Since Shohei Ohtani made his long-awaited decision about the future of his Major League Baseball (MLB) career earlier this month, many fans have been trying to understand how this historic deal came to be, and what it means.
Ohtani has taken baseball by storm since he came to America in 2018 to play for the Los Angeles Angels. Among many accolades, the “two-way” player has twice earned MVP, is a three-time all-star, and was named MLB Rookie of the year in 2018. More recently, Ohtani agreed to a monumental deal with the Los Angeles Dodgers for $700 million over 10 years. However, since Ohtani’s initial announcement on December 9, 2023, the details of his contract have been revealed.
Rather than being paid $70 million per year for 10 years, Ohtani will defer $680 million of his $700 million contract. For the first 10 years, Ohtani will be paid $2 million per year. The remaining $680 million will be paid out from 2034-2043, when his contract ends with the Dodgers. This unique and innovative deal has raised many questions across the MLB and professional sports. Many people are asking about baseball’s “Collective Bargaining Agreement” (CBA) and discussing it on social media, in newspapers, and on our television screens. Many sports fans are asking what the contract actually means. People are wondering, what is a CBA? What is a deferral? Is this even legal?
To answer these questions, we need to understand what these agreements represent for all athletes and organizations across professional sports. So – what is a CBA? And how was the Dodgers’ interpretation of the MLB CBA instrumental to the execution of this deal?
What is a Collective Bargaining Agreement?
A CBA is a legal contract between an employer and the employee’s union. In sport, the CBA is a contract between the owners of the sports teams and the player’s union, which are typically player associations.
The player associations act on behalf of the players to preserve, negotiate, and create rights in the employment and labor context, which are spelled out in a CBA. Traditionally, CBA’s include basic rights for athletes, such as salaries and working conditions. Over time, CBA’s have evolved to include arbitration terms, salary caps, player discipline, and revenue sharing between players and the professional organizations, as well as other terms.
No CBA exists until the player associations and team owners negotiate terms that are mutually agreeable. Unfortunately, these negotiations sometimes end in stalemate. When this happens, players may strike and refuse to play, or team owners may exercise lockouts in an attempt to force the player associations to accept certain terms in the CBA.
Needless to say, although CBA’s vary from sport to sport, they are crucial for the pure existence of professional sports as we know it.
The CBA’s Impact on Ohtani and the Dodgers
So how did the Los Angeles Dodgers utilize the current MLB CBA to the benefit of Ohtani’s deal?
Article XVI of the MLB CBA states:
“There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player's Contract may provide.”
Therefore, without limitation on deferred compensation, the Dodgers were able to defer however much of the of $700 million Ohtani wanted to finish this deal. It also was reported that the San Francisco Giants offered Ohtani $700 million, with deferred salary. Ohtani opted to stay in Los Angeles.
Because the Dodgers are paying Ohtani $2 million a year, they have more room on their payroll for other players, despite the high price for Ohtani. The contract also permits the Dodgers to potentially pay considerably less in competitive balance tax (“CBT”) or, luxury tax. CBT essentially regulates the amount of money the Dodgers can spend on its team. If a team spends over its calculated CBT, the team can be penalized and otherwise taxed on its surplus spending.
Although not as pronounced, Ohtani will also benefit from this arrangement. By the time the deferral period begins, Ohtani may not be living in California. So, he may not have to pay the state’s income tax. Ohtani could also benefit from inflation on his annual payments with his deferral ending in 2043. In the end, with more payroll flexibility, the Dodgers can also add supporting players around Ohtani to maximize their chances of success.
Has this type of deferral been seen in professional sports before? Yes, most famously with Bobby Bonilla and the New York Mets. In 2000, the Mets agreed to defer Bonilla’s salary ($5.9 million) at a rate of 8% over 25 years, from 2011 – 2035. They pay Bonilla $1.19 million on July 1 every year and will do so for another 12 years. What makes Ohtani’s deal unique is not just the dollar value, but the way the Dodgers were able to interpret and utilize the CBA to its advantage – for now.
This innovative deal is legal under the CBA. However, with the current MLB CBA expiring in December of 2026, fans will be eager to see how it impacts future negotiations and terms. Is this deal just a steppingstone for more high value transactions and deferrals? Will this type of contract spread to other sports? And if so, does it mean that only the wealthiest teams will be able to pay the most talented athletes? Future CBAs will determine whether these types of contracts will be allowed.