NHL Salary Cap

The NHL Salary Cap is the limit to the total amount of money that National Hockey League teams are allowed to pay their players and uses a "hard" cap, meaning there are no luxury taxes or exemptions.

The actual amount of the cap varies on a year-to-year basis, and is calculated as a percentage of the League's revenue from the previous season; for instance, in 2007-08, the NHL's salary cap was approximately US$50.3 million per team, and for the 2008-09 season it was $56.7 million. Like many professional sports leagues, the NHL has a salary cap to keep teams in larger markets (with more revenue) from buying all of the top players and extending their advantage over smaller-market franchises. The 2009-10 salary cap has been set at $56.8 million.

A salary cap existed in the early days of the National Hockey League (NHL). During the Great Depression, for example, the league was under financial pressure to lower its salary cap to $62,500 per team, and $7,000 per player, forcing some teams to trade away well paid star players in order to fit the cap.

Pre-salary cap
Prior to the resolution of the 2004–05 lockout, the NHL was the only major North American professional sports league that had no luxury tax, revenue sharing, salary cap, or salary floor.

Player salaries did not become an issue until the 1970s, when Alan Eagleson founded the NHL Players' Association (NHLPA) and the upstart World Hockey Association began competing with the NHL for players. On the other hand, owners such as Harold Ballard of the Toronto Maple Leafs spent among the league minimum on rosters, making his team the most profitable. There was little financial incentive for Ballard to spend money on star players to improve the quality of the on-ice product and attract fans, as all Maple Leafs games were sold out regardless of how poorly the team played.

The 1994–95 NHL lockout was fought over the issue of the salary cap. The 1994–95 season was only partially cancelled, with 48 games and the playoffs eventually being played.

Although six NHL franchises are based in Canada, all NHL salaries must be paid in U.S. dollars. This caused hardship among the small-market Canadian teams at the turn of the 20th century due to the weak Canadian dollar, as their revenues were in Canadian dollars. NHL Commissioner Gary Bettman successfully persuaded the US-based teams to donate towards a pool to mitigate the effect of the exchange rate.

Current salary cap
The negotiations for the most recent NHL Collective Bargaining Agreement revolved primarily around players' salaries. The league contended that its clubs spent about 75% of revenues on salaries; a percentage far higher than existed in other North American sports. NHL Commissioner Gary Bettman demanded "cost certainty" and presented the NHLPA with several concepts that the Players' Association considered nothing more than euphemisms for a salary cap, which it had vowed it would never accept; the previous CBA had expired on September 15, 2004.

A lockout ensued, leading to the cancellation of the entire 2004–05 NHL season, the first time a major sports league in North America had lost an entire season to a labor dispute. The lockout was resolved when the NHLPA agreed to a hard salary cap based on league revenues, although the NHL reciprocated by implementing revenue sharing which would allow for a higher cap figure.

The NHL salary cap is formally titled the "Upper Limit of the Payroll Range" in the new CBA. For the 2005–06 NHL season, the salary cap was set at US$39 million per team, with a maximum of $7.8 million (20% of the team's cap) for a player. Revenues for the six Canadian teams have all increased significantly since the lockout, and due to the fact the Canadian dollar rose to briefly reach parity with its U.S. counterpart (the Canadian dollar has since fallen to around 88 US cents, still significantly above its lows around 2000), league-wide revenues measured in U.S. dollars have been inflated accordingly.

As a result of these factors, the cap has been raised each year to its current figure of $56.8 million for the 2009–10 season, with a cap of $11.36 million for a player.

The CBA also contains a "Lower Limit of the Payroll Range", which is the minimum that each team must pay in player salaries. The lower limit was originally set at 55% of the cap, but is now defined to be $16 million below the cap; therefore the 2009–10 minimum is $40.8 million. The difference between the salary cap and a team's actual payroll is referred to as the team's "payroll room" or "cap room". Each year of an NHL player contract, the salary earned contributes to the team's "cap hit". The basic cap hit of a contract for each year it is effective is the total money a player will earn in regular salary over the life of the contract divided by the number of years it is effective. This prevents a team from paying a player different amounts each year in order to load his cap hit in years in which the team has more cap room. Teams still use this practice, however, for other reasons.

Performance bonuses also count towards the cap, but there is a percentage a team is allowed to go over the cap in order to pay bonuses. A team must still factor in possible bonus payments, however, which could go over that percentage. Salary for players sent to the minors, under most circumstances, do not count towards the cap while they are there. If a player has a legitimate long-term injury, his cap hit is still counted; however, the team is permitted to replace him with one or more players whose combined salary is equal to or less than that of the injured player, even the additional players would put the team over the salary cap (if the team's cap room is larger than the injured player's cap hit, they may take on as much as their cap room); however, the injured player may not return to play until the team is again compliant with the original cap.

The NHL has become the first of the major North American leagues to implement a hard cap while retaining guaranteed player contracts'. Guaranteed player contracts in the NHL differ from other sports, notably the NFL, where teams may opt out of a contract by waiving or cutting a player. NHL teams may buy-out player's contracts, but must still pay a portion of the money still owed which is spread out over twice the remaining duration of the contract. Any player can be bought out for one-third of the remaining salary if younger than 26 at the time of termination, or two-thirds if 26 or older, over twice the length of the remainder of their contract. Trading cash for players or agreeing to pay a portion of a player's remaining salary after trading him are forbidden in the new CBA in order to prevent wealthier teams from evading the restrictions of the cap.

The CBA also contains a 35-and-over rule, sometimes referred to as the Mogilny rule. This rule states that if a player signs a multi-year deal when the player is 35 or older, starting in the second year of the contract, that amount will count towards the team's salary cap regardless of whether the player is on the active roster or not. This is designed to keep teams from signing older players to lucrative front-loaded contracts, thus saving cap room, in which there is no expectation the player will actually play in the latter years.

Players, agents or employees found to have violated the cap face fines of $250,000 - $1 million and/or suspension. Teams found to have violated the cap face fines of up to $5 million, cancellation of contracts, loss of draft picks, loss of points and/or forfeiture of game(s) determined to have been affected by the violation of the cap.

Waivers
Unlike other professional leagues, waivers in the NHL do not always mean an unconditional release if a player clears waivers and elects free agency. Most NHL players will need to clear waivers before they are assigned to a minor league team- the exception is a young player with very little NHL experience. Clearing waivers means every other team in the NHL has the option to 'claim' that player off of the 'waiver wire', thus assuming his contract (and cap hit), and providing no compensation to the originating team. If a player clears waivers, the team has the right to either send the player to a minor league affiliate which is generally a team in the AHL, or the team can elect to keep that player with their club. If a player refuses to report to the minors, the team can use that as grounds to suspend the player (i.e. not pay them). To get a player back into the NHL, he would have to clear 're-entry waivers', for which there are also some exceptions (like the aforementioned young players, so-called "Veteran Minor League Players", and players on a 2-way contract earning under a certain amount). If another team claims the player on re-entry waivers, both the team that acquired the player and the team that placed that player on re-entry waivers, would split 50-50 of the remainder of the player's current contract and salary cap hit.

Free Agency
There are several kinds of NHL free agency, but generally the free agent pool in the NHL is split into restricted and unrestricted free agents. All contract signings can be of any length as long as the averaged annual salary (plus bonuses) will fit under the team's salary cap.

Players 27 years of age or younger, and have their contracts expiring on June 30 of that year, will become restricted free agents on July 1 if a team gives a player a qualifying offer. A qualifying offer is a single year contract offer that is either the the same amount as the previous year, or a slight raise, according to the previous year's amount. The 'restricted' part of free agency comes into play with the concept of an offer sheet. An offer sheet is a contract that a new team can offer a restricted free agent. If an offer sheet is signed by the player, the originating team has the option of matching that offer, or receiving compensation from the team in the form of draft picks. The number and round of the draft picks is according to a formula based on the amount of the contract, up to four first-round draft picks. If a team does not have the draft picks required (because they were traded away) then that team cannot make an offer sheet. Restricted free agents that have received a qualifying offer can also be traded, even if contract terms have not been agreed upon. If a restricted free agent does not sign with an NHL club by December 1 of that year, that player is declared ineligible to play in the NHL until the following season.

Some restricted free agents are eligible for salary arbitration. Salary arbitration is available to restricted free agents that have been in the league for a period of time; it's also a function of age. For instance, a 21 year old player is eligible for arbitration if he has been in the league for 3 years, whereas a 24 year old player is eligible for arbitration after only one year. After a qualifying offer is made, an eligible player can elect to go through the arbitration process, where the team and the player each make an argument for a certain contract size. An independent arbiter hears the arguments and decides on a fair contract amount.

If a qualifying offer is not given, or if a team rejects the amount awarded through salary arbitration, or if the player is 28 or older when the contract ends, the player becomes an unrestricted free agent. Any player who has been released outright and had their contract bought out by their team, would also be declared an unrestricted free agent.