Owing to a 92% drop in attendance during the COVID-19 pandemic, the National Football League (NFL) salary cap will be 8% lower this season, going from $198.2 million in 2020 to $182.5 million in 2021. The NFL has had a salary cap since 1994.  The cap regulates the amount that teams can spend on players in a given year.  This amount typically changes every year, and, in fact, cap limits had been going up every year since 2011 when the cap was at $120 million. The final number for 2021 was the result of negotiations between owners and the players union based on projected revenues and other factors.

The NFL salary cap came about as a result of the league allowing for unrestricted free agency starting with the 1993 season.  Prior to 1993, there was only very limited free agency in the NFL as teams could protect up to 37 players on their rosters.  This system was challenged in court by a group of players, and, in 1992, a federal jury ruled that it violated antitrust laws.  In the wake of that decision, owners and the players association resumed negotiations leading to unrestricted free agency in exchange for the implementation of a salary cap to protect competitive balance for smaller market teams.

The existence of a salary cap has levelled the playing field in the sport, such that teams in smaller markets like Green Bay or Kansas City are able to spend as much as teams in large markets like New York City and Los Angeles.  This has, in fact, contributed to small market teams achieving enormous success on the field such as Green Bay winning the Super Bowl twice since the cap came into effect, and Kansas City winning it in 2019.

Unlike some leagues where there is a “soft” cap and associated luxury tax payments for teams that go over it, the NFL utilizes a “hard” cap that teams must stay under at all times.  There are also salary floor regulations which discourage teams from attempting to save money by spending below the cap as any deficiencies are pooled and distributed among players who were on the offending team’s roster during a four-year floor cycle, with payments to players prorated according to the time on the roster during the period in question.  Although teams are not permitted to go over the cap, they can be creative in structuring player contracts in order to stay within the cap.  For example, they can back-load contracts so that a player is promised more money in the later years of the contract.  The benefit of this is that teams retain the option to release the player or to renegotiate the contract to avoid a big salary cap hit during those later years. To persuade players to sign back-loaded deals, teams will often pay a signing bonus which is guaranteed money that the player receives whether or not they are eventually released, but teams are able to spread the signing bonus money over multiple years for cap purposes.  This way, when a star free agent is given a sizeable signing bonus, it will not throw off a team’s salary cap for that particular year, thereby allowing the team flexibility in keeping desired players already on the roster or  for signing new players.  Another mechanism teams use to save salary cap space is what Tampa Bay just did in renegotiating Tom Brady’s contract by signing him to a four-year extension voidable to one year.  The voidable years will count toward the cap in future years, but the team saved $19 million in cap space for 2021, which fits with its “win now” strategy in light of Brady’s likely retirement after one or two more seasons.

In leagues like Major League Baseball which do not have a salary cap, there are much greater disparities in spending between small and large market teams.  While not always a determining factor in teams’ performance, it is harder for small market teams to sustain success over longer periods of time as they become unable to afford star players once they reach free agency.  The existence of a salary cap in the NFL generally permits teams to keep their franchise players, which helps with branding and maintaining a team identity in the eyes of fans.  Indeed, part of the bargain that lead to the salary cap was the advent of a “franchise tag” which allows teams to make a one-year tender to a player who would otherwise be a free agent with the offering being the average of the top five salaries at the player’s position for the current year, or 120 percent of his previous salary, whichever is greater. If that tender is made, the player cannot negotiate with another team for that particular year.

The ever-growing television rights revenues collected by the league and its great attendance numbers pre-COVID are a testament to the success of this model.  The dip in the NFL salary cap does appear to be temporary as attendance is expected to rebound in 2021 and the NFL is in the process of negotiating new television rights deals this year.  But for the time being, the lower salary cap is expected to result in more players entering free agency as teams work to get within the reduced cap, and also fewer high-dollar deals as teams have less to spend on free agents.