The “Over 38 Rule” is covered by Article VII, Section 3(a)(2) of the 2017 Collective Bargaining Agreement.
NOTE: Portions of this material appeared in a prior piece by the same author on the Over 36 Rule for Mid-Level Exceptional
What is the Over 38 Rule?
At its most basic, the Over 38 Rule takes out the incentive for teams to offer four- or five-year contracts to players of a certain age.
Why does the NBA want or need the Over 38 Rule?
While not as clear-cut as the agreement Minnesota made with Joe Smith, the Over 38 Rule focuses on a way teams could circumvent the league’s soft cap structure with older players. The rule attempts to eliminate a way to pay an older player less in the near term to overpay him after they are a viable contributor, presumably to fit into a finite amount of salary cap space or an exception like a Mid-Level exception. The NBA’s soft cap necessitates a different policy than the other major professional sports leagues since the NFL’s hard cap and MLB’s lack of a salary cap dramatically reduce the rationale for teams to engage in this kind of behavior.
How does the Over 38 Rule work?
Larry Coon’s excellent work at CBAFAQ on the prior CBA’s Over 36 Rule is a great place to start, but the main idea is that the rule treats “zero years” in contracts (defined by the rule but think of it as the final year of a four or five-year contract signed by someone 35 or older) as deferred compensation rather than salary. This pushes the agreed-to salary for that season on to the earlier seasons of the contract.
What makes the Over 38 Rule so interesting is how it affects the rules governing the salary cap. While shifting money around may seem like more of an accounting problem than anything else, deferred compensation in the later years of a contract shifts that salary forward, including a portion counting against the first season’s cap number. That means if you want to fit a player in with the Mid-Level exception or a smaller amount of remaining cap space than you have adding in part of that final season, a team must cut the actual payout to the player in question to still work in that exception. While Larry does an excellent job breaking down how the mechanics work, the Over 38 Rule functionally eliminates the usefulness of signing a player for any “zero year” if a franchise was trying to work him into an exception. If the fourth year of a contract worth the MLE were a zero year, signing that player to a three-year contract starting at the full MLE and a four-season contract worth the full MLE would yield the same total salary. As such, it creates a system where those longer deals are technically allowed but a player’s agent would never agree to it since getting the same money in fewer years allows for additional salary during what would otherwise be a zero year.
How has the new Collective Bargaining Agreement changed this rule?
Prior CBAs used an Over 36 Rule with a largely similar structure other than the shift in age from Over 36 to Over 38.
Why did the new Collective Bargaining Agreement change the Over 36 Rule to the Over 38 Rule?
There are two competing rationales that are not necessarily mutually exclusive. First, a larger group of players are contributing when they are older, thus challenging the assumption that a long-term contract for someone in their mid-thirties will have no value in the later seasons. Second, during the negotiations that produced the 2017 CBA, the Players Association was led by players like Chris Paul and LeBron James who could be affected by the shift, creating a greater sense of urgency to change the rule.
With changes to the CBA coupled with the Over 36 Rule becoming the Over 38 Rule, does it still matter?
Reducing the maximum lengths of contracts means there are far fewer circumstances where the rule applies. It blunted the impact because now players have to be signing deals at or close to the longest length at older ages since we cannot see 30 year olds agreeing to seven-year contracts anymore. After all, the only way veteran free agents can sign five-year deals are with Bird rights.
Even with a reduced impact, the Over 38 Rule still matters and it makes sense to discourage these kinds of contracts in a league where teams can and will attempt to use every advantage at their disposal.