This document is a quick reference to the NBA’s Collective Bargaining Agreement, and leaves the thorough explanations to the Salary Cap/Collective Bargaining Agreement FAQ.

Salary caps: A salary cap limits the amount teams can spend on player contracts. A team can only sign a free agent if its total payroll will not exceed the salary cap.  This helps to maintain competitive balance in the league, ensuring that teams with deep pockets are playing on a level playing field with every other team.  The NBA has a soft cap, which means teams can exceed the cap under certain conditions.  In fact, historically very few teams are ever under the cap during a season.  A soft cap helps promote the ability for teams to retain their own players.

Setting the salary cap:  Each July the league projects revenues and benefits for the upcoming season, then applies a formula to derive the season’s salary cap.  For the 2005-06 season the salary cap is $49.5 million.  There is also a minimum team salary, which is 75% of the salary cap.

Player salaries:  Players have minimum and maximum salaries, which are based on how long the player has been in the league.  In 2005-06 minimum salaries range from $398,762 to $1,138,500, and maximum salaries range from $12,000,000 to $17,400,000.  In multi-year contracts, only the first season's salary is subject to the maximum, but there are restrictions on the size of annual raises.  Free agents whose salary for the previous season was higher than the maximum can sign for up to 105% of their salary in the previous season.  A scale salary system is utilized for first round draft picks, which is explained below.

Team Salaries:  A team’s Team Salary is essentially its total payroll.  It is the amount that is compared to the salary cap to determine the amount the team has available for signing free agents.  It includes the salaries for all players, whether active, inactive, released or retired, as long as that salary is being paid.  It also includes a number of “cap holds” which prevent teams from leveraging loopholes.

Luxury tax:  The luxury tax is a mechanism to help control spending.  It is paid by teams whose payroll exceeds a predetermined tax level ($61.7 million in 2005-06).  Teams pay one dollar for each dollar their team salary (after a few adjustments) exceeds this tax level.  The tax money is redistributed to teams that did not pay a tax, again after the league office takes a cut.  Teams had a one-time opportunity in August, 2005 to release one player and exclude that player’s salary from future tax obligations.

Salary cap exceptions:  Teams are allowed to exceed the salary cap under certain circumstances.  These circumstances are defined by “exceptions,” which are:

• Bird Exception: Allows teams to exceed the salary cap to re-sign their own free agents.  A team can essentially ignore the cap to re-sign its own free agent who has been with the team for three seasons, with additional restrictions in place for players with less tenure.  The clock does not reset when a player is traded – a player’s “Bird rights” are essentially traded with the player.
  
  
• Mid-Level Exception: Allows a team to sign any free agent for up to the average salary ($5 million in 2005-06), every year.
  
  
• Bi-Annual Exception: Allows a team to sign any free agent for an amount analogous to the median salary ($1.672 million in 2005-06).  A team cannot utilize this exception in consecutive seasons.
  
  
• Rookie Exception: Allows a team to sign its first round draft pick to a scale salary contract.
  
  
• Minimum Player Salary Exception: Allows a team to sign any number of players for the minimum salary.
  
  
• Traded Player Exception: Allows teams to accept more salary in trade than they trade away, with several restrictions.

o       Disabled Player Exception: Allows teams to replace players suffering from long-term injuries.

o       Reinstatement: If a player was banned from the league for a drug-related offense and later reinstated, his prior team may re-sign him for up to his previous salary.

At any given time a team may have either exceptions or cap room, but they can't have both.  If a team has more than one exception available to sign a player it can choose which exception to use.  However, teams cannot combine exceptions together in order to create a larger exception.

Cap circumvention:  There are a number of safeguards to prevent teams from circumventing the salary cap.  First, certain exceptions and prior salary amounts are counted as part of a team’s Team Salary, which prevents certain accounting tricks (such as signing another team’s free agent using cap room, then re-signing its own free agents using the Bird Exception).  Second, there is a general prohibition on circumvention, which allows the league to step in and prevent deals which are clearly intended to circumvent the cap.  Third, the league can severely punish teams that are caught doing anything against the rules (such as making under-the-table agreements with players on future contracts).

Restricted free agency:  Free agents are either restricted or unrestricted.  An unrestricted free agent is free to sign with any other team; restricted free agency gives the player's original team the right to keep the player by matching an offer sheet the player signs with another team.  Restricted free agency exists only on a limited basis: following the rookie "scale" contracts for first-round draft picks, and for all veteran free agents who have been in the league three or fewer seasons.  All other free agency is limited to unrestricted free agency.  Teams must submit a qualifying offer to make their free agent restricted.  The player can accept his qualifying offer and play the following season under its terms, which is sometimes done in order to become an unrestricted free agent the following summer.  If instead he wants to sign with a different team, that team signs him to an offer sheet, the principal terms of which the original team is given seven days to match.  If the player's original team matches the principal terms of the offer sheet, the player remains under contract to his original team.  If the player's original team does not exercise its right of first refusal within seven days, the offer sheet becomes an official contract with the new team.  The player can also negotiate a new contract with his prior team that is independent of the qualifying offer.

Gilbert Arenas provision:  This provision prevents teams with limited forms of Bird rights from losing certain restricted free agents by preventing other teams from submitting offer sheets that are beyond the team’s ability to match.  For restricted free agents with one or two years in the league, the first-year salary in an offer sheet cannot be greater than the average salary.  This guarantees that the player's prior team will be able to match the offer sheet using their Mid-Level exception or one of the limited forms of the Bird exception.  To make up for the salary restraint in the first season, this provision allows a larger-than-normal raise in the third season.  The primary intent of this provision is to allow teams to retain their two-year players who were second round draft picks.  Certain restricted free agents in different situations might still be lost despite this provision.  This provision also ensures that second round picks can't cash in with a maximum salary sooner than first round picks can.

First round draft picks:  There's a strict salary scale for first round draft picks and their first contracts.  The scale amount is based on the draft year and the player’s draft position.  For example, the scale amount for the first pick in the 2005 draft is $3,617,100 in 05-06, $3,888,300 in 06-07, and $4,159,600 in 07-08.  The contract can provide anywhere from 80% to 120% of the scale amounts (subject to normal raise limitations).  These contracts are always for two seasons, with team options for the third and fourth seasons.  If the team invokes both options (keeping the player for all four seasons) then the player becomes a restricted free agent following his fourth season.  If the team declines either option, then the player becomes an unrestricted free agent.

Not agreeing to a contract:  If the team and player can’t agree to a contract, the player’s options are limited.  If the player is already under contract to, or signs a contract with a non-NBA team, the team retains the player's draft rights for one year after the player's obligation to the non-NBA team ends.  If the player was still eligible to play in college before he was drafted, the team retains the player's draft rights until the draft the player would have entered had he not left college early (however the current NCAA rules state that players lose their NCAA eligibility if they are drafted, so the player could not return or go on to play college ball).  For all other players, the team retains the player's draft rights until the date of the next draft.  In all cases, if the team does not sign the player in the allotted time, the player can enter the next draft.  If the team that selects the player in the next draft doesn't sign him either, he becomes a rookie free agent.

Contract lengths and raises: There are limits to the lengths of contracts, and also to the size of raises.  The limit depends on they type of contract.  Players with full (three year) Bird rights can receive six year contracts.  Most other players can receive five year contracts, although certain exceptions (such as the minimum salary exception) have shorter limits.  The two-year and three-year forms of the Bird exception allow for raises up to 10.5% of the salary in the first season of the contract (raises are always based on the salary in the first season of the contract, and are never compounded).  For most other contracts, the limit is 8%.  As mentioned above, first round draft picks have a different set of rules.

Draft eligibility:  A player can't play in the NBA unless he's been eligible for at least one draft (he doesn't have to actually be drafted, he just has to have been eligible).  A player who is eligible for a draft must be at least 19 during the calendar year of that draft, and if a U.S. player, at least one year removed from high school.

Over-36 rule: This rule prevents teams from circumventing the cap when signing players who are nearing retirement by signing them to more seasons than they expect to play.  For certain contracts the accounting is worked in such a way that the player can receive no more money in a longer contract than he can receive in a shorter contract.  Typically this happens with contracts that are longer than four seasons, and extend past the player’s 36^th birthday.

Option clauses:  An option clause allows a contract to be extended for one additional season after it is scheduled to end.  There are three kinds of options: team options give the team the right to invoke the option year.  Player options give the player the right to invoke the option year.  ETOs are similar to player options, giving the player the right to terminate the contract early.  An ETO can't occur prior to the end of the fourth season of the contract, so the contract must be for at least five seasons.

The salary in the first year of an extension to a rookie scale contract may be any amount up to the player's maximum.  For all other extensions, the salary in the first year of the extension is limited to 110.5% of the salary in the last year of the existing contract, not to exceed the player’s maximum salary.  Raises in each year of an extension are limited to 10.5% of the salary in the last year of the existing contract.

Retired players, career ending injury/illness:  All salary paid to a player is included in team salary, even if the player has retired.  It is at the team's discretion (or as the result of an agreement between the team and player) whether to continue to pay the player after he has retired.  If a player is forced to retire for medical reasons, then he can continue to receive his salary, but the salary is not included in the team's team salary.  There is a waiting period of one year following the disabling injury or illness before a team can apply for this salary cap relief.  Death is treated the same as a career ending injury or illness.

Waivers:  Waivers are a temporary status for players who are released by their team.  A player usually remains on waivers for 48 hours, however the waiver period is seven days between the end of the regular season and August 15.  During the waiver period other teams may claim the waived player, which means the claiming team acquires the player and his existing contract.  In order to claim a waived player, a team must have means to accommodate his salary, either with cap room or a sufficiently large exception.

If no team claims a waived player, he is said to have "cleared waivers."  The player may sign with a new team of his choice, and the player's prior team continues to pay the guaranteed portion of the terminated contract (which also counts against their team salary).  The player's salary with his new team is a matter of negotiation.  Few players are actually claimed while on waivers, since the team claiming a waived player inherits his entire contract.  It is far more common for teams to wait for players to clear waivers, and then sign them to a much smaller (even minimum salary) contract.

The team and player may negotiate a revised payment schedule to be utilized in the event the player is waived.  This revised payment schedule may call for the guaranteed portion of the player's contract to be paid over a longer or shorter period of time than originally specified in the contract, or even as a lump sum (a spread provision).

Set-off:  If another team signs a released player who had a guaranteed contract, the player's original team is allowed to reduce the amount of money they still owe the player (and lower their team salary) by a commensurate amount.  This is true if the player signs with any professional team -- it doesn't even have to be an NBA team.  The amount is one-half the difference between the player's new salary and the minimum salary for a one-year veteran (if the player is a rookie, then the rookie minimum is used instead).

Suspensions:  The CBA does not give a complete list of reasons for which a player can be suspended.  A few reasons are specified, such as for prohibited substances and disciplinary reasons.  Teams sometimes suspend players for other reasons, but those suspensions are often grieved.  The CBA does not specify the length of suspensions except in the cases of missing the rookie transition program (five games), unlawful violence (10 games minimum) and drugs (varies by drug and increases with subsequent violations).  Players are not paid while they are suspended.

Signing bonuses:  Teams are allowed to offer the players they sign a bonus worth as much as 20% of the total compensation (17.5% in offer sheets to restricted free agents).  The signing bonus is charged to team salary by being spread proportionally among the guaranteed seasons in the contract.  Certain other payments are treated as signing bonuses including payments in excess of $500,000 that are made to non-NBA teams or federations to release rights to a player, buy-outs for option years, and trade bonuses.

Local tax differences:  Since the tax rate varies by state (and in Canada), teams in a more “tax friendly” state have an inherent advantage – due to tax differences they can offer the player a higher net income for the same contract amount.  However, the league helps neutralize the tax disadvantage of Canadian teams, by taxing signing bonuses at just 15%.

Roster sizes:  A team may have 12-15 players on its roster.  Twelve players must be on a team’s active roster, although they can drop to 11 for up to two weeks at a time.  They must suit up at least eight players for every game.

Inactive list:  Any players beyond a team’s 12 active must be on its Inactive List, and are ineligible to play in games.  A team must have a minimum of one and a maximum of three players on its Inactive List, although they can drop to zero for up to two weeks at a time, and can temporarily have four with league approval in the event of a hardship.  The composition of the Inactive List can change on a game-by-game basis -- no less than 60 minutes prior to tipoff, the team must present to the official scorer a list of the players who will be active for that game.  A player can be inactive for as little as one game.  Players assigned to the NBA Developmental League are automatically placed on their team's Inactive List.

Traded Player exception:  The Traded Player exception is the primary means used by teams over the cap for completing trades.  It allows teams to make trades that leave them over the cap, but it limits the salaries teams can acquire in trade.  If the trade is completed at once (a simultaneous trade), a can acquire up to 125% plus $100,000 of the salaries they are trading.  In some circumstances, a team can take up to a year to replace a player they trade away (a non-simultaneous trade).  In a non-simultaneous trade, the team can acquire up to 100% plus $100,000 of the salaries they are trading.  Non-simultaneous trades are allowed only when a single player is traded away, although teams can sometimes structure multi-player trades as multiple single-player trades to get around this restriction.  The Traded Player exception has additional restrictions, which are described below.

Trading minimum salary players:  The Minimum Salary exception allows teams to acquire minimum-salary players without regard to salary matching.  Therefore, when a team acquires multiple players in the same trade, it essentially ignores the incoming salary for all minimum-salary players, as they fall under the Minimum Salary exception. Teams trading away minimum-salary players do count their salaries (the portion not reimbursed by the league) as outgoing salary when comparing salaries for trade.

Trading draft picks:  Draft picks (both first and second round) count $0 for salary matching purposes.  This is true both before and after the draft, until the player signs a contract.  Once the draft pick signs a contract, his actual salary becomes his trade value.

Teams can only trade draft picks five years into the future (for example, if this is the 2005-06 season, then the 2010 pick can be traded, but the 2011 pick can't).  It is common to "protect" picks depending on their position, and the protection typically relaxes over several years -- for example, a first-round pick in 2005, unless it is in the lottery, in which case a first-round pick in 2006, unless it is one of the top three, in which case an unconditional pick in 2007.  Teams cannot trade away future first round draft picks in consecutive years.

Combining exceptions in trade:  While teams can utilize multiple exceptions in the same trade, they can never do so in such a way that they use more than one exception on the same player.  For example, a team cannot combine their $5 million player with a $4 million trade exception from an earlier trade to acquire a $9 million player.

Base year compensation (BYC):  Base year compensation is a component of the Traded Player exception which prevents a salary cap loophole. It prevents teams from re-signing their own free agent for the sole purpose of trading him for a more expensive player (and therefore giving him an over-inflated salary), by temporarily lowering the player’s trade value after he signs a contract that includes a large raise.  BYC is triggered when a team is over the cap, re-signs its own player using the Bird exception, and gives the player more than a 20% raise.  When this happens, for the first six months after the contract is signed, the player’s trade value (i.e., his outgoing salary for salary matching purposes) is his previous salary, or 50% of the first-year salary in his new contract, whichever is greater.

Poison pill provision:  For extended rookie scale contracts, if the team tries to trade the player between the date his extension is signed and the date it takes effect, his "trade value" for the receiving team is the average of the salaries in the last year of the scale contract and each year of the extension.

Sign-and-trade:  The sign-and-trade rule allows teams to re-sign their own free agents for trading purposes.  The player is signed and then traded to a specific team (named in the contract) within 48 hours.  If the trade is not completed in the allotted time, then the entire contract is void.  Sign-and-trade contracts must be for three years or longer, but only the first season of the contract must be guaranteed (this prevents the receiving team from acquiring Bird rights in less than three years).  Sign-and-trade allows teams to get something in return for players they lose to free agency, in return for which the player can get a richer contract by being signed by his original team.

One complication with sign-and-trade deals is that the signed player can immediately become a BYC player, in which case the player's BYC value must be used when determining whether the trade is allowed.  If a sign-and-trade contract contains a trade bonus, then the bonus is not earned upon the trade that accompanies the signing, but rather on the first subsequent trade.

Cash in trades:  Players can be traded for cash, and cash can be included in trade packages.  The amount of cash is limited to $3 million.  The cash is NOT considered when matching salaries under the Traded Player exception.

Trade bonuses:  Some contracts (as a matter of individual negotiation) contain trade bonuses.  A trade bonus is paid to the player when he is traded, but only upon his first trade and not upon any subsequent trades (in the case of a sign-and-trade, they don't count the initial trade when the contract is signed).  The trade bonus can be defined as a specific dollar amount, a specific percentage of the remaining value of the contract, or some combination (e.g., "$1 million or 10% of the remaining value of the contract, whichever is less").  In either case, the actual amount cannot exceed 15% of the remaining value of the contract.

A trade bonus is counted as incoming salary for the team trading for such a player, which can complicate salary matching.  The CBA allows the player to waive part of his trade bonus if necessary to make a trade legal.

Trade restrictions:  A player cannot be traded at all under certain circumstances:

• For three months after signing a contract or December 15th of that season, whichever is later (except for draft picks).
• For 30 days after signing a contract as a draft pick.

o       For two months after receiving the player in trade or claiming him off waivers, if the team is over the cap and the player is being traded in combination with other players (the player can be traded solo immediately).

o       After the trading deadline (16^th Thursday of the season).  Players can be traded again after the end of the season, except for players whose contract is ending or may end due to an option.

o       Without the player's consent when the player is playing under a one-year contract (excluding any option year) and will have Larry Bird or Early Bird rights at the end of the season.

o       For one year after exercising the right of first refusal to keep a restricted free agent (however, the player can consent to a trade to any team except the team that tried to sign him).

• After claiming a player on waivers, for 30 days if the player was claimed during a season, or until the first day of the next season if the player was claimed during the offseason.
• A team cannot reacquire a player they traded away during that season unless the player has been waived.

In addition, a "no-trade clause" can be negotiated into an individual contract if the player has been in the NBA for at least eight seasons, and has played for the team with which he is signing for at least four seasons.  Very few players actually have one of these no-trade provisions.

Ending contracts:  Some players who aren't necessarily trade-worthy from a basketball standpoint become valuable trade commodities from a financial standpoint.  This happens when their contract is about to end (typically in the contract’s final year).  If another team is stuck with a long-term contract and would prefer having salary cap flexibility the following summer, they can often trade the player for ending contracts.  By trading for ending contracts, the team is able to lower their team salary the following summer (when the players’ contracts end), and the team trading away the ending contract is able to parlay the contract into a better basketball player (at the cost of assuming an expensive contract).

July Moratorium:  During the first part of July teams may not sign most free agents or make trades.  This allows the league to complete the accounting necessary to set the salary cap for the upcoming season.  A few signings that do not rely on the specific value of the salary cap are allowed, such as signing first round draft picks to scale contracts.

Guaranteed contracts:  There are a few specific types of contracts that must be guaranteed.  All other guarantees are a matter of individual negotiation between the player and team when the contract is signed.  Only a player's base salary can be guaranteed -- not bonuses or incentives.  Guarantees can be provided for lack of skill, death (insured or non-insured), injury/illness (insured or non-insured), mental disability (insured or non-insured), and non-insured basketball-related injury.  Partial guarantees (e.g., $2 million of a $5 million salary) are allowed.

On January 10 the base salary in all contracts becomes guaranteed for the remainder of that season.

Tampering:  Tampering is when a player or team directly or indirectly entices, induces or persuades anybody (player, general manager, etc.) who is under contract with another team to negotiate for their services.  The NBA takes tampering very seriously and may impose stiff penalties if it is discovered, however the league will not investigate unless another team files tampering charges.

When team personnel talk to the press, they are careful to avoid talking about specific players who play for other teams.  They do this in order to avoid tampering.

Expansion:  To supply an expansion team with its initial complement of players, the league holds an expansion draft prior to that year's NBA draft.  Existing teams are allowed to protect up to eight players (including restricted free agents) from being selected in the expansion draft, but every team must expose at least one player who can't possibly become a free agent as the result of the exercise or non-exercise of an option or ETO.  Unrestricted free agents can neither be protected from nor selected in the expansion draft, and are essentially ignored.  Restricted free agents may be selected, but become unrestricted free agents upon selection (with the caveat that they cannot then re-sign with the team from which they came).  No team may lose more than one player in an expansion draft.  Existing teams are allowed to compensate expansion teams (usually with draft picks) in exchange for selecting or not selecting particular players in the expansion draft.  It is also common to see teams leave a desirable player unprotected, hoping that the player's age and/or high salary will dissuade the expansion team from selecting him.  This allows those teams to protect an additional player whom they might have been more likely to lose.  In some cases they might dangle a high-priced player hoping the expansion team takes him off their hands.

Expansion teams have a lower salary cap for the first two years of their existence.  They also have restrictions placed on their draft position in their first few seasons.  For example, Charlotte was assigned the #4 pick in the 2004 NBA draft, and Vancouver & Toronto could not receive the #1 pick in the NBA draft for their first four seasons.  Most league calculations (average salary, total benefits, total salaries, BRI, salary cap) simply ignore expansion teams (and the players on those teams) for two years.

Player dress code:  The league has broad powers which enable them to institute a dress code (and the Players Association has always acknowledged the league's right to do so).  For example, every player's contract contains a provision which states that the player agrees to be "neatly and fully attired in public."  In addition, the Commissioner has the general power to penalize players for conduct (which would include dress) detrimental to the league's best interests.

About this document:  This document is intended to be a quick reference for the NBA Salary Cap/Collective Bargaining Agreement FAQ.  Like the FAQ, I’m pretty confident about its accuracy.  Still, this document isn't necessarily 100% accurate.  If you find any errors, please contact me at lmcoon@cox.net (please include the source of your information, if possible).  If you have any questions, they are probably answered in the FAQ, which is available at http://www.cbafaq.com.  If the FAQ does not answer your questions, see question number 101 of the FAQ for information on contacting me.

The author is not connected to the NBA, any of its teams or the Players Association.

Larry Coon

January, 2006

Copyright Notice:

Copyright 2006 by Larry Coon.  All rights reserved.  No person may (a) re-produce more than any one section contained in this FAQ;  or (b) re-produce for profit any portion of this FAQ, in any form (including electronic), without the express, prior written (including e-mail) consent of the copyright holder.