MLB Quietly Fighting Wage Discrimination Case Brought by Former Minor League Player Aaron Senne

I'm a bit surprised that the lawsuit brought by former minor league baseball players Aaron Senne, Michael Liberto and Oliver Odle against various Major League Baseball teams in California is not getting more attention because so far the minor league players are putting up quite a good case.

The lawsuit by the Plaintiffs claims that Major League Baseball teams are routinely paying minor league players less than the minimum wage in California and are in violation of the Fair Labor Standards Act.  In case you are wondering why the lawsuit is not against the minor league teams, that is because major league teams actually control and pay the salaries of all players.  Minor league teams have no control over personnel.

It should also be noted that minor league players are not benefiting at all from the collective bargaining agreement between the Major League Players Union and Major League Baseball.  Minor league baseball players have no union.

The plaintiffs claim that most minor league baseball players earn about $3000 to $7500 per YEAR, but that they routinely work in excess of 50 hours per week during the five month season, not including travel.  Additionally, the players are required to stay in shape during the offseason and often they must also participate in other team related activities.

California's minimum wage is currently $10/hour, and that is climbing to $15/hour over the next five years.  Let's calculate some of these numbers rough-hand, after all, I'm not the legendary Nate Silver. If the average minor league player is required to attend every game and practice including spring training, they would to work approximately 185 days per year.  Most seasons are about 140-144 games, except for players playing in lower levels.

Well, if a player is working 185 days per year, multiply that by $10/hour by 8 hours/day, that should be a salary of $14,800.  Now most workers are limited to a 40/hour work week, otherwise they are entitled to overtime - not minor league baseball players.   On average, a player is only getting 1 day off per week during the season, so we should calculate that at least once a week for 26 weeks that a player should be entitled to overtime.  So, $5 (overtime) multiplied by 26 (days) multiplied by 8 (hours) equals another $1040, for a total of $15,840/year... still barely above the poverty line, but way above the current average.

I'm having trouble figuring out exactly how many minor league players there are, but I think it is around 5300.  Let's be generous and say that there are 5300 players earning an average of $7500 per year now, that comes a cost of $40M.  (Note, even though some players earn a signing bonus, they are generally relatively small and most still are paid a fixed minor league salary, which is different from the signing bonus.)

Increasing the average salary to $15,840 would result in a cost of $84M, or increase of $44M.  That may sound like a lot, but that is going to be divided up over 30 teams, so per team there would be an increase of less than $1.5M per team.

According to the web site, Statista.com, in 2015, the average major league baseball team had gross revenues of $280M.  This does not include private revenue that most owners receive via ownership interests in cable TV stations that have rights to the teams' games.  The Yankees earned the most with $516M in revenue and Tampa Bay earned the least, at $193M in revenue.

Clubs do not release their expenses, so it is difficult to know how profitable these teams really are and whether or not they can afford to pay more in minor league salaries without making major cuts elsewhere.  However, they should start thinking about how they are going to be able to afford to pay more, as I sense change is coming.

Two important separate decisions have already been reached in this case:
1) The Court has allowed the action to go forward as a class action suit; and
2) The Court has ruled that some teams that do not have offices or minor league teams in California are still viable defendants based upon their contacts with players and potential players in California.

Additionally, many other major lawsuits by college and professional athletes are trigger closer scrutiny at the way the professional sports business is being run.  Heck, we are even paying college athletes now.  Surely it won't be long before we pay professional baseball players the minimum wage.

Weighing in on the Matt Harvey Contract Situation

It's been a while since I've felt like there's been something worthwhile to talk about regarding baseball law, but with the Mets being in first place and bit of a controversy surrounding Matt Harvey, I thought I'd put in my two cents.

In case you haven't heard, Scott Boras, the agent for Matt Harvey, recently contacted the Mets to remind them that Matt was reaching his 180 inning pitch limit for the season.  Matt, who had Tommy John surgery in 2013, was out all of last year recovering.  His doctors, while apparently not giving the Mets a hard limit, have advised that his innings be capped to avoid further damage to his very valuable pitching arm.

From a fan's perspective, I really do understand how this looks as if Matt is putting himself ahead of the team when the team is making its first playoff run in a while.  But remember, an agent's job is to look out for his client.  While I think Scott Boras' tone could have been a little better, the reality is that he is just doing his job.

Matt is young, he should be thinking about baseball.  His agent is the one pushing the Mets to make sure that Matt is healthy enough to sign a mega-million dollar contract.  Matt is not eligible for free agency for three years, so unless the Mets agree to buy out his arbitration years and sign him to a long term contract, he does not have that ability to make the type of money where he never has to worry about finances again.

Now here's the reason I'm writing this article, no one is talking about an obvious solution to the problem. Everyone is just blasting Matt for being selfish.  However, if the Mets sign Matt to a long term deal now, he will have the confidence to pitch throughout the playoffs without wondering if his financial well being is going to be permanently damaged.

Unfortunately, the Mets probably won't sign Matt to a long-term deal now for three reasons:
1) The Mets are still recovering from the Bernie Madoff disaster and probably can't afford to pay Matt big-time money (as well as Yoenis Cespedis who has shown he deserves to be re-signed);
2)  Boras will request more than others are typically getting when a team buys out a player's free agency years, making it difficult to come to terms; and
3)  Matt is a financial bargain to the Mets right now and it is a big risk to sign him to a long term deal.  They have plenty of pitching, so he is probably better utilized as trade bait to get someone good in return and let the other team worry about the big payday.

Currently Matt is only making $614,125 for 2015.  That is not a lot compared to what others of his caliber are making.  As Grantland.com pointed out in a nice article, the Mets are able to decide when to use Matt, but Matt bears the physical risk of overusage.  It's not as if Major League Baseball, with it's court approved monopoly, allows him to change employers at this point in his career.

While you may not care about Matt's state of mind or his financial well being, the reality is that if you are fan of the Mets, you have to understand that he likely won't perform at his peak and throw as hard as he might or put as much bite on that slider if he's worried it will blow his arm.  That could be the difference between a quick exit from the playoffs and a World Series victory.  How much would that be worth to the Wilpons?

Drayton McLane Theoretically Selling Astros Because of Estate Planning Issues?

I've read a few articles on the internet lately, including this one at MLB.com, which report that Drayton McLane, owner of the Houston Astros, is selling the team for "Estate Planning Reasons".

Now, I've never met the man, and I do not know the man's business nor do I know much about the man's personal wealth other than what is in the public domain, but something really bugs me about the reason he is giving for wanting to sell the team. Frankly, I think it is a public relations snowjob - and here's why:

1) Drayton McLane has been trying to sell the team for years, unsuccessfully. He had a deal fall through just a few years ago because the buyer, Jim Crane, was concerned about the economy.

2) There may be a very large estate tax when the SURVIVOR of Drayton and his wife, Elizabeth, dies - but there will be a large capital gains as soon as he sells the team. Moreover, the Drayton family will still have a super large taxable estate. So let's talk taxes:

• Let's say the McLanes are worth about $1.5 Billion. and the Astros make up about $450 million of that. If they were both to pass in 2012, and the estate tax law reverts to pre-2001 levels, they would owe an estate tax of about $825 million assuming nothing goes to charity. (Incidentally, I believe that they would donate substantial sums to charity.)
• Now let's say Drayton McLane sells the team for $450 million and pays a $70 million capital gains tax (because he bought the franchise for about $100 million and there is a 20% capital gains tax in 2011). The McLanes would then have an estate worth $1.43 Billion. If they were both to pass in 2012, then the estate tax would be $786.5 million - a savings of $38.5 Million. However, because of the payment of the capital gains tax, there is a net loss of $31.5 million in taxes.
• If the McLanes wait until Drayton passes before selling his interest in the Astros, it will receive a step-up in basis. This means that there will not be any capital gains tax due because the team will receive a basis equal to the fair market value on Drayton's death.
• One might argue that if Drayton McLane does not sell the team while he is alive, his estate must sell it in a firesale to raise capital to pay the taxman. This argument really only works if Drayton and Elizabeth die in the same year because if they were working with even a semi-competent estate planning attorney, they could guarantee the tax gets postponed until the second to die.
• Well - what if they did both die within the next two years, then there would be a firesale and they wouldn't receive as much for the team. This may be true, but would that firesale cost them $38.5 million PLUS the time value of the interest? Probably not.

3) There is a throwaway line at the end of the MLB article which reports that Drayton's children "never entertained taking over the club." To me, this is far more important than any tax planning reason they could have for selling the team. If the children wanted the business, Drayton and his attorneys could easily have found a way. Most likely he would have borrowed heavily against the team to reduce its value, transferred it in a part sale-part gift transaction, and then used the liquidity to pay any taxes.

There are many reasons to sell an asset like a baseball team, but estate planning should not be one of them - except to the extent that the McLanes wish to simplify their life and have come to the realization that their children do not wish to be in the family business.

So why does the MLB article upset me so? Mainly because of the implication that he's selling off the team to avoid the estate tax and for the reasons stated above, I think that would be a bad decision. Since I believe Mr. McLane is a smart man who doesn't make many bad decisions, I think he's selling the team for personal and business reasons - not estate planning reasons.

Should Baseball have a Worldwide Draft?

I recently came across a very thoughtful law review article by Daniel Hauptman arguing that Major League Baseball (MLB) should have a worldwide draft. Currently, MLB only drafts players from the United States of America, Canada, Puerto Rico and other U.S. territories.

The crux of Hauptman's argument is that since MLB does not have a worldwide draft, they are engaged in a type of reverse discrimination.

Background
The MLB draft acts as an orderly way for teams to bring in new talent. It has the effect of reducing competition for a particular player. Normally this would be an anti-trust violation, but MLB enjoys a long-standing exemption from the anti-trust laws.

No super talented player actually wants to be drafted. MLB has rules, both formal and informal, that dictate how much a drafted player should be compensated. If a players signed as a free agent, the player would be have more control over the team he signs with, the salary and the contract terms. The effect of this for very talented players is that they could earn a lot more money if there were no draft because there would be competition for their services.

Since the MLB draft only affects players from the United States of America, Canada, Puerto Rico and other U.S. territories, they are at a competitive disadvantage compared to players from other parts of the world who can sign as free agents.

To be clear though, free agency really only helps top athletes. Everyone else has to take what they can get and teams will not bid up these players.

The Law
The draft, as it stands, is something that arrived at as part of the collective bargaining agreement between MLB and the Major League Baseball Player's Association (MLBPA). It is important to note that players who have not signed a major league contract can not be part of the union.

Collective bargaining agreements are governed by federal labor law and it has been traditionally very difficult for individuals who are not a party to the agreement to affect them. Read Hauptman's article for more details.

One argument that can be made to challenge the agreement is that the draft violates a federal or state employment discrimination law. However, these anti-discrimination laws may be preempted by the national labor law which encourages employers and employees to come up with their own agreements - i.e. the collective bargaining agreement.

Non-Legal Issues
Hauptman goes to great lengths in discussing the history of the draft and the effect of the draft on the economies of Latin American countries. In particular, MLB teams used to spend a lot of money developing players in Puerto Rico. Once teams could draft players from Puerto Rico instead of having to bid on their services, teams stopped investing time and resources there and moved to places like the Dominican Republic.

In these Latin American countries where there is no draft, teams are able to sign many players as free agents, but terms and conditions highly favorable to the teams and at very low cost. It also gives large market teams a tremendous advantage because they can sign more players hoping a tiny fraction of them work out.

What a Worldwide Draft Would Accomplish
In the end, Hauptman argues it would be a good idea to have a worldwide draft. He thinks it would result in players being treated equally regardless of where they are from. He also believes it would result in better competition on the field. This is not to say that the draft itself is fair, but it would level the playing field for teams and the individual players.

What if we Did Not Have a Draft?
If a draft bad for the players, many argue we should get rid of it. After all, it suppresses competition for the player's services. The problem with getting rid of the draft is that it serves one very important legitimate purpose - it provides for competitive balance. For that reason alone, MLB will never give it up. The fact that they use it to keep salaries down and provide an orderly method of hiring players is merely a great side benefit.

Final Thoughts
Although MLB and the MLBPA has stated publicly since 2002 that they want a worldwide draft, there are no plans at this time to introduce one. I personally don't see anyone challenging baseball's draft because of the cost of a suit and the potentially deleterious affect it might have on the player filing the suit.

Passing of a Legend - George Steinbrenner

Regardless of whether you are a Yankees fan or not, we should all pause for a moment to reflect on the valuable contributions that Mr. Steinbrenner has give to baseball. He was a great promoter who heavily invested in his team. He single handedly reshaped the way owners thought about free agency and owning their own television rights. And, perhaps most importantly for other owners, he helped steer baseball into its greatest era of profitability.

George Steinbrenner, and minority partner E. Michael Burke, bought the New York Yankees (and some parking garages) from CBS in January of 1973 for $10 million. In 2009, the Yankees were valued at $1.5 billion by Forbes magazine. I am uncertain as to how much of the franchise Mr. Steinbrenner owned at his death, but according to the Forbes 400, he was worth $1.15 billion in 2009.

It is interesting to note that the Yankees franchise itself is very heavily leveraged, and that most of his wealth is tied up in the YES Network. I'm sure that this was done on purpose so that the franchise could be passed on to his children more easily.

It is a bit gruesome to think about, but by George - he passed away in the correct year as far as taxes go. This year, there is no federal estate tax (unless Congress tries to enact a retroactive tax). Moreover, since Mr. Steinbrenner passed away while he was domiciled in Florida, his estate does not owe a state Estate tax either.

What does this mean? Well - in almost any other year his estate would owe the federal government upwards of $500 million in estate taxes. Instead, his heirs merely have to pay a modified capital gains tax when and if they sell George's assets.

Proper estate planning is important, but sometimes it helps to be lucky too.

Should my child choose college or go pro?

Professional baseball scouts like to point out that of all the thousands of players who play baseball each year, only a few are chosen in the draft.

Ultimately, your high school graduate will have to decide one of three things: Does he go pro? Does he go to college? Does he quit and do something else?

Some of the reasons to go to college include:
a) the fact that a player drafted out of college has a higher chance of making it to the majors;
b) the college experience;
c) the professional team is not offering enough of a signing bonus to justify losing your amateur status;
d) your child is not confident enough in his own abilities to think he can make it to the pros and he wants a solid backup plan;
e) your child is a multisport athlete and is not sure which sport he wants to play yet; and
f) your child is not sure if he wants a career in professional baseball.

Some of the reasons to go professional include:
a) your child is not a good student, and is more likely to have a successful career in professional baseball;
b) your child receives a significant signing bonus;
c) your child cannot get a scholarship and does not have the resources to go to college;
d) your child has lost his amateur eligibility;
e) the coaches are generally better on the professional teams;
f) the professional team guarantees to pay for college for your child after his baseball career is over; and
g) baseball is a young man’s game and the sooner your son gets started the quicker he can develop and fulfill his dream.

A reason that can cut both ways is injuries. If a player has a bad injury while in school, he will need to do something other than baseball with his life. On the flip side, a scout once told me, “Injuries and age have never stopped anyone from getting an education but they have stopped a promising career in sports, so it is best to start early.” (I apologize, but I can no longer find the source for this quote.)

So what do the experts say?

Jack Cust & Keith Dilgard, of Jack Cust Baseball Academy, suggest that for most position players, it is best to go to college. However, for pitchers, due to the high risk for injury, going professional has additional advantages. They also cautioned that a player must be careful where he goes to college as some places expect you to leave by the end of your junior year.

George (Curvy) Ramos suggests that if a player is drafted in the top three rounds, it is best to sign with a professional team.

Joe Barth’s best advise is to “go where you are wanted.” You will be happier as a result, especially if you are choosing among colleges. He warns that a player’s scholarship can be pulled for a variety of reasons, so it is important to have a good relationship with the coaches.

In the end, your child should not make this decision until he has all the good offers on the table from the colleges and the professional team that has drafted your son. At a certain point, if the drafting team offers enough money, it will make sense to play professional ball rather than go to college. This number is different for everyone and I will discuss what draft picks are receiving in more detail in the next installment.

Next issue: Who is eligible to be drafted?

Special thanks to Jack Cust, Sr., Keith Dilgard, Joe Barth, and George (Curvy) Ramos for providing valuable time and resources in the preparation of this article.

Follow up on Oliver v. NCAA

If the NCAA has to change their amateur eligibility rules in light of the Oliver ruling, here is an idea as to how they might do it:

My personal suggestion would be to change the definition of what it means to be an amateur so that student athletes lives aren’t ruined so easily by a mistake. A player shouldn't become professional the second he/she signs a professional contract, but the second he/she plays as a professional or receives money under the contract. (The NCAA can create a window such as before college and during the summer when the player may sign and/or negotiate a professional contract. If it is still in place when the college sport starts, then they lose their eligibility.)

I welcome your thoughts.