What is Escrow in NHL, how does it work?
Wondering what is Escrow in NHL? Escrow is an important part of the business side of hockey. Most players might not be a big fan of the escrow payment system, but the League sees the technology as a necessity.
How does the NHL players’ escrow work? The NHL uses this system to hold part of the player’s salary until the league discovers its revenue for the year. After this, players could get part or full annual salary payments.
This system ensures that the owners and NHL do not pay players without accurately predicting their revenue for the year.
Today, we will discuss how escrow works with NHL players.
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What is escrow in NHL?
To ensure that the players don’t get more than 50% of Hockey Related Revenue (HRR), the NHL holds a percentage of player paychecks in escrow.
The money is held in escrow and returned to the players or the league at the end of each season. It’s a common practice in professional hockey, but it’s not one that’s been especially well-received by players.
Why Does The NHL Use Escrow?
Before we get too deep into the nitty-gritty of how escrow works, let’s take a step back and see why NHL teams use it.
According to The Athletic’s Pierre LeBrun, the introduction of escrow goes back to 2005, when the NHL Players Association agreed to an immediate 24% salary rollback.
In exchange for that concession, they were promised that the league would never again ask them to accept a similar deal — and they were given some safeguards in the CBA to make sure that could happen.
This is where escrow comes into play. It was designed as a built-in salary cap within the CBA’s hard salary cap system. Essentially, it was intended as an insurance policy against any financial hitch on either side (players or owners).
Hockey Related Revenue And Escrow
The NHL salary cap is calculated using a percentage of the NHL’s hockey-related revenue (HRR). So, that means that the salary cap is 50% of HRR. If you’re wondering who gets the other half, it’s split 50/50 between owners and players.
Players and owners pay their share towards “escrow,” which is money held in trust until the true value of HRR can be determined.
If HRR ended up being $5 billion for the year, players would earn half of that ($2.5 billion) against the salary cap. The escrow contributions from both sides add up to $2.5 billion; if there’s no surplus or deficit at the season’s end, then everyone gets their money back (and this usually works out).
However, if there’s a surplus or deficit at season’s end, players could get 100%, 75%, 50%, 25%, or 0% of their escrow contributions back, depending on what happens with HRR. And that is why players hate the escrow system.
How does an escrow system work?
The NHL and NHLPA have agreed to a collective bargaining agreement (CBA), including an escrow system. For each season, the league and players association determines how much money should go into escrow for that year.
Player paychecks include a percentage of their salary that is designated for escrow. At the end of the season, if players were paid too much money relative to hockey-related revenue (for instance, if the salary cap was set too high), the league can take back some of those funds into its account.
What happens to the money withheld in escrow after the season ends?
The money is returned to the players and distributed based on a player’s salary and the number of games played. The NHLPA collects and analyzes league revenues, then calculates for each player how much he can expect to receive.
For example, say the NHL withholds $10 million in escrow at the start of the season. After reviewing revenues, they determine that while they’ve met their revenue targets, they’re still $5 million short of reaching a 50-50 split with players.
They would then distribute another $5 million from that escrow fund to ensure that both sides receive exactly 50% of hockey-related revenue.
In this scenario, because they spent half their escrow funds, each player would receive only 50% of what was withheld from his paycheck per pay period (50% withheld = 50% returned).
Players may be disappointed with this development if it means less money in their paychecks at year’s end—but it’s not all bad news: If an additional portion of escrow had been distributed at season’s end than expected (as was the case for 2018-19 season), then players would ultimately receive more than originally withheld.
What happens to escrow if the league exceeds its salary cap?
A team can only spend up to a certain amount of money on salaries, where the salary cap comes in. If a team goes over the salary cap, that’s a problem—and that’s why escrow payments come into play. The league redistributes any amounts over this limit so that each side gets their fair share, and then the season can start.
The escrow is calculated by taking the total salary cap hit of all 31 teams and dividing it by the projected revenue. The players then receive half of that revenue, a percentage known as the player’s share.
So, if the NHL makes $2 billion in revenue and player salaries count for $1 billion against the cap, then 50% of that goes to the players’ share. If the league only made $1.5 billion, however, then this money would come out of escrow and be returned to each team so they could pay their players in full according to that season’s salary cap.
Both sides have an interest in making sure this doesn’t happen. There are penalties for not paying players completely what they’re owed under the CBA (and even harsher ones for not paying them at all).
Secondly, owners want their teams to perform well on-ice because it keeps fans coming through turnstiles or tuning into games on TV—which means more ticket and merchandise sales and better local TV deals (for some teams) down the road. Players want to win, too, because successful teams generally pay higher salaries than bad ones over time.
Conclusion
The bottom line is this; the NHL uses the escrow system to cut its losses– if they get any. Players, on the other side, fear not getting a full payment at the end of the season. However, the new CBA rule allows for both parties to agree on the amount of money to be held in escrow.
The NHL has agreed to pre-set the percentage escrow will hold for each year in the next six years. That way, players can reduce threats of massive loss, and teams would easily predict their costs.
If you were thinking, what is escrow in the NHL? Or how does NHL players’ escrow work? I believe you know it now.
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