An introductory guide to the NFL’s salary cap

With the National Football League (NFL) Free Agency period beginning this week and the College Draft¹ around the corner, a good basic understanding of the NFL’s salary cap rules will enrich any analysis of a team's roster decisions at this intriguing time of the year.

This article provides an introductory guide to the inner workings of the NFL’s salary cap, explaining its objectives, key provisions and how it achieves them. The salary cap rules are found at Articles 12-14 of the NFL Collective Bargaining Agreement (CBA).

Why does the NFL have a salary cap?

The NFL salary cap is primarily designed to enable the league to control team spending on players’ salaries in order to limit financial risks and underpin the financial integrity of the league.

The cap is also aimed at maintaining parity of competition within the League, with all teams being subject to the same spending limits. In theory, this creates a leveler playing field.

The salary cap rules aim to achieve these objectives while still providing sufficient flexibility to allow teams to creatively manage their spending. This is how they work.

Maximum and Minimum Spend

The cap limits how much each NFL franchise can spend on player salaries per year.² One point to note is that the cap only applies to players, not coaches, trainers or other personnel.³ In 2014, the salary cap was set at $133 million for each team, $143.28 million in 2015, and for 2016 is $155.27 million.⁴

The League also sets a minimum salary spend, which applies not annually, but to each of the four-year periods of the current CBA, from 2013 – 2016 and 2017 – 2020.

The "Guaranteed League-Wide Cash Spending"⁵ provision demands that for each of those periods, at least 95% of the salary cap must be spent across the League. As well as this guaranteed League-wide spending, for each of the same four-year periods, each team must also individually spend at least 89% of their team salary cap for that period.

The "Minimum Team Cash Spending"⁶ provision states that where a team fails to spend 89% of its Cap over a four-year period, any shortfall shall be paid on or before the next September 15 by the team who fell short. Payment is made directly to any players who were on the team roster at any time during those four years, subject to reasonable allocation instructions from the NFL Player's Association (NFLPA).

Once teams have met their obligations to spend 89%, any remaining shortfall up to the 95% threshold becomes the responsibility of the League, who shall pay the shortfall directly to the players who were on a Club roster at any time during the seasons, again subject to reasonable allocation instructions from the NFLPA.

The maximum and minimum spend provisions demonstrate how the NFL Cap effectively shares wealth between the League, the teams and its players.

How is the salary cap calculated?

The provisions relating to the calculation of the salary cap at Article 12 CBA⁷ are extensive and complex. It is beyond the scope of this article to explain them in depth, but it is worth briefly summarizing them to indicate where the salary cap figure comes from and what it relates to.

The NFL salary cap is calculated by reference to projected annual League and club revenues foreach league year, defined as "All Revenues", or “AR”. Details of how this figure is calculated are set out in Article 12 CBA. In summary, it can be broken down into three categories:

• League Media AR e.g. television rights sold nationally for entire for entire NFL games and internationally for live and delayed games; radio revenues; Copyright Royalty Tribunal revenues.
• NFL Ventures/Postseason AR e.g. revenues arising from the operation of postseason games to be received by the NFL and NFL-affiliates such as NFL Network, and revenues arising from the operation of NFL-affiliated entities such as NFL Network.
• Local AR e.g. all revenues to be received by Clubs or Club affiliates not included in either category above, including the sale or license of preseason television rights

These figures are combined to make total AR. Once the total AR figure is calculated, a percentage of it is set as the "Player Cost Amount", which is the total allowable expenditure on player salary and player benefits across the league. The amount for player benefits is deducted and divided equally among the 32 teams, leaving the total salary cap which is also divided equally among the teams.

Calculating the salary cap by reference to revenues in this way ensures that it operates as a valuable cost control provision; as goes the health of the League and its teams collectively, so goes the size of the salary cap.

This is not always the approach in sports with salary caps. For example, take the wage cap featured in the English Premier League’s (EPL) current handbook. Daniel Geey wrote for LawInSport⁸ about how the English Premier Leagues’ soft wage cap limits club spending on player services and image contracts but allows clubs to spend over the salary cap, provided the spending is justified by their own commercial revenues during a particular season.

Making the salary cap relative to each club's individual turnover allows for drastic differences in spending between clubs. As Mr Geey noted, “this regulation will continue to provide clubs participating in the Champions League… with a real competitive advantage” due to the additional TV revenue generated. The NFL makes no special allowances for rich or successful clubs, who must ultimately operate within the parameters of the maximum and minimum spend provisions, which apply regardless of a club’s individual wealth.