Problems Created with Contract Restructures

I wanted to jump into a bit of a different topic today and one that I guess would be aimed more at either agents who are representing players or students/professionals who are pursuing a career in sports representation. The topic is about salary conversions into bonus money and the negatives that are attached to it by just maintaining the status quo, default contract language used by most teams. Ive spoken a bit on this on the podcast before and I believe I touched on it in the book too but what reminded me of the topic was Tony Romo’s release and the following tweet by Joel Corry

The CBA has a number of rules in regards to the forfeiture of money in a contract, which are all outlined in Article 4, Section 9.  The gist of it is that the NFL team holds the right to force a player to forfeit bonus money if the player holds out, is suspended under the NFL drug policies, or retires. The forfeiture amounts vary but in general they are a proportionate amount to the number of weeks the player misses. The amount is based on signing bonus prorations attributed to the year or a prorated amount tied to roster, reporting or option bonuses. The fundamental difference between the two categories is that the signing bonus is able to be forfeited in any season, regardless of when it was earned, in which the amount is more than $0 while the second group can only be forfeited if the violation occurs in the year that they are paid.

Most readers of OTC know the backstory of Romo’s contract and how it became the most leveraged contract in the history of the NFL. Based on the original structure of the contract Romo’s retirement should have put him in a position where he could have been forced to pay the team back $5 million of his $25 million signing bonus earned in 2013. That is certainly no small number, but in light of the magnitude of the contract not crazy.

But as Joel tweeted the amount was much more. How much more I am not certain, but most likely it was close to $19.6 million, which is the amount of prorated money that was built into the contract via multiple restructures. That number is crazy no matter how you slice it. That is about 75% of what Romo earned in the last two seasons. It’s money Romo never should have been in a position to possibly pay back.

Every year we hear about players like Romo who restructure their contracts by converting salary to bonus money to reduce their salary cap charge. Often this is portrayed as some generous gesture by the player (it isn’t) for the betterment of the team, but when the mechanisms used to create the cap space are not properly utilized it is in fact a generous gesture.

Contrary to popular belief restructures are generally not carried out by a team reaching out to player and asking him to restructure the contract. In most situations these clauses are pre-negotiated at the time a new contract is signed giving the team the unilateral right to convert any paragraph 5 salary, roster bonus, option bonus, reporting bonus or anything else into a signing bonus.  In many cases the team simply carries over the language from the original signing bonus meaning that forfeiture will occur to the maximum extent unless they are forced to do otherwise.

This should never happen. The player should not be in a position where he is making any possible concession beyond what was the intent of the original contract simply because the team was unable to properly manage the salary cap. If you contracted to earn a salary in 2017 you should not be forced to pay some of that back in 2021 because you decided to retire in 2021 and “helped” the team by converting your salary to a signing bonus back in 2017. That is exactly what could have happened with Romo this year had Dallas not released him from his contract.

Remember when the player gets this new signing bonus money the terms of the payment rarely change or at least don’t change significantly. These are accounting moves not cash related moves. If a player is converting P5 to a bonus odds are this new bonus will be paid out in 17 installments just like the P5 was to be paid. If it’s a roster bonus conversion where payment was due September 1 the new signing bonus will be paid on September 1. So the player is really receiving nothing in this case except the potential to put more money at risk.

This is something that every agent should be paying attention to when they are reading over the final contract. Whenever a team needs salary cap relief the team should either be forced to include language that only permits forfeiture of the bonus money in the year of the conversion, just like would be the case if the contract stayed as is, or to use a different mechanism, such as a fully guaranteed roster bonus or advance, to force the proration. This way there are no future implications for the player.

This should be a relatively simple task to accomplish and all it should take is about 5 minutes to instruct the team to change the language. I’m sure you can even find plenty of examples that they have negotiated those types of contracts with. But if you aren’t careful, don’t know the rules, or just aren’t thinking about the future and let the team slip it in you are putting your player at risk.