One of the most hot topic issues in NHL’s collective bargaining agreement (CBA) negotiations for years has been escrow. Most recently, escrow has been a significant discussion point in shaping how the next NHL season will look, and how player salaries would be handled in the COVID world.
It’s a very important topic, and escrow is a key reason why the NHL and NHLPA haven’t come to terms on the format for the 2020-21 season yet. Many have reported a targeted start date of January 1, 2021, but according to top reporters like Elliotte Friedman, if a deal wasn’t reached by American Thanksgiving, it would be extremely difficult for the NHL to stick to that target date. Well, it’s Thanksgiving weekend, and no deal is in sight. Escrow is at least part of the explanation why.
What is escrow?
In the CBA, the players and owners have agreed to split hockey-related revenue (HRR) right down the middle, 50/50. However, the combined salaries of all the players is often higher than HRR for that year.
To ensure HRR is split appropriately, a certain percentage of all players’ salaries are withheld in a collective fund, called escrow. At the end of the season, the league will dip into this fund to balance out HRR, and whatever remains is redistributed back to the players. It’s not a one way street. If player salaries are lower than the HRR for a particular season, the players will earn extra money to balance things out.
Escrow is used as a cost certainty measure for owners. Ensuring there is a pool of money available to balance out the revenue share, the owners are insulated to losses they may incur during a particular season. It gives them flexibility and confidence that they will get their 50% of HRR.
The obvious question is why the players have part of their salaries withheld and not the other way around. The simple answer is that it’s just not reasonable to expect employees to cut cheques back to their companies after they’ve been paid. It just makes sense to take off a percentage off the bat, and then redistribute afterwards if needed. Beyond that though, it has to do with how the salary cap is calculated, which explains why more often than not, money from the pooled escrow fund is given to owners.
Based on the HRR projection for the next season, the midpoint of the salary range is determined. This is an important distinction from the salary cap. The salary cap is always 15% higher than this midpoint (it follows that the salary floor is 15% lower). Therefore, by definition, if the average team’s player salaries adds to the midpoint, and the revenue projection is correct, the HRR would likely balance out close to 50/50.
However, because most teams spend closer to the cap, and the inherent inaccuracies in revenue projections, the average spend for teams is almost always higher than the midpoint, and HRR. This results in escrow money flowing to the owners to balance everything out.
How has escrow worked to date?
Up to the most recent CBA which was negotiated during the pandemic and gave the league labour peace until 2026, the amount withheld in escrow was undetermined and would fluctuate during the year. This caused great uncertainty on the players’ side, where they wouldn’t know how much of their agreed upon salary they would be taking home at the end of the year.
For example, 14.7% of the players’ salaries was withheld in escrow for the 2013-14 season, 3.8% was given back, for a total of 10.9% of player salaries going back to the owners. In 2018-19, 12.9% was withheld, 3.25% was given back, for a total of 6.65% going back to the owners.
Last season, with players deferring their final paycheques and ultimately giving the whole cheque to escrow, 19.55% was withheld. The fluctuation is significant, and it’s not hard to see why the players did not like this system one bit.
In the new CBA, escrow is capped at a certain percentage that decreases based on the assumption that HRR will increase year to year.
With a new TV deal on the way, plus another team joining the league in 2021-22, this seemed to be a valid assumption. Now, with the pandemic throwing all previous assumptions out the window, questions have arisen.
Why is escrow a problem now?
It’s no secret that teams are bleeding money, and without the majority of HRR for the next season at least due to fans not being in the stands, the players will almost certainly out-earn their 50% share of HRR in the 2020-21 season. With escrow capped at 20%, it limits the owners’ ability to recoup their lost money.
As a result, owners are asking players for concessions to the escrow caps that were negotiated into the newest CBA. Instead of 6%, the ask is apparently somewhere in the 8-9% range. From the owners’ perspective, they feel that the revenue share has to be 50/50, full stop. If they can’t get there based on the current escrow caps due to the pandemic, then things need to change.
On the players’ side, they feel that they provided cost certainty to the owners for many years and it was a burden they felt was not theirs to carry any longer. That’s why they negotiated caps in the new CBA, and, just like how the owners didn’t provide an help in the past, it’s not up to them to provide help to the owners now. The deal was agreed to and it’s both unfair and unreasonable to ask for a renegotiation of terms five months later.
What role will escrow play in restarting the NHL?
According to Elliotte Friedman, it’s expected that the owners are looking for up to $300 million in relief, which is a significant number. This won’t prevent the season from starting, but it has delayed it. There needs to be an agreement between the owners and players on how this 50/50 share will eventually be made up, when it will happen, and which side needs to take a hit this season.
The best path forward for both sides is to get hockey back and start earning revenue. However, escrow has become such a dirty word in the eyes of the players that the owners may have to bear a greater loss in the short term.
What effect that has on the standing of each franchise, especially those already in financial hot water, remains to be seen. There’s a tough task ahead in hammering out the financial details, which falls on top of finding a safe way to play out the regular season. With any luck, a definitive start date for the 2020-21 season may come to light sooner rather than later, and the parties involved can look forward to seeing NHL hockey return.
Photo courtesy: Gene J. Puskar/AP Photo