The business and legal impact of MLB’s new collective bargaining agreement

Just hours before its midnight, Dec. 1 deadline, Major League Baseball and the Major League Baseball Players’ Association reached a tentative agreement Wednesday night on a five-year collective bargaining agreement. The new CBA, which must (and will) be ratified by both sides, eschews transformative change in exchange for targeted reforms. As detailed by SI’s Jon Tayler, Wednesday’s agreement ensures that there will be no lockout and thus no disruption of the Hot Stove season. Baseball will continue its 21-year run of labor peace. 

Here are the top three things to keep an eye on from a business and legal perspective:

1. Revised competitive balance tax

The most substantial change in the new CBA centers on heightened penalties for violations of the competitive balance tax, which is better known as the luxury tax. The luxury tax has been in place since 2003 and serves as Baseball’s version of a salary cap. The luxury tax, however, is not an actual cap—it merely assigns a financial penalty on teams that exceed a payroll threshold, with higher penalties levied on repeat offenders. The basic idea is that it discourages, but doesn’t prohibit, teams from substantially outspending other teams.

Violating teams currently pay a penalty ranging from 17.5% to 50% on the difference between a team’s payroll and the threshold. According to published reports, the highest penalty will rise to 92% and it will apply when a team exceeds the threshold three years in a row. Such a high percentage is almost akin to a dollar-for-dollar tax. Logic suggests that this revised luxury tax penalty will more effectively deter MLB teams from vastly outspending other teams. That could cause player salaries across the league to suffer. Perhaps we’d see slower growth in the average MLB salary, which has risen steadily in recent years. However, the actual impact of the new luxury tax on salaries will depend on whether ownership groups are willing to accept a higher tax as simply the revised cost of doing business.

There are also other changes that will influence team spending. For one, the luxury tax threshold, which is currently $189 million, will reportedly increase from $195 million in 2017 to $210 million in '21. This gradual increase will offset some of the impact of the increased tax percentage on violating teams. Working in the opposite direction, however, is that violating teams will be required to relinquish two draft picks—a second round pick and a fifth round pick—when signing a free agent whose prior team made him a qualifying offer, whereas non-violating teams will only need to relinquish a third round pick. MLB is betting that these new rules will sway teams’ willingness to spend in a downward direction.

2. No international draft but a hard cap

MLB had hoped to convince the union to accept an international draft, in which teams would be able to choose players from outside the U.S., its territories and Canada, rather than compete for them as free agents. The idea was problematic for several reasons, including legal ones. Owners eventually dropped the international draft as a negotiation demand.

Owners, however, have reportedly convinced the players to agree that teams will be bound by a $5 million per year hard cap on most types of international signings. International players who are classified as professional players in Japan, South Korea and Taiwan and Cuba (a “professional player” in Cuba will be designated as one who is at least 25 years old and has at least six years of experience) are expected to be exempt from the cap.

To some degree, the cap should level the playing field for the 30 MLB teams when trying to sign international free agents. But it will come at a steep cost to the most coveted international players. Under the previous system, these players would have been able to attract contract offers worth tens of millions of dollars. That will no longer be the case.

Along those lines, it remains to be seen if the cap encounters antitrust and labor law challenges in countries most impacted by its implementation. Like the international draft, a cap is a mechanism by which competing businesses (teams) conspire to limit pay for labor. While such a mechanism is lawful in the U.S. because it has been collectively bargained, other countries’ legal systems are constructed differently. Further, the players most impacted by the cap—young international players who have not yet signed—had no seat at the bargaining table with MLB and MLBPA.

3. Smokeless tobacco banned, sort of

Smokeless tobacco has a long history in baseball. But it is also highly addictive and has cancer-causing qualities. Many health advocates are concerned that when children watch their baseball heroes use tobacco, they’ll be inclined to try it and then become hooked. With that in mind, several lawmakers have prohibited the use of smokeless tobacco at ballparks. In recent years, these ballpark bans have been enacted in New York, Los Angeles, Chicago, Washington D.C., San Francisco and Boston.

While there is a compelling health argument against smokeless tobacco, ballplayers have long resisted a ban. Part of their resistance stems from autonomy: ballplayers are adults, not children, and if they want to use smokeless tobacco, it’s their choice. Players, it should be noted, already agreed to limited restrictions on the use of smokeless tobacco: In the previous CBA, they acquiesced to not use it in, among other situations, pregame and postgame interviews and at team functions.

Going forward, smokeless tobacco will be banned in baseball—but players who have already spent at least one day in the big leagues will be grandfathered out. So the ban is targeted for future big league players. It will be interesting to see how some minor leaguers adjust to the ban. While smokeless tobacco has been banned in the minors since 1993, it appears the ban has not entirely eliminated usage.

Michael McCann is SI's legal analyst. He is also a Massachusetts attorney and a tenured sports law professor at the University of New Hampshire School of Law.

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