Caps the stars don't want

A look at the legal and practical issues over capping footballers' wages

The Journal, March 2004, page 57

With club accounts now gaining as many headlines as the league table and star striker, the idea of restricting the amount of money clubs can spend on players’ wages is thought by some to be an answer to football’s financial woes. The theory is that capping will maintain economic viability and preserve competitive balance between clubs. Indeed, the House of Commons All-Party Football Group has recently recommended a wage cap be introduced in England, a call supported by accountants Deloitte  & Touche.

The most prevalent form of salary cap is the “hard cap”, a maximum ceiling that limits the amount a club must spend on wages in any given period. Hard caps exist in the USA in the NBA, NFL and NHL, albeit to differing extents. However, the structure of US sport, together with the relative protection these caps receive due to collective agreements and specific anti-trust exemptions, makes a comparative hypothetical analysis in football difficult. A hard cap also exists in English club rugby league. While as yet unchallenged, the fan base and investment (and therefore the potential for challenging the cap) do not exist at a comparable level to football. That said, Bradford Bulls RFC have threatened to challenge any reduction in the current ceiling.

There is also the “soft cap”, a limit based on a percentage of income/revenue of the individual club. While this may appear fairer than a hard cap, it can be criticised for maintaining any power imbalance and preventing smaller clubs from competing with bigger clubs. The elite European football group, G14, unsurprisingly prefer the soft cap, advising clubs to restrict wage spend to 60% of all turnover. A soft cap would appear only to be a viable option where the percentage limit is applied to common income from central contracts, thus in effect becoming a form of hard cap.

There are many difficulties when considering the imposition of either form of cap. If a hard cap was adopted, at what level would the limit be set? In all European football leagues, clubs differ – often wildly – in size and expectations of fan base. Should a large club, such as Manchester United, be restricted to spending the same salary levels as a small club, such as Portsmouth? How would such a national restriction impinge on Manchester United’s aspirations of success on the European stage? More generally, what would constitute “salary”? For example, how would payments to offshore private companies in respect of a player’s image rights be treated? These are issues requiring close attention. Certainly, effective capping would only be achieved with tight rules, rigorous auditing and strict penalties for breach. Without strict policing the risks of a black market wage economy are obvious.

Any capping of wages in football may lead to a challenge over the legality of such measures. A wage cap could not be unilaterally imposed on contracted players without constituting a breach of contract. Such a difficulty could be circumvented with sufficient lead-in time. Of more concern is that capping may be a prima facie breach of UK and EC competition prohibitions of collusive conduct, abuse of dominant positions and even the free movement of workers. Capping also appears, at first hand, at odds with the UK common law restraint of trade doctrine.

However, the ECJ does recognise the importance of sport (particularly football) in European society, and it may be that a cap, introduced against the backdrop of football’s financial meltdown, would receive a sympathetic hearing. Many have suggested, after all, that football’s financial woes are largely because of the ECJ ruling in the case of Bosman. In the ENIC case (Comp/37 806), when having regard to the article 81(1) EC (restrictive agreements) prohibition the ECJ concluded that the question to be answered is “whether the consequential effects of the rule are inherent in the pursuit of the very existence of credible pan European Football Competitions”?

One other option is the “luxury tax”, which exists in America’s MLB and allows teams to spend what they like on players’ wages, but with anything spent over the set threshold being “taxed” and redistributed to the poorer teams. Whilst this appears less restrictive and anti-competitive than capping, it would, one imagines, be given short shrift in football.

It is unlikely that wage capping will become widespread in European football, not least in mandatory form, until other measures, such as the new insolvency policies recently introduced, have first been given a chance to take effect. If, however, problems are particularly bad, or lessons are not learned and problems continue because of excessive wages, salary capping may be introduced.  

Ross Thomson, Sports Practice Group, Harper Macleod