National Basketball Association (NBA) fans have been glued to their phones lately wondering which players will sign where. The start of the NBA free agency period has become somewhat of a sports holiday when players announce their new (or same) destinations. Teams often resort to buying billboards, hiring celebrities, and even offering players free food for life to convince these free agents to sign with them. The contract and monetary amounts for players can be staggering. Players are accumulating generational wealth and are constantly switching teams. Why? Primarily because the NBA makes an astonishing amount of money from television broadcasting rights.

But how is that money distributed? The answers are all in a written contract called the collective bargaining agreement (CBA), which is negotiated between the NBA (Commissioner Adam Silver and 30 NBA owners) and the National Basketball Players Association (NBPA), a labor union that represents NBA players. This contract is the most important contract for each respective professional sport in the United States – it may also be one of the most challenging contracts for players, agents and fans to understand. But without these contracts, the entire professional sports system would crumble under federal antitrust laws. In some ways, the NBA’s CBA functions as the Constitution of Basketball. Without this contract, the NBA would cease to exist. In this post, we’re going to dig deeper into the intricacies of the CBA.

The Intersection Between Labor and Antitrust Laws

The CBA dictates the rules for salaries, trades, free agency, the NBA Draft, and the salary cap among, essentially, every rule in which the league follows. The CBA also prevents the NBA from being in violation of federal antitrust laws. During difficult contract negotiations, the NBPA can “disclaim interest” or the players can decertify, which ends the union’s collective bargaining rights and turns the NBPA into a non-union trade association. This ends the continuing labor relationship and opens the NBA to an antitrust lawsuit.

As explained in Larry Coon’s NBA CBA FAQ, “[a]ntitrust laws are at odds with labor laws — while antitrust laws prohibit cooperation among competitors and agreements that are anticompetitive, labor laws encourage cooperation among competitors — such as forming unions and bargaining collectively. This tension is resolved with the ’non-statutory labor exemption,’ which exempts collective bargaining agreements from the antitrust provisions.” Furthermore, “[t]he NBA draft and restrictions on salaries and free agency are immune from the antitrust laws so long as they are part of the CBA.”

This intersection between labor and antitrust laws is important, yet complicated. But understanding how this contract works is applicable to other CBAs with labor unions in other industries. Simply put, it is the legal contract which controls everything NBA players, executives, the league office, and owners can do.

Salary Basics: The Rookie Salary Scale System

First round draft picks now operate under a “salary scale” for their initial NBA contract. The idea is that players must “earn” higher salaries by performing well in the NBA. This structure was implemented after Glenn Robinson, the number one pick of the 1994 NBA Draft, threatened to sit out his rookie season to gain contract leverage, which led to a 10-year, $68 million rookie deal. The Robinson contract became a financial disaster for the Milwaukee Bucks. As a result, the NBA implemented the rookie salary scale system and long-term contracts were substituted with shorter, more lucrative deals for veteran players.

Rookie contracts are determined by declining scale – meaning that players may earn less the lower they are selected in the draft. Teams may sign a rookie for as little as 80 percent or as much as 120 percent of the scale salary figure.

Salary amounts are calculated based on a complicated formula, which increases the amount rookies make each season along with the continued rise of the overall salary cap. Each first-round pick signs a two-year guaranteed contract that includes two individual team-options. This means that in years three and four of the contract, the team makes a decision whether or not to sign the player to that amount. If the team declines the team-option in either the player’s third or fourth season, the player becomes an unrestricted free agent.

Let’s use Zion Williamson, the first pick in the 2019 NBA Draft, as an example. Although most players sign for the full 120 percent, it’s up to the players (and their agents) to negotiate between those parameters. Obviously, Williamson will make the maximum salary amount because he is a transcendent talent. As Sportrac reported via Twitter, Williamson signed a two-year, $20 million contract with two additional team options. The exact salary amount is $20,005,320 over two seasons with two additional team-options. His third year team-option is already set and in his fourth season, he will receive a raise of 26.1 percent if he does not qualify for a designated rookie extension.

If he does not qualify for the designated rookie extension, he will become a “restricted free agent” after his fourth season. The team has the option to offer the player a “qualifying offer,” which is an amount set by the same rookie-scale system. For the number one pick, the qualifying offer is to be a 30 percent increase from his fourth year salary. During free agency, Williamson would, in this scenario, have three options:

  1. Accept the qualifying offer* of a 30 percent raise for one season from his previous season’s salary if offered by the team (see table below). This way, he would become an unrestricted free agent the following offseason, meaning he can choose to sign with any team he chooses, including the same team.
  2. Sign an “offer sheet” with another team. This means, according to the CBA FAQ, “[w]hen a restricted free agent wants to sign with another team, the player and team sign an offer sheet, the principal terms of which the original team is given two days to match. The offer sheet must be for at least two seasons (not including option years), and a standard NBA contract (not a two-way contract). If the player’s prior team also submitted a maximum qualifying offer, then the offer sheet must be for at least three seasons (not including option years). If the player’s original team exercises its right of first refusal within two days (by issuing a First Refusal Exercise Notice), the player is then under contract to his original team, at the principal terms of the offer sheet (but not the non-principal terms). If the player’s original team does not exercise its right of first refusal within two days (or provides written notice that it is declining its right of first refusal), the player is deemed to be under contract with the new team.”
  3. Sign an extension with his own team. Usually, this occurs when teams want to show good faith and would rather offer the player a maximum contract than allow him to explore the market and risk him signing the qualifying offer, which means the player could potentially leave for another team the next offseason.

How much money can Zion Williamson expect from being the number one pick?

#1 Pick Salary Slot 120 percent 80 percent
Rookie Year Salary $8,133,200 $9,759,840 $6,506,560
Second Year Salary $8,537,900 $10,245,480 $6,830,320
Third Year Salary (team option) $8,944,500 $10,733,400 $7,155,600
Fourth Year (team option – percentage raise over 3rd year) 26.1 percent raise from previous season’s salary $13,534,817.40 $9,023,211.60
Qualifying Offer (percentage raise over 4th year)* 30.0 percent raise from previous season’s salary $17,595,262.62 $11,730,175.08

Bold = Guaranteed

This is why you see the agony on the faces of players who slide down NBA draft boards contrary to their predicted selections. They’re losing millions of dollars with every passing pick.

Salary Basics: Second Round Picks and Two-Way Contracts

Unfortunately, second round picks do not have any salary restrictions. They can sign for any amount up to the maximum salary or could be cut from the team. However, almost every second-round rookie either signs for the league minimum, which raises every year with the salary cap, or signs a two-way contract.A two-way contract means that the player receives the prorated amount for an NBA minimum salary for each day he is with an NBA team. This includes days involving travel, workouts, or actual games. But this two-way player can only spend 45 collective days with the NBA team and must spend the rest of the season with the team’s G-League affiliate, which essentially functions as the minor league system for the NBA. When the two-way player is with the drafting team’s G-League affiliate, he makes a prorated version of a two-way salary. For 2019-20, two-way players will make a prorated version of $79,568 depending on how many days they spend with the NBA team whom they signed with. Each NBA team can sign up to two players to such contracts.

This creates uncertainty for players like Bol Bol, who fell from being a projected lottery pick to being selected by the Denver Nuggets with the 44th pick in the draft. Bol will likely sign for the league minimum as a 7’2” prospect with tremendous upside. However, his injury concerns caused him to lose significant money. As a projected top five pick coming into the 2018-19 college basketball season, Bol would have made somewhere between 80 percent and 120 percent of $4,463,700 in his first season as the fifth pick. Instead, he will likely make the league minimum amount of $898,310 as a rookie.

The financial structure of rookie contracts can be extremely difficult to understand. They also have significant logistical concerns. Rookies, particularly those on two-way contracts, are moved back and forth between their G-League affiliated city and their NBA team’s city. Players on two-way contracts also have significant uncertainty as to how much money they will make based on the prorated differences in amounts.

These two-way contracts were designed to give more opportunities for G-League players to play in the NBA. Unfortunately, these contracts have led to punitive financial loss for players with health concerns, financial uncertainty, and geographical instability to add to the immense stresses of being a young professional basketball player.

Player Salaries and a Team’s Salary Cap

These salary amounts are extremely important for each team. These salaries count toward your team’s salary cap, which is an annual maximum amount of money in which a team can spend in a given season on player salaries without using other exceptions to spend more.

According to the NBA’s CBA, the NBPA and NBA agreed in 2017 to players receiving up to 51 percent of all basketball related income (BRI), which comprises of everything from beverage right sales, summer camp revenue, parking revenue, ticket sales, and most lucratively, broadcasting revenue among a large list of other basketball-related revenue streams. There are other complicated stipulations which lead to fluctuations in the actual team salary cap for a given season versus their expected amount, which can leave teams scrambling to make trades and shed salary. This is why the league performs a yearly financial audit to determine, among other things, what the salary cap will be for that season. On June 29, 2019, the NBA released an official statement that the salary cap will be $109.14 million for the 2019-20 season. This means that teams can only spend that much money on their team without having to both use exceptions and pay luxury tax to sign players to fill their rosters.

Teams have to at least spend 90 percent of the salary cap. Any amount of that 90 percent threshold that the team is under, which for the 2019-20 season will be a minimum of $98,226,000, is distributed evenly amongst players on the team. However, players cannot receive more than their maximum salary as the result of a “shortfall payment.”

In 2019-20, teams have to spend between $98,226,000 and $109.14 million on player salaries. They can spend more than the maximum amount, but they must use “exceptions” to do so. There are many exceptions, some of which are extremely complicated. However, there are two that are important to highlight:

  1. the mid-level exception
  2. the Larry Bird exception

Team Salary Caps and the Mid-Level Exception

The mid-level exception is given to every team regardless of the team salary situation. They are separated into two groups: the tax-payer mid-level exception and the non-tax payer mid-level exception. Teams over the $109.14 million team salary amount can sign a player to a first year salary of $5.718 million in his first year. The contract can be up to three years in length and can increase each season by up to 5 percent. This is how the Golden State Warriors signed DeMarcus Cousins last season despite paying a total of $146,291,276 in player salaries. That amount is far above the team’s salary cap threshold, so how can teams pay that much?

Team Salary Caps and the Larry Bird Exception

The most common way to sign a player while exceeding the salary cap is through the Larry Bird exception. This exception, which was designed to allow Larry Bird to re-sign with the Celtics in the 1980s, simply allows players to re-sign with their current team for up to their individual maximum salary as long as they have played under contract for three seasons without clearing waivers or changing teams as a free agent. This means that a player could hypothetically sign three one-year contracts and qualify for this exception after the third season.

A player’s “Bird Rights” can also be traded along with him to another team. For example, Paul George’s Bird Rights will carry over with him to the Los Angeles Clippers. This means that when he is eligible to either sign an extension or a new contract, the Clippers, who traded for George, can exceed the salary cap to give him up to his maximum salary.

There are other exceptions over-the-cap teams can use as well. For example, teams who are over the salary cap can sign players to minimum salary contracts. These minimum salaries increase based on years played in the league, and the contracts can last for a maximum of two years. Teams contending for championships have recently been able to convince players to take pay cuts to play for the minimum salary.

David West declined a $12.6 million player option in favor of a one-year, $1.2 million minimum contract in 2015 in hopes of winning a championship. Although he did not get his wish that season, he eventually won two championships with the Golden State Warriors in 2017 and 2018 while playing for minimum salary contracts below his market worth.

Teams can also go over the salary to sign rookies. This assures that all teams can participate in the draft. The other exceptions are explained in Larry Coon’s CBA FAQ. But these exceptions scare team owners, because exceeding the salary cap costs them in “luxury taxes.”

This luxury tax system is designed to deter teams from spending too much money through the use of their exceptions. Teams who are in the luxury tax pay a set penalty for every dollar spent over the salary cap. For each year that teams exceed this salary cap threshold, the more the luxury tax increases. Teams who exceed the salary cap in three out of the four previous seasons are charged with a dreaded “repeater tax.”

This repeater tax was punitive enough for the Oklahoma City Thunder to trade future MVP James Harden, despite contending for a championship. This is where larger markets and riskier owners have a significant advantage. Teams who are willing to pay more can keep their respective teams together to compete for championships.

Extensions: Rookie, Veterans, Supermax

The new CBA designed performance criteria that, while well-intended, has put all parties involved in awkward situations.

First, there is a designated rookie extension. Rookies entering the fourth year of their contract can sign special five-year extensions for a total of six years (the fourth year of the rookie contract counts as the first year of the extension.) They can either sign for 25 percent or 30 percent of the salary cap. For a player to qualify for the higher amount, one of the following must be true:

  • The player was named to the All-NBA First, Second or Third team in the most recent season, or both of the two seasons that preceded the most recent season.
  • The player was named the Defensive Player of the Year in the most recent season, or both of the two seasons that preceded the most recent season.
  • The player was named the NBA Most Valuable Player in any of the three most recent seasons.

This criteria is the same for “Designated Veteran Extensions,” which are reserved for players who have played in the league for seven or more seasons with the same team continuously (unless traded within the first four years in the league). These lucky players can receive 35 percent of the overall salary cap for up to six seasons (or five if they’ve played eight or nine seasons) in a contract extension. This is commonly known as the “supermax,” and it leads to contract extensions such as James Harden’s $228 million extension over four years through 2023.

The Unintended Consequences of the Supermax Extension

However, this supermax extension has left teams and players in awkward positions. For example, this extension must be accepted one year before the player’s current contract ends (this is a simplified interpretation of the official CBA rules). The NBA created this supermax extension to incentivize players to stay with their current teams. However, it has created unintended consequences.

Some teams have seemingly felt forced to trade superstar players prior to the summer in which the player is eligible for the supermax. The Sacramento Kings traded star center DeMarcus Cousins in early 2017 to the New Orleans Pelicans, perhaps to avoid having to offer him a $200 million extension. Cousins tore his Achilles while with the Pelicans and signed a deal the following season with the Warriors for the mid-level exception, which was just $5.3 million. In the trade, Cousins lost an opportunity to make $200 million and instead will make around $27.8 million in total between 2017 and 2020. In total, Cousins is estimated to have lost at least $150 million in career earnings due to his injuries.

The second concern is when players decide that they do not want to accept the supermax contract. Those who qualify and decline the extension lose the right to sign it the following season. Thus, if a player does not sign it, you should expect that he will leave in free agency the following summer.

Some players have begun letting their teams know ahead of time that they will not accept the supermax and would like to instead be traded. This allows the team to receive at least some compensation for a player who will leave anyway. The latest example of this was Anthony Davis, who told the New Orleans Pelicans he would not sign a five-year, $239 million extension this offseason and asked to be traded. He was traded to his desired destination, the Los Angeles Lakers. However, he forfeited an extra $87.3 million in future salary via supermax extension by changing teams.

What the NBA did not foresee when they created this provision was that players would be willing to forfeit that much money. If players are willing to make less money, player mobility will live on.

The third concern happened for the first time this season. Somewhat unexpectedly, Kemba Walker qualified for the supermax with the Charlotte Hornets by being selected to the All-NBA Third Team. This meant he could sign a five-year, $221.3 million contract extension. Had he not been selected, he would have qualified for a five-year, $189.7 million extension. That $31.7 million difference is likely why the Hornets decided to move on, allowing Walker signed a four-year, $141 million deal with the Boston Celtics in a sign-and-trade.

This also puts journalists in a position where their votes for individual awards and All-NBA selections can determine whether players qualify for supermax extensions. Although this provides incentives for voters to take their obligation seriously, it also gives them the tremendous burden of power to determine how much money players can make. Ultimately, award voters can decide the financial fate of future free agents under the current contract extension incentive system.

Final thoughts

It is nearly impossible to comprehend the entire NBA CBA, which is thicker than a phonebook. It is specifically designed to avoid circumvention. However, teams have won championships by understanding the rules and how to use them to their advantage. The next time you see that an NBA player sign a contract, try to understand its broader implications. But just remember: every NBA stakeholder stresses within the margins of this contract.