside a pool of funds to cover the required payments to teams in the event that the league invokes force majeure. And, in that respect, it’s not nearly enough.

A total of $475 million will be collected as a result of the agreement. But if the entire rest of the season is canceled, teams can invoke force majeure to take $850 million (1.08% of each player’s payheck, for all current NBA players, for all 259 regular season and 84 projected playoff games missed). So there’s still a big shortfall.

Analyzing it on a per game basis tells the same story. At a potential cost of 1.08% of players’ salary per canceled game, withholding a total of 12.5% is only enough to cover 11.6 canceled games. Teams have anywhere between 20.6 and 24.6 games remaining. Again, nowhere near enough.

On the other hand, if fewer than 11.6 games per team are canceled, the withholding could end up being too much. Imagine, for example, a scenario in which the entire rest of the season is able to be saved — where all games are played out, in a bubble, without fans in attendance. In such a scenario, there would be no force majeure collections, and the league would only need to set aside funds to protect for a $1 billion or so revenue loss (not the $1.75 billion referenced above).

Therefore, the agreement to withhold  25% of player salaries starting May 15 is just an estimate of what will be needed. But, in reality, it will likely end up being either too little or too much, depending upon whether or not the rest of the 2019-20 NBA season can be salvaged.

What Adjustments Mechanisms Are Built into the Agreement for When Things Get Clearer?

The parties recognized that, while the 25% withholding will start with the May 15 paycheck cycle, it may not ultimately be the right figure. It all depends upon how many games end up being canceled and how much revenue the league loses. And, in that respect, they realized that they’d have a much better assessment by June 15. So they agreed to adjust the withholding percentage, as necessary, at that point.

Therefore, in reality, the players have agreed to have 25% withheld from their May 15 and June 1 paychecks only. After that, the percentage will almost certainly change.

If the season can be saved, that withholding will likely prove to be too much, and the percentage will likely be adjusted downward.

If the season must be canceled, that withholding will likely prove to be too little, and the percentage will likely  be adjusted upward. But the players association was able to put a cap on any upward adjustment – from 25% to no more than 40%. In simpler terms, the portion of his total 2019-20 salary that a player can lose can only increase from 12.5% to 18.75%.

If the withholding percentage is increased to 40% starting June 15, the total amount collected would increase from about $475 million to about $710 million.

Between the $380 million in the regular escrow account and that up to $710 million, there could be a total of up to $1.09 billion withheld. That’s enough to maintain the integrity of the revenue split even if revenue drops by up to $2.1 billion. That should hopefully be enough to cover even a worst-case scenario.

But, again, the parties understood that, even by June 15, they may still not have enough visibility to make the most accurate adjustment possible to the withholding percentage. So, as an added protection measure, they agreed to review the percentage again, as necessary to ensure the integrity of the revenue split is maintained, after the annual revenue audit or by September 15.

What Would A Worst-Case Scenario Look Like?

Prior to the coronavirus outbreak, the league was expecting to generate about $8.0 billion in revenue.

Let’s assume that in a worse-case scenario, in which the rest of the season will be canceled, the league would lose $2.0 billion. Revenues would fall from $8.0 billion to $6.0 billion.

Of the $6.0 billion in total revenue in this hypothetical scenario – players would be entitled to $3.02 billion (50.34%), while the league and its teams would get $2.98 billion (49.66%).

If you add up all of the gross salaries of all players across the league as of right now, you’ll get to about $3.80 billion. The benefits they’d be getting would add in another $300 million or so. So that’s $4.10 billion total.

So how will the league get the players down from $4.10 billion in revenue to the pre-determined $3.02 billion to which they are entitled? That’s $1.08 billion the league would need to take back.

First, they would respond to the cancelation of the rest of the season by increasing players’ withholding from 25% to the maximum 40% of their paychecks. This would increase the special withholding fund from $475 million to $710 million. Between that $710 million and the $380 million in normal escrow, there would now be $1.09 billion in withheld funds that would ultimately need to get divided between the league and its players in accordance with the predetermined revenue split.

Second, the league would invoke force majeure, so that its member teams can collect the 1.08% of each rostered player’s salary to which it is entitled for each canceled game. Since that adds up to around $850 million, they’ll clean out the entire $710 million of cash sitting in the special escrow account, and then take the remaining $140 million from the normal escrow account.

As a result, the normal escrow account would fall from $380 million to $240 million. To reach the predetermined split, the league would need to take back another $230 million. So, they’d take $230 million from the remainder in the escrow and return the final $10 million to the players. Done!

What Would A Best-Case Scenario Look Like?

A best-case scenario is still not an ideal one — the entire rest of the season would be saved, but most likely still not in front of fans.

Let’s assume that in a best-case scenario, the league would lose $1.0 billion. Revenues would fall from $8.0 billion to $7.0 billion.

Of the $7.0 billion in total revenue in this hypothetical scenario – players would end up getting $3.57 billion (exactly 51%), while the league and its teams would get the remaining $3.43 billion (exactly 49%).

If you add up all of the gross salaries of all players across the league as of right now, you’ll get to about $3.8 billion. The benefits they’re getting would add in another $310 million or so (slightly more than the worst-case scenario). So that’s $4.11 billion in gross salary and benefits.

So how will the league get the players down from $4.11 billion in revenue to the pre-determined $3.57 billion to which they are entitled? That’s around $540 million the league would need to take back.

First, the players association could respond to the lack of any canceled games by immediately canceling the players’ withholding prior to the June 15 paycheck cycle. This special withholding fund will only have accumulated 25% withholding from two paychecks. That equates to 2.1% of each player’s salary, or roughly $80 million total. Players could demand this money back, since force majeure can’t be invoked if no games are canceled, but let’s just assume they agree to keep it in escrow to ensure there are enough funds in both escrow accounts to maintain the integrity of the revenue split. So that’s the first $80 million.

Second, there’s $380 million in the escrow account. The league would take it all. So that gets you to $460 million total. But they’d still be about $80 million short.

At this point, a relatively unknown feature of the CBA could kick in. Included in the players’ share of revenue is an “additional benefits pool” that is funded with 1% of league revenue. This pool is used to fund various benefits for players who have retired. If the normal escrow fund is not large enough to bring salaries and benefits down to the players’ designated share of revenue, they take the remainder out of this pool. With a $1.0 billion revenue loss — $7.0 billion total — the pool would be funded with $70 million. So they could take that.

If they took it, it would still leave the league $10 million short. They’d need to take further action to get it. This is where the September 15 review period kicks in. There would be two more paychecks remaining at that point. If they were to reinstate withholding — this time at just 5% — that would give them another $15 million, which would be enough to cover the shortfall, with room to spare. Instead increase it to 25% and you get the full $80 million, without needing to take from the “additional benefits pool.” Done!

Which Side Does This Agreement Favor?

Short answer (in my humble opinion): The players.

The league initially proposed to withhold 50% of player paychecks starting with the April 15 payment cycle. Where they ended up effectively matches the players’ counterproposal.

As a result of the agreement, the players will only need to start their withholding on May 15, after their initial escrow withholding has already been completed. And it will only start at 25%. And even that 25% will only be subtracted for two paychecks, until the situation is reevaluated again before the June 15 paycheck cycle. And, even if it is determined in June that a worst-case scenario will become reality, it can only be increased to 40%. That’s far less than the league’s 50% request. It’s not even enough to cover the funds to which teams would be entitled via force majeure if the rest of the season is canceled.

But, again, perspective is needed. Revenues will be what they will be. The split of those revenues is predefined. So, in the end, what matters most is that the integrity of the revenue split is maintained. This agreement secures the necessary funds to do that.

Then what does it mean that this agreement favors the players? They had all the leverage. They used it wisely. And, in the end, it means they’ll get their portion of league revenues just a little bit quicker.

What Does This Agreement Mean for Future Salary Cap Levels?

As I first made you aware in mid-March, the salary cap has both revenue- and salary-related components that could combine together to create wild fluctuations in future cap levels as a result of a potential revenue drop this season.

Many, including me, have since leveraged these concepts to speculate on future cap levels. Some have speculated that a large drop in revenue this season could tank the salary cap for next season. Others have speculated that if revenue drops, players could wind up making too much, which could tank the 2020-21 salary cap even further and, worse still, could thereafter cause a big artificial spike in the 2021-22 salary cap. Still others have speculated that, if the 2020-21 salary cap falls substantially, players could wind up making too much next season, which could tank the 2021-22 salary cap. And so on.

But what this agreement reinforces is what I’ve continued to try to reinforce: Such speculation is premature. None of these things is likely to happen. It is more likely that league and the players will come to an agreement to override the provisions of the CBA, and simply set next season’s salary cap and luxury tax at levels they deem appropriate.

The latest salary cap projection for next season was lowered from $116 million to $115 million at the end of January, due to the loss of China-driven revenue resulting from a tweet sent by Houston Rockets general manager Daryl Morey in support of Hong Kong protesters in October. The projection will surely decline further, due to the coronavirus pandemic. How much further, only time will tell.

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