The Return of Salary Arbitration in Major League Baseball

The right for certain classes of MLB players to have their salary determined through a neutral arbitration process was a hard-fought right obtained as part of players’ efforts to gain free agency during the early 1970s (Ed Edmonds provides an excellent history of this issue).  The players gained considerable leverage with the 1975 Messersmith/McNally arbitration decision (upheld by the courts) that provided players a path to free agency.  See K.C. Royals Baseball Corp. v. Major League Baseball Players Ass’n, 532 F.2d 615 (8th Cir. 1976).  With this leverage, in 1976, MLB and the MLBPA negotiated a new collective bargaining agreement (“CBA”) that provided players with free agency after six years, and the right to salary arbitration for players with two to six years of experience.

The system remains largely the same today, providing players with three to six years of experience (or certain players with only two years known as “Super Twos”), the opportunity to have their next season’s salary determined via a neutral arbitration process.  The CBA sets forth the criteria that is considered in determining the player’s salary:  the player’s performance; special qualities of leadership and public appeal; the length and consistency of the player’s contribution; the player’s past compensation; comparative baseball salaries; the club’s record; and any physical or mental defects on the part of the player.  See MLB CBA, Art. VI.

Importantly, the arbitration panel can only choose the salary submitted by either the player or the club – it cannot choose a different salary, such as the midpoint.  This “final offer arbitration” system is intended to force the two sides to submit more reasonable bids (to both each other and the arbitration panel) that are more likely to lead to settlements before an arbitration hearing takes place.  While as many as 200 players may be eligible for salary arbitration each year, the success of the process may be revealed by how many of those cases settle before an arbitration hearing takes place.

In fact, the data indicates that, during the history of MLB salary arbitration, the “final offer arbitration” system has worked with increasing frequency.  Using data from baseball writer Maury Brown and the website MLB Trade Rumors, during the 1980s there was an average of 21.3 hearings per offseason; in the 1990s, there was an average of 13.7 hearings; in the 2000s, there was an average of 7 hearings; and finally, between 2010 and 2014 there was an average of only 4.2 hearings.  Indeed, there were no hearings at all in 2013 – meaning every case settled.

However, this trend is reversing.  While there were only 4 hearings in 2016, there were 14 in 2015, 15 in 2017, and 22 in 2018.  Why?

Although MLB and MLBPA have a contentious labor history, they have recently experienced sustained labor peace.  In November 2016, the parties agreed to a new collective bargaining agreement through the 2021 season; 2021 would mark 26 years since the sport’s last work stoppage.  Nevertheless, this offseason has shown that there are serious strains in the relationship.  Free agents have not received the contract offers to which they believe they are entitled, causing some to allege collusion by the clubs.  Without new contracts and clubs, the free agents (with the help of MLBPA) have conducted their own spring training while awaiting the offers they think they deserve.  Thus, an increase in the number of salary arbitration hearings might be reflective of a more generalized disagreement between players and clubs about their appropriate compensation.

This apparent disagreement may also be the result of what seems to be an increasing willingness of clubs to challenge a rise in player salaries by pursuing salary disputes through the conclusion of the arbitration process – albeit, in many instances, unsuccessfully – as reflected in the aggregate arbitration hearing records.  In 43 years of salary arbitration:

  •          In 32 of those years (74.4%), clubs won the majority of salary arbitration hearings;
  •          In 10 of those years (23.3%), players won the majority of salary arbitration hearings; and
  •          In 1 year, all the cases settled.

Additionally, in recent years clubs seem to be employing a “file and trial” strategy, which requires some explanation.  The clubs and their salary arbitration eligible players typically attempt to negotiate deals in December and early January.  If they are unable to reach a deal, they must “file” and exchange requested salary figures between which the arbitration panel will decide.  This year the filing deadline was January 12, with hearings taking place in the first two weeks of February.  Nothing prevents players and clubs from continuing to negotiate after the filing deadline and before the hearing, but it is decreasingly common.  Instead, clubs are insisting that if the parties do not negotiate a settlement before filing, the case will proceed to a hearing (or “trial”).  The clubs hope that this type of hard deadline forces more players to accept the club’s last offer.

The next CBA negotiation will not take place for a few more years.  It remains to be seen how labor relations will develop over that time.  In the interim, salary arbitration might be the canary in the coal mine on labor relations in baseball.

Disclosure: I assist Glenn Wong, Professor, Sandra Day O’Connor College of Law at Arizona State University, perform salary arbitration work for the Baltimore Orioles.

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