Let’s Fix MLB’s Salary Arbitration System: Introducing Restricted Free Agency

We’ve reached, at long last, the finale of our series on how to fix salary arbitration. The previous installments have all focused on how the arbitration process works, and how it might work better – from changing evidentiary rules, to granting greater independence to the arbitrators, to eliminating the either/or model. But today, we’re going to look at something different: who is eligible for arbitration, and how we might replace the current system with one designed to adapt to the realities of the current market for player labor. Doing so requires addressing service time manipulation, and ensuring that both sides can opt-in or out of a particular arbitration hearing and also that players are paid even in a slow free agent market. Can we do all of that without breaking teams’ payroll? I think the answer is yes.

A little over a year ago, Travis Sawchik floated the idea of adding restricted free agency to baseball, which would bring the sport more in line with the NFL and NBA. More recently, he revisited the topic.

Players with more than three years of service time but less than six are eligible for arbitration. The first year of arbitration eligibility is supposed to garner a player about 40 percent of their open-market value, the second year 60 percent, and the third year of arbitration approximately 80 percent, though that estimate does not always apply. While arbitration earnings are far greater than pre-arbitration salaries, which are typically near the minimum salary, they are still short of market value.

The type of restricted free-agency system that owners attempted to implement in 1994 seems increasingly beneficial to players today. That system could have made young star Francisco Lindor a 25-year-old free agent this winter and Mookie Betts a 25-year-old free agent last winter.

An approach similar to other sports leagues could address many of the problems inherent to baseball’s current system. So let’s examine how Travis’ system might work in practice. To start, let’s look at current rules for arbitration eligibility, courtesy of the fantastic FanGraphs Library (which, if you’ve never used, you should).

Players are eligible for arbitration hearings if they meet any of the following requirements:

  • They have at least three full seasons of MLB service time, and less than six. Players with six or more years of service time become free agents after their contracts have expired, while players with less than six seasons are under team-control. Up until players have acquired three seasons of service time, their salary is determined solely by their team. For years three through six, players can take their salary demands to an arbitration panel if they can’t reach an agreement with their team.
  • If they have less then three full seasons of MLB service time, but are within the top 22% of players with more than two years of service time. This is called the “Super Two” exception, and it often leads to top prospects being held down in the minor leagues until they have passed the Super Two threshold. For more on this, see our Super Two page.

The first part of this is fairly straightforward, at least in theory: if you have less than three years of service time, you aren’t eligible for arbitration; if you have more than three years of service time, you are. Of course, it’s more complicated than that. That service time definition – 172 days – is the pivot point around which many teams determine big league promotions, and it leads to all sorts of tomfoolery.

I’ve discussed service time manipulation at some length in these digital pages. Preventing players from accruing major league service time delays free agency, allowing teams to keep talented players cost-controlled for longer. And while service time manipulation isn’t barred by the letter of the Collective Bargaining Agreement, it likely does violate its spirit, as I noted last March. Players can file grievances, as Kris Bryant did, but those can languish for years without resolution. And it is difficult to prove that a team kept a player from the majors to stunt service time, rather than for valid developmental reasons; it’s why we hear about top prospects needing defensive reps in Triple-A every spring. It is unlikely that we can create a system fully immune from manipulation. But it is worthwhile to see if we might suggest a system that contains less easily exploitable loopholes.

The second part of the arbitration criteria is even more complex. Determining Super Two eligibility is so confusing that Major League Baseball has a separate glossary entry for “Super Two,” on its website, and the union and league have to sit down and prepare an agreed list of eligible players.

These eligibility requirements are fixed for players, but teams have the ability to effectively opt-out of the arbitration system by simply declining to tender the player a contract, making that player a free agent. There are reasons a team may non-tender a player that aren’t about the player’s potential arbitration award, like 40-man roster crunch, and very good players obviously aren’t released out of hand. But many non-tender decisions emanate from an assessment on the team’s part that the player’s value is misaligned with their current or likely salary, and the fact remains teams have the ability to eschew the whole process beforehand. The player, on the other hand, has no such recourse.

So how might restricted free agency work in baseball? To find out, let’s look at the National Hockey League, the only other major North American Sport to use an arbitration system.

A restricted free agent in the NHL is a player who has completed his entry-level contract, but does not have enough NHL service to become an unrestricted free agent. This player qualifies as a restricted free agent when his contract expires.

An offer sheet is a contract negotiated between an NHL team and a restricted free agent on another team. It includes all the terms of a standard player contract, including length, salary, bonuses, etc. When a player signs an offer sheet with a new team, his current team is notified. That team has the right to “match” the offer sheet with an identical contract and keep the player. Or it can decline and let the player join the new team under the terms of the offer sheet.

The original team has seven days to make its decision.

Taking those parameters as a guide, here is our thought experiment:

  • The current service time rules are eliminated. A “major league season” is now any season in which a player spends more calendar days on a major league active roster than on a minor league active roster.
  • All arbitration-eligible players now have the ability to opt out of arbitration once and become restricted free agents. They can do so in any year of their arbitration eligibility, but may do so only once.
  • Deals would have minimum lengths tied to the number of years of the player’s original arbitration eligibility remaining. Thus, a player who opts out in his first year of eligibility would, upon completion of the process, sign at minimum a three year deal (players could opt to sign longer deals extending into their free agency); a player who opts out in his second year would sign at minimum a two-year deal, and so on. If a player doesn’t receive any multi-year deals in restricted free agency, his rights would revert to his original team.

To see how this might play out, let’s use Travis’ example of Mookie Betts. Each time Betts goes through the arbitration system, he and the Red Sox exchange figures. At that point, the Red Sox have the option of non-tendering Betts or proceeding to arbitration. Betts has the option of opting out of arbitration to become a restricted free agent, or proceeding to arbitration. If Betts opts for restricted free agency, the Red Sox would have the option of either matching whatever offer another team makes, or letting Betts walk at that higher price. Should Betts not find a restricted free agent contract to his liking, he and the Red Sox would then go through the standard arbitration process, though hopefully one that has integrated the improvements we have previously proposed. As with the current system, the parties involved could reach a settlement prior to arbitration.

Why might this system be superior? First, it would encourage compromise and the resolution of arbitration cases. If a team knows a lowball offer might result in the loss of a valuable player, it’s likely to increase its initial offer, bringing players and teams closer to resolutions. Second, it disincentives the “file-and-trial” approach by penalizing those teams with the very real possibility of losing players, further incentivizing pre-arbitration settlement resolutions. And third, it incentivizes players not to overreach, because a player who files for restricted free agency and receives no offers significantly better than that offered by their current team would have a difficult time arguing that they were worth their filed salary figure and would have just had burned their shot at restricted free agency.

But there’s another reason why this kind of system would work better than the current one. It incentivizes teams to offer big, long-term deals to players when they first hit their prime, so as not to lose them to competitors. Turning arbitration into a pseudo-competitive market would drive up player salaries earlier, making long-term deals for players in their thirties less necessary, as it will no longer be their one shot at a major payday. We’ve seen this kind of system work well in the NBA, and even in the NFL, allowing teams to uncover hidden gems while also driving players’ salaries up.

This system might, as Travis noted, therefore be a meaningful step towards addressing the dysfunction in the free agent market. By the time many players reach free agency, they’re often in their late 20s, solidly in their peak years, but also nearer to the beginnings of their declines. Restricted free agency would allow for players to shift their peak earning years from free agency toward their presumed prime. Whit Merrifield, for example, won’t hit free agency under the existing system until he’s 34; under this proposed system, he would be able to cash in earlier by opting out of arbitration, and potentially receive far more than the extension he just inked with Kansas City.

And while it won’t eliminate the ability of teams to manipulate service time, it might at least curb the practice: under this system, if the Red Sox had wanted to manipulate Betts’ service time in his first season in the big leagues, they would have had to leave him in the minors for at least half the year. For contenders who need their top prospects in the majors, that’s an unappealing proposition.

This kind of restricted free agency system recognizes that teams are increasingly hesitant to guarantee long deals to players reaching free agency as they approach or enter their 30s. But that newfound reticence shouldn’t preclude players from being paid what they are worth at some point in their careers. Paying a player what he’s worth during his prime seems like the optimal solution.

Sheryl Ring is a litigation attorney and General Counsel at Open Communities, a non-profit legal aid agency in the Chicago suburbs. You can reach her on twitter at @Ring_Sheryl. The opinions expressed here are solely the author's. This post is intended for informational purposes only and is not intended as legal advice.

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3 years ago

I wish this existed a few years ago just to see what type of contract 23 year old Mike Trout would have gotten from the Yankees.

3 years ago
Reply to  NolanPower

Trout shows the power of being a couple sigma better than the average player and one sigma better than the next tier. The problem is there are so few players in the Trout tier (Betts might be it) AND the second tier once you count all aspects (defense, injury risk/age) and HUNDREDS in the middle group.

3 years ago
Reply to  Michael

Betts has been close to Trout for one season, Trout broke in at that level and hasnt slowed since!