Analysis: Force Majeure would have a significant impact on certain players’ cash flows

There are a lot of words and phrases that have entered the public’s vocabulary in the last month or so. I, for one, had never heard the word “coronavirus” before, but now it’ll be seared into my brain for the rest of my natural life. From an NBA perspective “force majeure” is another of these phrases – as engrossed in the Collective Bargaining Agreement as I have been for the past several years, I had never really read that section and certainly hadn’t internalized it. Now, I’ve read and re-read it just as much as I’ve pored over Section VII or any other cap-relevant section of the agreement.

In the wake of the NBA suspending operations, the Force Majeure clause has become a primary focus for the league, its teams, and every player and agent. Thus far, the NBA has declined to enforce the clause and have paid their players in full. On March 15, the league’s teams paid out their regular checks and the same will happen tomorrow, as each player collects their tenth semi-monthly paycheck for the 2019-20 season. However, as the New York Times’ Marc Stein reported on Tuesday, the league has not committed to a full April 15 payment, nor any payments beyond that date.

Invoking this clause would entitle the league to 1/92.6th of each player’s base salary for each game missed, which would be withheld from future payments until the entire amount had been collected from that player. There are 259 regular season games remaining on the schedule, plus a stated average of 5.6 playoff games per team. This amounts to a total of 22.87 games remaining on each player’s schedule, regardless of how many games his team has actually played or whether his team was going to make the playoffs or not. The Force Majeure clause does not differentiate between which teams are competitive and which teams aren’t; even a mathematically-eliminated team like the Golden State Warriors would still be treated as though they have 5.6 playoff games on the docket for salary-withholding purposes, while a highly-competitive team like the Milwaukee Bucks, Los Angeles Lakers, or Los Angeles Clippers would have the same 5.6 playoff games tacked onto their remaining games for this particular calculation..

With 22.87 games remaining out of 92.6, this represents 24.69 percent of each player’s base salary. The league would withhold paychecks until they had withheld enough money to hit this threshold, which varies from player to player based on his base salary, and then would restart payment on those semi-monthly checks for the rest of the player’s payment schedule.

Update: The Force Majeure clause is not entirely clear as to whether the same 22.87 games would apply to all teams or if each team’s individual remaining schedule (plus 5.6 playoff games) would be taken into consideration. Considering there is no precedent for the league invoking this clause, there’s no way to know beforehand whether they would use the same 22.87 games for every team or base the withholding on each team’s schedule.

There are three types of payment schedules for NBA contracts that pay a player out over six months, 12 months, and 18 months. The default payment schedule is 24 semi-monthly checks paid out over 12 months, but players and teams are free to negotiate an accelerated or decelerated payment schedule if they’d like. The vast majority of contracts do not have any alterations to that 12-month schedule, as Stein noted.

Another issue that complicates matters further is advance payments: players can negotiate for up to 50% of their base salary for a season to be paid before the season begins. 25% can be paid as early as July 1 and another 25% can be paid as soon as October 1, with the remaining 50% paid out in the same semi-monthly checks as everyone else, starting November 15. Advance payments and payment schedules can be negotiated separately: a player could receive up to 50% of his salary up front and then take a six-month, 12-month or 18-month payment schedule – those two things aren’t explicitly connected in any way. Further reporting from Stein indicates that that fewer than 20 players have the fastest payment schedule possible: 50% in advance and the six-month payment schedule.

The Force Majeure clause doesn’t discriminate based on advance payments or payment schedule – if the league invokes the clause, then every player’s compensation would be reduced by the same 24.69 percent, regardless of team, payment structure, or any other considerations. This would create a very interesting situation for these players with any six-month payment schedule: they would actually have to write a check back to the league to cover the difference between what they’d already been paid and what they should have been paid based on the Force Majeure adjustment.

For a player like LeBron James, who has the hyper-accelerated structure on his contract, that would mean he’d have to write a check for $6.12 million back to the league to cover his share. As of April 1, he’ll have already been paid $34.32 million of his $37.44 million salary for this season: half up front, plus ten of his 12 payments of the remaining $18.72 million. The Lakers would withhold his two remaining checks in full, totaling $3.12 million, but they would have no further checks from which they could withhold for the 2019-20 season and would still be $6.12 million short of the $9.24 million he stands to lose in this situation.

There aren’t many players to whom this would apply, as any player on a 12- or 18-month payment schedule would have enough unpaid cash remaining to cover the entire Force Majeure amount, regardless of how much they receive in advance. However, for James and any other player on a six-month schedule, they would have to pay back some of what they’d already received in order to make the league whole, should the Force Majeure clause be invoked. Those players will owe back somewhere between about 8% and 16% of their base salaries, depending on how much they got in advance, which may be a problem for players who do not have the requisite savings to write those checks.

Even if he has to write a $6.12 million check, James will be fine financially, one would think. He has a lifetime contract with Nike and, from the outside, seems to have his financial ducks in a row. If not, the Force Majeure amount would be withheld from payments in future years of his contract until the team is made whole. For players on expiring, or potentially-expiring contracts, like James’ teammate Kentavious Caldwell-Pope, the remaining amount could be withheld from future contracts. There is no guideline to cover what happens if an upcoming free agent were to not have the cash on hand nor sign another contract with an NBA team, but it stands to reason that the case would then be taken to the legal system to be resolved.

It remains to be seen whether the NBA invokes the Force Majeure clause ahead of the April 15 payroll. If they do, there could be cascading consequences, starting with James, Caldwell-Pope, and the rest of their six-month brethren having to figure out how to pay the NBA back and perhaps ending with the entire 2017 CBA being thrown out and a new one negotiated – the league has the option to terminate the entire agreement 60 days after invoking the Force Majeure clause. There is no reporting that would indicate they want to do that, but if negotiations with the Players Association turn sour, that is an option for them.