Breaking Down MLB's New Labor Deal

Yes, the new Collective Bargaining Agreement between Major League Baseball and the Players Association means five more years of labor peace. But there are big changes afoot, and we've got the only primer you'll ever need.

Big changes are coming to Major League Baseball. Changes to instant replay. Changes to the amateur draft. Changes to the process for signing international players. Changes to player compensation. Changes to the free-agent signing process. Changes to drug testing. Changes to the playoffs. 

All these changes -- and more -- result from a new labor deal agreed to in principle by Major League Baseball owners and the Major League Baseball Players Association. The two sides announced the key terms of the deal on Tuesday. A more fulsome agreement will now be drafted and voted on by players and owners. 

What are the changes? How will they work? Who are the winners and losers? We attempt to answer these questions in this breakdown of the new MLB labor deal. We will provide additional information and analysis as details emerge. 

Instant Replay
Instant replay will increase under the new agreement. Subject to further discussions with the umpire's union, the players and owners have agreed to use instant replay to resolve disputed fair/foul calls and so-called "trapped ball" plays. 

Amateur Draft
Under the expiring labor agreement, the amateur draft (also called the Rule 4 draft) was held in late June.  Draft order was determined by the final records from the prior season, with the worst team picking first. Teams were required to offer contracts to their draftees within 15 days and to enter into contracts with the draftees no later than August 15. The Commissioner's office set recommended dollar amounts for draft bonuses based on draft position. In practice, teams honored these recommended bonus amounts in the breach, meaning they didn't honor them at all.

Heading into the labor negotiations, many analysts expected that owners would insist on hard-slotting for the draft. With hard-slotting, the Commissioner's office would do more than make recommendations on bonus levels; it would determine precisely how much each drafted player could be paid, depending on his selection in the draft. Teams would be prohibited from paying more than the "hard slot" dollar amount. The impetus for "hard slotting" came from certain owners concerned about escalating draft bonuses. Commissioner Selig supported the idea. 

Many analysts with knowledge of and experience with the amateur draft strongly opposed hard-slotting, for three key reasons. First, players cost substantially less in the early part of their careers, even when their talent exceeds those of veterans. Limiting amateur bonuses increases that disparity further, without justification. Second, hard slotting penalizes teams -- particularly those in the rebuilding process -- that allocate resources away from veterans toward younger and more talented players. And third, it increased the likelihood that highly-regarded two-sport athletes would choose the other sport over baseball because the other sport offered more guaranteed money.

An oft-used example against hard-slotting is Minnesota Twins catcher Joe Mauer, who was a high-school National Player of the Year in football and baseball. Mauer turned down a scholarship to play football at Florida State to enter baseball's amateur draft. He was selected first in the 2001 draft and received a $5.15 million signing bonus, the highest in history at the time. Would Mauer and others like him choose baseball with hard slotting in place? Many scouts and draft experts believe they would not, thus reducing the overall talent level in baseball.

The new labor deal does not include hard slotting, but something very, very close to it. Instead of a hard ceiling on bonuses that may paid to each individual drafted player, the new agreement sets a ceiling on the total amount each team may spend on players selected in the June amateur draft. Each team will be assigned an aggregate Signing Bonus Pool prior to each draft depending on that team's position in the draft.  The Signing Bonus Pool will be tied to the amounts spent in the amateur draft in the prior year. Each pick in the first 10 rounds of the draft has been assigned a value; values that will grow each year with the growth of industry revenue. A team's Signing Bonus Pool will apply to that team's selections in the first 10 rounds of the draft. If a post-tenth-round draftee is given a bonus greater than $100,000, that amount will also be included in the Pool. 

Teams that exceed the ceiling by 5% will be taxed 75%; teams that exceed it by 5-10% will be taxed 75% and lose a first-round draft pick the following year. If a team goes over by 10-15%, the tax will be 100% with the loss of first- and second-round draft picks. Draft spending at 15% more than permitted will be taxed 100% and the team will lose two first-round picks.

For the first time, there will also be something called a Competitive Balance Lottery. Teams with the lowest revenues and in the smallest markets will have the opportunity to obtain additional draft picks through a lottery. Of course, even with more draft picks, new limits on total draft spending will severely restrict how teams use those picks. 

The cap on total spending leaves some room for teams to spend big on two-sport athletes but doing so will leave that team with a lot less money for signing other draft picks. Overall, these new restrictions on draft spending will significantly harm teams that invest heavily in scouting and the draft like the Texas Rangers, Tampa Bay Rays, Pittsburgh Pirates, and Kansas City Royals. As the deal was being announced, many baseball analysts responded negatively on Twitter to these new draft restrictions. 

Draft picks may sign only minor-league contracts. Contracts must be entered into between July 12-18. 

The top 200 amateur prospects will be subject to drug testing. 

International Free Agents
The Rule 4 (June) amateur draft covers residents of the United States, Canada, Puerto Rico and other U.S. territories and foreign-born players who attend high school or college in the United States. The process for scouting and signing foreign-born players has been much less structured and subject to significantly fewer restrictions, with no limits on the amount a team spends on any individual player or the total amount it spends on international players in any one year. 

Under the new labor agreement, international free agents signings will be subject to a tax much like the one for amateur draft bonuses. For the 2012-2013 signing season, teams will have the same international signing bonus pool. In later years, the teams with the worst records the prior year will have $5 million to spend in signing international players. Teams with the best records will get only $1.8 million. Beginning in the 2012-2013 off-season, teams will be able to trade "cap room" to spend more in the international market. 

Caps on international spending -- like the bonus signing pools for the amateur draft -- will impact certain teams that have been very active in the international market. The Rangers, for example, spent $17.6 million over the last several years on international players; the Cincinnati Reds spent nearly $29 million. Again, scouting and player development experts are very concerned that limits on international spending will substantially lower the overall talent level of players drafted, signed and eventually make to the majors. 

Minimum Salary for First-Year Players
Under the expiring labor agreement, the minimum salary for first-year players increased from $380,000 in 2007 to $414,000 in 2011. Next season, the minimum salary will rise to $480,000 with additional increases over the course of the five-year agreement.  These salary increases benefit only those players who make it to the major leagues. Minor-league salaries are much lower. In 2011, for example, the minimum salary for a minor-league player on a team's 40-man roster for two consecutive years -- or with at least one day of major league service -- was $67,500. 

Arbitration Eligibility and Super-Twos
Players in the majors are subject to the minimum salary until they are eligible for salary arbitration or they enter into a contract with their team for a higher salary. The latter situation is rare. The best-known example is Evan Longoria of the Tampa Bay Rays, who signed a six-year deal with the Rays for $17.5 million just weeks after he was called up to the majors in 2008.

Most players become eligible for salary arbitration after three years of major-league service. The changes to arbitration eligibility in the new agreement focus on the "super-twos," those players with more than two years but less than three years of service who have amassed the most service time in the majors. Under the expiring agreement, super-twos were limited to the top 17% of these players. In the new deal, that number will rise to 22%, thus making more players eligible for arbitration at an earlier date.

One issue not addressed in the new agreement is the timing of when highly-touted prospects begin their major-league service. Teams have total control over whether and when to elevate a player from the minor leagues. There's been a fair bit of criticism directed at teams that appear to delay calling up their best prospects in order to keep the super-two clock from beginning, so as to put off arbitration with those players whose salaries are most likely to rise significantly. Think Buster Posey, Stephen Strasburg and Bryce Harper. So while the percentage of players eligible to become super-twos increases in the agreement, teams continue to have an incentive to keep their best players in the minors long enough to avoid super-two status.

Compensation for Free-Agent Signings
Players with six years of major-league service time are eligible for free agency. But for years, free agency has come with strings attached. If Team 1 offered arbitration to a player who filed for free agency, and the player signed a contract with Team 2, Team 1 would receive compensatory picks in the Rule 4 draft from Team 2. The type of draft pick Team 1 received -- i.e., first round, supplemental round -- was determined by the type of free agent who signed with Team 2. A team signing a Type A free agent would give up its first-round draft pick and a supplemental draft pick the following year. A type B free agent signing would garner Team 1 a supplemental draft pick. The Elias Sports Bureau ranked free agents into Type A, Type B and no type. 

This process has come under heavy criticism for years, particularly the methods used by Elias to rank free agents. Players considered more valuable by more advanced metrics would be classified as Type B free agents while others considered less valuable by those metrics would be classified as Type A. The market for over-valued Type A free agents would stagnate, as teams were reluctant to sign these players and give up a first-round draft pick. Teams losing undervalued Type B free agents would receive less in compensation than they believed was warranted.

Starting with the 2012-2013 off-season, the entire Elias-Type A-Type B ranking system has been scrapped. Instead, teams that offer a contract with an annual average value of more than $12.4 million to a free agent from their team will receive a first-round draft pick as compensation if that free agent signs elsewhere. The $12.4 million figure is the average salary of the 125 highest-paid players in the league. That figure will rise yearly as salaries rise. A team that finishes in the bottom 15 in the majors cannot lose a first-round draft pick. 

Type A and B rankings will remain in place for the current off-season, but certain players not considered "top" Type As will be reclassified as Type Bs -- mostly relief pitchers. In addition, teams signing Type A relief pitchers will not forfeit draft picks, but the teams that lose the Type A relievers will receive a compensatory pick. This provision is not retroactive. As a result, the Philadelphia Phillies will forfeit a draft pick to the Boston Red Sox in compensation for signing closer Jonathan Papelbon. On the other hand, if the Red Sox sign another Type A reliever to replace Papelbon, the Red Sox will not forfeit a pick. 

The motivation to eliminate the Elias ranking system was to create a more efficient free-agent marketplace. Only the most valuable free agents will give rise to compensation for the team losing the player. The value for all other free agents will be subject only to supply and demand in any given off-season. 

Luxury Tax
The luxury tax threshold will remain at $178 million for 2012-2013 and then rise to $189 million for the remaining three years of the agreement. 

Balanced Leagues, Interleague Throughout the Season and Expanded Playoffs
The Houston Astros will move to the American League West before the 2013 season, resulting in six divisions of five teams each -- three in the American League and three in the National League. With 15 teams in each league, we will see interleague games throughout the season. We've already done some analysis of this realignment and the resulting changes to game schedules, which you can read here.

The agreement sets a deadline of March 1, 2012 for deciding whether to expand to two wild-card teams for the 2012 playoffs. If they do so agree, the two wild-card teams in each league will face off in a one-game playoff. The winner will go on to face the team with the best record in that league, even if that team is in the same division as the wild-card winner. That's a big change from the first 17 years of the Wild Card Era. We've given some thought to the expanded playoffs, which you can read about here.

Testing for Human Growth Hormone
The players and owners agreed to limited blood testing for human growth hormone. During 2012 spring training, players will have blood drawn and will be monitored for their physical reaction to the blood test. The blood samples will be tested for HGH and will then be destroyed. (Recall, however, that when urine tests for steroids were first introduced, the urine samples were supposed to be destroyed. They were not, and the FBI then seized the urine samples during its investigation of BALCO Labs.)  

Players will be subject to random HGH testing during the 2012 season based on reasonable suspicion and in all off-seasons starting with the 2012-2013 off-season. The players and owners appear to have responded to pressure from Congress to institute a blood-testing program directed at HGH use. There is considerable skepticism, however, over the validity of available blood tests in detecting HGH use. 

Smokeless Tobacco
Players will be prohibited from using smokeless tobacco during interviews or club appearances, and cannot carry tobacco tins in their uniforms. 

All-Star Game
Players will be required to play in the All-Star Game if selected, unless one has an injury or is otherwise excused by the Commissioner's Office.

Summary
During the press conference announcing the new labor deal, players and owners emphasized the open and communicative process that led to the agreement, resulting in 21 years of "labor peace." That may be so, but the changes to the amateur draft and international signings may create peace among current players at the expense of future ones, many of whom -- even the most talented ones -- may never make to the majors. 

Wendy also writes about baseball at Fangraphs and HangingSliders. You can follow her on Twitter @hangingsliders.

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