The EFL Salary Cap: Lessons from Premiership Rugby

1.       INTRODUCTION

On 7 August 2020, the English Football League (“EFL”) announced the immediate introduction of new financial controls in the form of “Squad Salary Caps” for clubs in League One and League Two – the third and fourth tiers of English football. Their aim is to address “sustainability and wage inflation issues across the EFL” but have been met with opposition from the Professional Footballers’ Association (“PFA”), concerned by a lack of “proper consideration”.

In its report to the EFL, the PFA notes that the EFL’s draft salary cap rules (the “EFL Rules”) “appear to be closely aligned to the Premiership Rugby Salary Regulations” (the “Premiership Regulations”).1 With that in mind, this article will consider the key lessons the EFL can learn from Premiership Rugby’s salary cap which, since its inception in 1999, has not been short of controversy and is currently undergoing a process of reform.

2.       LEGALITY

The PFA considers that the legality of the EFL Rules is “unclear”.2 It has raised the lack of consultation with the PFA, and doubts over compliance with competition law, as grounds for legal concern. As regards the latter, Premiership Rugby has notable experience.

In November 2019, an independent disciplinary panel chaired by Lord Dyson upheld the legality of the Premiership Regulations after a competition law challenge by Premiership club, Saracens.3 In doing so, it held that its aims of promoting financial stability and competitive balance were consistent with EU law and did not reveal a “sufficient degree of harm”,4 noting the “margin of appreciation” given to the organisers of sports competitions in the relevant jurisprudence.5 It also found that there was no “appreciable adverse effect on competition”.6

The PFA suggests that the EFL Rules may be unlawful due to the lack of “consideration given to less onerous rules or cost controls”. Notably, a similar argument was advanced by Saracens to no avail. The panel held that a “test of strict necessity is not…the test to be applied”.7

Of course, the fact that Premiership Rugby’s salary cap was held to be consistent with EU law does not mean the EFL’s salary cap will be immune to challenge since the EFL will have its own particularities that could tip the balance the other way. Moreover, that fact that the issue could be determined by a different tribunal should not be underestimated.  

3.       SUFFICIENCY

Aside from the legalities, the EFL should be considering whether the introduction of a salary cap is sufficient to address its concerns. English professional rugby has seen, with London Welsh’s liquidation in 2016 and continuing competitive imbalance, that this may not be the case.

Promoting competitive balance is inherent to the idea of a salary cap, in addition to the aim of financial stability. More competitive leagues are more attractive to fans and investors, reinforcing the financial objective. However, introducing a salary cap does not guarantee competitive balance. Within a league there might only be a handful of teams spending up to the limit , meaning some competitive imbalance may remain.8 The EFL Rules will allow clubs relegated into League One or Two to spend more than clubs already in each league, so the disparity in spending power could be large.  A “salary collar” would remedy this – a minimum spend requirement for each club. This has been used successfully in the Australian Football League (“AFL”) and National Football League (“NFL”).9

It is reassuring to see that the EFL has introduced fixed squad sizes,10 as the Premier League has, which will go some way to supporting the aims of the salary cap. Other ‘equalisation’ measures might include minimum player wages, a player draft system and even “ring-fencing” (eliminating promotion and relegation). These are all employed across the major North American sports, and in Australia.11 

Premiership Rugby has seen a worrying trend, whereby star players’ wages have continued to rise, while the ‘middle’ of squads have been squeezed, leading to smaller squads and lower wages for those outside of the elite. While this might not be so pronounced in football’s lower divisions, minimum player wages ought to be introduced, as in the US and Australia minimum, to guard against such squad imbalance.

4.       GOOD GOVERNANCE

If the EFL salary cap is to be successful, it must be administered appropriately. In this regard, some may argue that Premiership Rugby has shown how not to do it. The recent independent review of the Premiership Regulations by Lord Myners (the “Myners Review”) highlighted significant interference by the clubs themselves. For example, after the recent disciplinary case against Saracens for breaching the Premiership Regulations, the clubs went around the disciplinary process to impose a further points deduction on Saracens, to ensure its relegation.12 The result was that the process became “compromised”, with clubs acting as “judge and jury for fellow competitors”, undermining the trust and confidence between them, and of the public.13

By having allegedly failed to consult the PFA prior to introducing the salary cap, the EFL has not got off to the best of starts as far as governance is concerned. Going forward, it ought to ensure that the salary cap is administered transparently and free from conflicts of interest. Ensuring independence in the application and enforcement of the EFL Rules, in a fully transparent manner, should be of utmost importance. In this respect, the EFL would do well to take note of Lord Myners’ recommendations to Premiership Rugby – for instance:

• The appointment of an independent “cap governance monitor” to oversee the regulations;14 and
• Information on the operation of the cap should be published regularly, including an annual report detailing any breaches and/or sanctions and the publication of all disciplinary decisions in full.15

5.       SETTING THE LEVEL OF THE CAP

The level of the EFL salary cap has also been subject to criticism. The PFA report notes that the mechanism for arriving at the figures of £2.5m and £1.5m respectively is unclear.16  Further, the PFA points out that the EFL’s proposal to adjust the salary cap in response to new broadcast agreements would mean fixed salary caps potentially lasting as long as five years (based on the most recent EFL broadcast cycle), leaving “no flexibility around other economic or financial factors that may affect the game”.17

Premiership Rugby does not make clear the basis on which the level of its salary cap is determined, other than that it is “reviewed regularly”. 

Given the inevitable impact on players’ contracts, it would seem sensible for the EFL to consult wilt the PFA as regards the factors that ought to be considered in setting any cap. Whilst this lead to difficult discussions, it may well ultimately give more legitimacy to the process and in turn make it more difficult to challenge.

Further, the EFL might look at Premiership Rugby’s ‘marquee player’ rule. This allows clubs to sign two players whose salaries are excluded from the salary cap, subject to certain conditions.18 This is seen as a concession to concerns that a salary cap inhibits a league’s ability to attract top talent. However, it has become clear that a side-effect of this is wage inflation – the presence of two higher-earning players has increased wage demands among the rest of a playing squad, contrary to the cap’s objective.19

6.       DRAFTING & DEFINITIONS

Another difficulty Premiership Rugby has faced, highlighted by the Saracens case, was the definition of “salary” and thus the classification of what counts towards the cap. At its heart were a series of co-investments between Saracens’ owner and some of its players. The Premiership Regulations include a list of items classed as “salary”,20 but provide that certain individual arrangements may not be so categorised if they are genuine commercial transactions – rather than attempts to circumvent the cap – between a player and a party connected to the club (“Connected Parties”).21 Saracens argued (unsuccessfully) that these co-investments were genuine commercial transactions. This raised questions about identifying and valuing such transactions.

In his subsequent report, Lord Myners recommended prohibiting all “subjective payments” between players and Connected Parties, and automatically classifying all permitted payments to players as salary, subject to a few pre-approved exceptional items.22 The all-encompassing approach – though well-intentioned – risks going too far and will inevitably catch genuine commercial transactions pursued by players. It is not difficult to imagine that the approach might be challenged on the grounds that it is an unreasonable restraint of trade.

A simpler approach would be to count all payments to players from clubs or Connected Parties as salary, subject to a pre-approval process to determine whether a Connected Party transaction was genuine or not. Genuine commercial arrangements would be able to go ahead, without impacting upon the salary cap.

7.       ENFORCEMENT

Lastly, the EFL must ensure that its regulations allow it to properly enforce the salary cap – a task that ought not be underestimated. The Myners Review found the Premiership Regulations to be lacking in this regard and recommended a number of changes to strengthen the league’s ability to monitor compliance and to sanction breaches. Key among these was that the “Salary Cap Manager” should be able to attend clubs without notice and require access to the relevant financial information – akin to anti-doping testing – and that two clubs will undergo “random mini investigatory audits” each season.

As regards sanctioning, the Premiership Regulations were deemed weak. Lord Myners advocated increasing financial penalties, and introducing additional sporting sanctions, including relegation, suspension, stripping of titles and return of prize money. The Myners Review also recommended placing responsibility on players and their agents – with sanctions available for breaches.23

The EFL will no doubt be considering whether to adopt similar options to promote compliance.

8.       CONCLUSION

It appears that the EFL Rules have been introduced in a rush. The PFA report expresses concerns about a lack of clarity on various issues, including the way in which it is to be brought into effect. Much uncertainty remains and, as indicated above, adopting a model aligned to the existing Premiership Regulations may not be the best course of action. If it wishes to create an effective salary cap, and suppress wage inflation, the EFL ought to take heed of the Myners Review and learn from Premiership Rugby’s shortcomings.

Authored By

Ben Cisneros
Trainee Solicitor