The CBA Glossary

An explainer thing for the NBA's Collective Bargaining Agreement

The Over-38 Rule

There exists a little-known provision in the NBA salary cap that affects only the league's elder statesmen. It is colloquially called the Over-38 Rule, and, since it was most recently refined in the 2017 Collective Bargaining Agreement, it has been a prohibitive factor roughly as many times at it has been renamed.

Previously the Over-35 Rule and then the Over-36 Rule - the threshold being progressively updated in successive CBAs to reflect the fact that player careers are lasting longer - the Over-38 Rule exists to prevent new contracts given to senior players being longer than it is expected (or known) that the player will want to keep playing for.

The basic idea of the Over-38 Rule

The Over-38 Rule is best demonstrated by way of example.

If a team wanted to sign a 39-year-old player that they knew would retire in two years, they could potentially give him a mid-range value four-year contract instead of a higher-range two-year contract, thus circumventing the salary cap. If they for example intended to sign a player for two years and $40 million, but only had a non-taxpayer Mid-Level Exception to offer, they could theoretically sign him for four years and $40 million with the MLE, watch him retire after two, and take the cap hit in the final two years. The total commitment would be the same, while the immediate-term salary cap machinations would be far more favourable.

This would to the team's benefit, who could potentially get to sign a guy they would not otherwise get to sign. In the same hypothetical scenario, pretend that that player's incumbent team are only prepared to re-sign him for two years and $30 million. You need to outbid that to lure the player, but do not have enough cap space or the right amount of an exception to do so. Backloading the contract, then, could offset that disadvantage, and indeed turn it into an advantage. The Over-38 seeks to stop that from happening.

The Over-38 rule seeks to shut this loophole by imposing parameters based on the age threshold suggested by its name. The particulars of how it does this are particularly complicated, yet at the core of it, players signed to four- or five-year contracts that run beyond their 38th birthday will have salary in years after that date (the last year of a four-year deal, or the last two of a five-year deal, unless only the last year is after 38) treated as deferred compensation. Deferred compensation is charged to the salary cap in the years in which it is earned, not necessarily those in which it is paid, and thus the amounts of the final year/final two years becomes distributed across the salary numbers of the years of the contract prior to that date.

Correspondingly, therefore, the exceptions or cap room used to sign those contracts have to be big enough to incorporate both the deferred amounts in the post-38 years, as well as the base amount in the first year.

This does not prevent teams from signing players to multi-year contracts that run beyond their 38th birthday. It does however limit the size of such deals, to prevent deals being backloaded in an act of cap circumvention (or, perhaps more accurately, cap can-kicking).

This age threshold - and thus, the colloquial name - has been moved up twice to reflect the fact that, with the advancement of biomechanics, nutrition, therapy and understanding of load management, player's careers are lasting longer in the present day than ever before. The by-product of moving the threshold up, though, is that the instrument is almost never used.

There was one famous public example in the summer of 2017, when 14-year NBA veteran Nene's career was winding down. He was still a good back-up centre effective in a small role, particularly offensively, but he was also about to turn 35, and looking for one final multi-year deal. It seemed he had arrived upon it when he agreed to re-sign with the Houston Rockets to a reported four-year, $15 million deal, which would take him up to almost his 39th birthday.

Nene had spent the previous year with the Rockets, signing as a free agent to a one-year, $2,898,000 contract using the post-cap room Room Exception, having been with the Washington Wizards for the previous four and a half years. Because he changed teams as a free agent in this way only one year prior, he had neither Bird rights nor Early Bird rights.

Therefore, if Nene was to re-sign with the Rockets without using their 2017 MLE to do it, his new deal would have to fit within the upper limits of what he could get with non-Bird rights. That is to say, the biggest deal he could sign would be one staring at 120% of this previous salary, with maximum raises equal to 105% of that first year, for a maximum of four years.

In total, this meant a maximum deal of:

2017/18 - $3,477,720
2018/19 - $3,651,606
2019/20 - $3,825,492
2020/21 - $3,999,378

Total: $14,954,196

However, the final season would have come after Nene's 38th birthday. Per the Over-38 rule, this means it would be treated as deferred compensation, and instead of having $3,999,378 on the 2020/21 salary cap, the Rockets would instead have one third of it ($1,333,126) added on to each prior year. This would have meant Nene's 2017/18 salary cap number up to $3,477,720 plus $1,333,126, or $4,810,846. And since this was more than was allowable using the exception they were trying to sign him with, the deal was invalid, and negotiations had to begin again.

(Ultimately, Nene re-signed to the same deal as above, except without the fourth year entirely, bypassing the Over-38 provision yet costing him $4 million.)

As convoluted and confusing as that sounds, it is also incredibly rare that it is relevant. This is because, while it is established that NBA player's careers are lasting longer, they still are rarely lasting that long. And when they do, the players are invariably not commanding salaries big enough for it to matter.

Other things to note:

- The Over-38 rule would apply to new contracts, extensions, and - although it is tough to fathom a situation in which it ever comes about - renegotiated contracts.

- Only contracts of at least four years in length are susceptible to the rule, hence Nene's decision to forgo it.

- For the purpose of the Over-38 rule, all seasons are said to begin on October 1st.later, then the season will commence b

 

The real nitty-gritty

[TBC]

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