What’s the Deal with Arbitration?



In checking out today’s headlines, I saw that the St. Louis Cardinals avoided arbitration with 3B David Freese, which got me thinking, what’s the big deal with arbitration anyway?

This time of year, you see the headlines all the time: Team X avoids arbitration with Player Y. And if you’re anything like me, you usually continue scrolling without clicking to read more. But salary arbitration is as big a part of a team’s offseason as free agency and the trading block, so it deserves at least a little more respect than we, as casual fans, give it.

It’s for that reason that I took a little time to brush up on the basics of the process.

What is salary arbitration?

Players and teams turn to arbitration when they are unable to come to an agreement on a new contract. Arbitration is a method of alternative dispute resolution involving a neutral third party (the arbitrator) who presides over negotiations between two or more parties and makes a binding decision on the outcome.

The process begins by the team making an arbitration offer to the player, who has until December 7 to decide whether or not to accept the team’s offer. If accepted, the team and player are locked into a 1-year contract at a salary that will be determined by the binding decision made by the arbitrator in the case. If the player declines, the player is free to explore the free agent market. However, if the player signs with another team, the player’s former team is awarded a compensatory draft pick from the signing team for the MLB Draft in June.

How does a player become arbitration eligible?

According to MLB.com, there are two classes of players who are eligible to file for salary arbitration: (1) A player with at least three years, but less than six years, of Major League service; and (2) a player that is classified as a “Super Two”.

A “Super Two” is a player with at least two years, but less than three years, of Major League service, and who meets certain statistical requirements. The player must have accumulated at least 86 days of Major League service during the season immediately preceding the proposed salary arbitration. Service time is accumulated based on the number of actual days a player spends on the active roster during the course of a standard 172-day championship season. The amount of actual games played is immaterial for the purposes of qualifying as a “Super Two”.

In addition, the player must rank in the top 22 percent in total Major League service among other players who have at least two, but less than three, years of Major League service.

Players who have filed for free agency may also go through arbitration if their former team makes an offer of arbitration and the player accepts.

What does it mean to “win” in arbitration?

Major League Baseball utilizes a process known as “final offer arbitration”. Under this type of arbitration, each party presents arguments and evidence before submitting a final offer to the arbitrator. Admissible evidence includes that which pertains to the length and quality of the player’s performance for and contributions to the club, the record of the player’s past compensation, comparative salaries of other players, the recent performance of the club (both in record and attendance), and any physical or mental conditions of the player.

At the arbitration hearings, which are typically held in February, the arbitrators pick one of the offers – either the team’s offer or the player’s. The arbitrator has no discretion to split the difference or modify either of the offers. One side “wins” when their offer is selected, the other side loses.

The purpose of “final offer arbitration” is to encourage teams and players to negotiate and settle salary disputes on their own, without requiring the arbitrator to have to render a verdict. It also gives each party an incentive to make reasonable offers; otherwise they risk the probability that the arbitrator will accept the other side’s offer.

So what’s the big deal?

Avoiding arbitration is important from both teams’ and players’ perspectives.

With regard to players, while arbitration provides them with the opportunity to “win” the highest of the submitted salary offers, it only provides them with a 1-year non-guaranteed contract at that figure. And it offers few protections against getting cut (it only entitles them to 30 or 45 days worth of termination pay, depending on when they get cut). The 1-year deal received through arbitration offers less job security, and less total money than would a multi-year deal negotiated with the team.

With regard to teams, arbitration has an inflation affect on salaries. Arbitrators tend to award higher salaries for players who otherwise would have taken a pay cut on the free agency market. In addition, if a player is awarded a high salary, it could have serious implications on a team’s payroll for the given year.

Why then, are teams willing to make arbitration offers in the first place? First, it allows teams to extend the window of time for negotiating a new contract with the player in the event the player does not accept the initial arbitration offer. Second, if a player makes an arbitration offer and the player signs with another team, the team that made the offer will be awarded a compensatory draft pick from the signing team for the MLB Draft in June.

Arbitration Tracker

MLBTradeRumors.com has compiled a 2013 arbitration tracker that monitors salary arbitration results for all eligible players this offseason.


About Matthew George

Matthew George graduated from the University of Kentucky in 2008 with a bachelor of science in journalism. He spent three years writing sports for the Kentucky Kernel, the university's daily paper, and served as assistant sports editor. After undergrad, Matthew attended Chase College of Law at Northern Kentucky University where he earned his juris doctorate. He is now admitted to practice law in Kentucky and Indiana.

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