EFL Salary Caps and the PFA’s Challenge
Further to a statement released by the Professional Footballers’ Association (“PFA”) on 20 June 2020, the PFA released another statement on 6 August 2020 that stated:
‘Ahead of the [English Football League’s (“EFL”)] vote [taking place on 8 August 2020], the PFA has sent a report [(“the PFA’s Report”)] to all club Chief Executives and the EFL regarding the proposed salary caps for League One and Two.
The report has raised concerns that the proposed cap is being rushed through, without proper consideration or consultation.
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The introduction of a salary cap in English football represents a seismic change. It is a change that will have far-reaching and significant impacts right across the professional game. We must take the time to ensure that these are properly considered and understood.
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Today, we have invited the EFL to a period of expedited arbitration in August, before the next season starts and the transfer window closes, in order to reach a shared agreement on the way forward.
The EFL has a legal obligation to consult with the PFA and the Professional Football Negotiating and Consultative Committee [(“PFNCC”)], over any potential changes to a player’s conditions.
This consultation has not happened, and as such, we are gravely concerned that any cap brought in will be unlawful and unenforceable, which will ultimately be detrimental to everyone involved’.
The PFA’s reference to inviting the EFL to an ‘expedited arbitration’ is added to in footnote in the PFA’s Report:
‘…since the ability for the rules to be legally robust should underpin every principle - we would also note that legality is “unclear in draft rules” for two reasons: first because such rules must be subject to collective bargaining with the PFA and other stakeholders through the PFNCC, and these have not yet been so; and secondly it is unclear that the rules would satisfy competition law scrutiny, in particular given the lack of consultation and consideration given to less onerous rules or cost controls. For the credibility of all and the potential to achieve sustainability, it is essential that the draft rules are legally sound’.
A statement released by the EFL on 7 August 2020 stated:
‘Clubs in League One and League Two have today voted for the introduction of new financial controls in the form of ‘Squad Salary Caps’ [(“Salary Cap Rules”)] into their respective divisions which take effect immediately.
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… representatives of League One and League Two Clubs [opted] to implement the new measures in place of the existing Salary Cost Management Protocols (SCMP), with fixed caps of £2.5million and £1.5million respectively.
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When calculating total salary spending, the ‘cap’ includes:
· Basic Wages;
· Taxes;
· Bonuses;
· Image Rights;
· Agents’ fees; and
· Other fees and expenses paid directly or indirectly to all registered players.
Payments directly linked to a Club’s progression in cup competitions or promotion are excluded from the Cap, while any income generated from players going out on loan is deducted from the Club’s Salary Cap calculation.
Transition arrangements have been incorporated in respect of a Club’s squad salary cap calculation with the key element of these aimed at addressing committed contracts and relegated Clubs. Any contract entered into on or prior to today’s vote will be capped at an agreed divisional average until that contract expires. Moving forwards, Clubs that are relegated will be permitted to cap all contracts at the divisional average prior to the Club’s relegation until those contracts expire.
An ‘overrun’ concept is also included if a Club’s total squad salary payments exceed the Cap by up to 5%, whereby dependent on the percentage level of the overrun, a financial penalty would be payable for every £1 in excess. Clubs exceeding the ‘overrun’ would be referred to an Independent Disciplinary Commission, although the EFL will monitor the Cap on a real-time basis throughout the season as is the current position with SCMP measures across the two divisions. Where breaches do occur, sanction guidelines are in place to be considered as appropriate by an independent Disciplinary Commission’.
This article will (i) explain the role of the PFA and the PFNCC; (ii) explain what is known of the Salary Cap and how this differs to the previous League One Salary Cost Management Protocol and League Two Salary Cost Management Protocol stated in the EFL Regulations, Appendix 5; and (iii) consider the strength of the PFA’s arguments as to the legality of the Salary Cap Rules.
The PFA and the PFNCC
The PFA was formed in 1907 and is a union for professional footballers that aims to ‘protect, improve and negotiate the conditions, rights and status of all professional players by collective bargaining agreements’. The PFA is also a member of International Players’ Association (FIFPro) and the Professional Players’ Federation.
Alongside the PFA is the PFNNC, which was originally established in 1978 and was a committee consisting of an independent chairman and other members providing equal representation of the PFA and the EFL. This committee discussed ‘all matters affecting the game and players’, and no changes to a player’s conditions could be made without PFA agreement.
The PFNCC was re-established in 1992 to include committee members from The FA and the FA Premier League.
The Constitution of the PFNCC (“PFNCC Constitution”) is provided in the Premier League Handbook, which states, inter alia:
The PFNCC shall consist of four representatives from the PFA, two representatives from the EFL, two representatives from the FA Premier League, one representative from the FA and the chief executive or equivalent of each of those four bodies or their respective nominees (PFNCC Constitution, para. 2). Each of those four bodies are together the ‘Members’ and individually a ‘Member’ of the PFNCC.
The PFNCC appoints an independent chair whose appointment is for a term of three years (PFNCC Constitution, para. 4). The current chair of the PFNCC is Quentin Smith.
The PFNCC’s terms of reference state, inter alia, that the ‘PFNCC shall be the forum in which the Members consider matters relating to the employment of, and any associated rules and regulations relating to, those professional football players (Players) employed by clubs in membership of EFL and the PL (the Leagues)’ (PFNCC Constitution, para. 3(a)).
The PFFNC’s terms of reference also state that no ‘major changes in the regulations of the Leagues affecting a Player’s terms and conditions of employment shall take place without full discussion and agreement in the PFNCC’ (see PFNCC Constitution, para 3(b)).
The PFNCC has four ordinary meetings each season and special meetings may be called in addition to those ordinary meetings (PFNCC Constitution, para. 7).
If the Members are unable to reach an agreement following the processes provided for in the PFNCC Constitution then ‘they may by agreement seek independent arbitration by the Advisory Conciliation and Arbitration Service or any other agreed independent arbitrator’ (PFNCC Constitution, para. 9(c)).
The PFNCC Constitution is ‘subject to the approval of each of the Members. If approved by each of them it shall be regarded as an agreement binding on each and all of them and shall be appended to the rules of each League and published in their respective handbooks’ (PFNCC Constitution, para. 13).
Salary Cost Management Protocol out, Salary Cap Rules in
Fans of the clubs in the EFL’s three leagues will have heard of the Championship Profitability and Sustainability Rules, not least because of Derby County FC and Sheffield Wednesday FC being subject to charges for breaches of the same recently.
Before the introduction of the Salary Cap Rules, there were also Financial Fair Play regulations in respect of EFL’s League One and League Two, known as the League One Salary Cost Management Protocol (“SCMP”) and the League Two SCMP.
Both the League One SCMP and the League Two SCMP were ineffective. In particular, both the League One SCMP and the League Two SCMP allowed clubs to receive cash injections and equity injections that are included in calculations to determine the applicable salary caps. So, a club’s company entity could issue new shares which are purchased by the owner or otherwise, or the club’s company entity could simply receive a cash injection from its owner, and these amounts would allow a club to avoid being in breach of what would otherwise have been a lower salary cap:
League One SCMP: all League One clubs were required to meet the SCMP Requirement of their club’s ‘Player Related Expenditure’ not exceeding the sum of 60% of the club’s ‘Relevant Turnover’ for the ‘Reporting Period’ and 100% of the club’s ‘Football Fortune Income’ for the ‘Reporting Period’ (League One SCMP, regulation 1):
‘Player Related Expenditure’ included ‘all expenses that are due during a Reporting Period to a Contract Player, Temporary Contract Player or Professional Under 21 Player under the terms of his contract’ (League One SCMP, Appendix B). For example, this included salaries, bonuses, signing-on fees, agents’ fees and image rights fees. However, the wages of players transferred out on loan are excluded or the proportion of the loan player’s wages paid by the loanee club are excluded from this calculation.
‘Relevant Turnover’ included the revenues received by a club for league distributions, match and season ticket revenue and generally all ‘Football Income’ (League One SCMP, Appendix A, para. 1).
‘Football Fortune Income’ included all revenues received by a club ‘reasonably regarded as a “bonus”’ (League One SCMP, Appendix A, para. 2). For example, this included cup competition distributions (i.e. the EFL Cup and the FA Cup), net transfer incomes, cash injections, equity injections and ‘Other Income – [to] be assessed on a case by case basis [sic]’.
‘Reporting Period’ was the 12-month period recorded in a club’s annual accounts (League One SCMP, regulation 1.3).
League Two SCMP: all League Two clubs were required to meet the SCMP Requirements of their club’s Related Player Expenditure not exceeding the sum of 50% of the club’s Relevant Turnover for the Reporting Period and 100% of the club’s Football Fortune Income for the Reporting Period (League Two SCMP, regulation 1). The definitions of terms explained in respect of the League One SCMP are replicated in the League Two SCMP (League Two SCMP, Regulation 1.3, Appendix A, and Appendix B).
As an example of the above:
Football Law FC is a League One club and for the upcoming Reporting Period can see that its Player Related Expenditure is going to be £7m.
Football Law FC’s anticipated Relevant Turnover for the upcoming Reporting Period is £5m, with 60% of that amount being £3m.
Football Law FC’s anticipated Football Fortune Income for the upcoming Reporting Period is £2m.
Accordingly, Football Law FC is anticipating a breach of the League One SCMP by £2m, being the difference between (i) Football Law FC’s Player Related Expenditure of £7m and (ii) the total of 60% of Football Law FC’s Relevant Turnover (£3m) and 100% of Football Law FC’s Football Fortune Income (£2m).
In order to ensure compliance with League One SCMP the owner of Football Law FC provides a cash injection of £2m within the relevant Reporting Period.
The significance of the Salary Cap Rules is that there is now a defined salary cap for each league; the leagues’ salary caps are no longer to be determined on the basis of clubs’ revenues or the depths of clubs’ owners’ pockets.
The Salary Cap Rules provide a salary cap of £2.5m for League One clubs and a salary cap of £1.5m for League Two clubs. Unfortunately it is not yet possible to provide any full explanation or analysis of the Salary Cap Rules as they have not yet been released publicly. However, from the statements and reports referred to at the beginning of this article, the following is noted:
Save for the exclusion of amounts payable by a club to its players for a progression in cup competitions or promotion, the calculation of a club’s salary spending (i.e. salary, bonuses etc.) reflects the same spending that was considered under League One SCMP’s and League Two SCMP’s ‘Player Related Expenditure’.
The PFA’s Report explains that the Salary Cap Rules provide transitional arrangements which mean that '“no Club will be in breach on implementation [of the Salary Cap Rules]”, and safeguards are in place to ensure no Clubs are penalised for existing contracts entered into prior to the date of adoption of the draft rules’.
Further, the EFL’s statement explains that (i) existing contracts will not be considered as part of a club’s salary spending at their full value but will be considered at a ‘divisional average until that contract expires’; and (ii) following implementation of the Salary Cap Rules, a club that is relegated from the Championship to League One or from League One to League Two will be permitted to have its contracts considered at the ‘divisional average prior to the Club’s relegation until those contracts expire’, which presumably means the divisional average of the league to which the club has been relegated to. As Kieran Maguire, senior teacher in accountancy at the University of Liverpool, author of The Price of Football and of the Price of Football podcast, explained in an interview with TalkSport, these transitional and relegation provisions will be of benefit to clubs relegated at the end of the 2019/2020 season with players on expensive contracts.
The legality of the Salary Cap Rules
The PFA’s statement dated 6 August 2020 and the PFA’s Report indicate the two bases upon which the PFA challenge the legality of the Salary Cap Rules: (i) the EFL failed to follow the procedure set out in the PFNCC Constitution; and (ii) the Salary Cap Rules are in breach of competition law. It is this author’s opinion that there may be a third argument to challenge the legality of the Salary Cap Rules concerning the voting process required to make changes to the EFL Regulations. Each of these arguments will be considered in turn.
Failure to follow PFNCC Procedure
As identified above, the PFNCC Constitution, para. 13 states that the PFNCC Constitution is subject to the approval of each of the Members (i.e. PFA, FA Premier League, EFL, and the FA) and if approved ‘shall be regarded as an agreement binding on each and all of them and shall be appended to the rules of each League and published in their respective handbooks’.
The PFNCC Constitution is appended to the Premier League Handbook. This author does not have a copy of the EFL Handbook as, unlike the Premier League Handbook, the EFL Handbook is not available online. The EFL’s Regulations, which are available online, do not include or refer to the PFNCC Constitution. It is also noted that the PFNCC Constitution is not appended to the FA Handbook 2019/2020 or 2020/2021. This author is unaware of any general announcement of approval or non-approval of the PFNCC Constitution yet the inclusion of the PFNCC Constitution in the Premier League Handbook indicates to this author that the Members approved the PFNCC Constitution and, on that basis, the PFNCC Constitution is considered as part of the corporate framework of and binding upon the EFL.
The requirement under para. 3(a) of the PFNCC Constitution is understood to be the basis of this part of the PFA’s challenge as to the legality of the Salary Cap Rules. Considering that the EFL Regulations are contractual in nature (see EFL Regulations, regulation 3.1) – and which the Salary Cap Rules would form part of – there is a strong argument that the need for the EFL to comply with para. 3(a) of the PFNCC Constitution is a condition precedent that must be complied with before the Salary Cap Rules come into effect.[1] However, one drawback to that argument is that para. 3(a) of the PFNCC Constitution does not expressly state, and nor does the PFNCC Constitution state elsewhere, that but for compliance with para. 3(a) of the PFNCC Constitution then any ‘rules and regulations relating to… players… employed by clubs in membership of the EFL’ will not come into effect. This can be contrasted with para. 3(b) of the PFNCC Constitution, yet because the Salary Cap Rules contain transitional arrangements then there is no change to the EFL Regulations ‘affecting a Player’s terms and conditions of employment’. Courts have stressed that ‘clear words [are to be] used if a term is to be construed as a condition precedent’.[2]
If the PFA can successfully establish the argument that para. 3(a) of the PFNCC Constitution is a condition precedent then the PFA could seek a declaration that the Salary Cap Rules do not come into effect until para. 3(a) of the PFNCC Constitution is complied with. Further, it is possible that the PFA and the EFL may also be party to a separate collective agreement which could also include a condition precedent upon which the same legal argument could be made and the same declaration could be sought.
Breach of competition law
The argument that financial fair play-type rules breach competition law is nothing new. Queens Park Rangers FC was unsuccessful in arguing that the EFL’s Championship Fair Play Rules (2012) breached competition law.[3] (It should be noted that an appeal against that decision was withdrawn following a settlement agreement entered between QPR and the EFL.) Galatasaray failed in its appeal to the Court of Arbitration for Sport (“CAS”) against a decision of UEFA’s Club Financial Control Body’s Adjudicatory Chamber, which included arguments that UEFA’s Club Licensing and Financial Fair Play Regulations breached article 101 of the Treaty on the Functioning of the European Union (“TFEU”).[4] (This author recognises the criticisms of that CAS decision that have been stated elsewhere.[5]) In respect of a salary cap – as opposed to rules relating to permissible levels of equity contributions or break-even requirements –, the recent decision in Premier Rugby Limited v Saracens Limited saw Saracens fail in their arguments that the Premier Rugby Salary Regulations breached article 101 and 102 of the TFEU and/or the materially identical rules under the Competition Act 1998.[6] In particular, in considering whether there had been an object infringement of competition law, the panel stated:
‘No judgment of a court or decision of an EU competition authority was cited to us in which a regulation akin to a salary cap was held to be an object infringement…
By contrast, the decision in QPR v EFL, while concerning rules on FFP (limited the amount of investment owners may make in clubs) rather than a salary cap, strongly indicates that rules of this nature aimed at promoting financial stability are not of such a nature as to reveal a sufficient degree of harm to competition absent an examination of their effects’.[7]
It is difficult to see how the PFA would establish any object infringement, and it is also difficult to see how the PFA would establish any effect infringement due to there yet being any available evidence of the effect of the Salary Cap Rules.
It is this author’s opinion that the PFA, who would have the burden of proof, would face a difficult and not inexpensive task in establishing that the Salary Cap Rules are in breach of competition law.
EFL voting process for changes to the EFL Regulations
The clubs of the EFL’s three leagues (known as ‘member clubs’) are the shareholders of the Football League Limited, the company entity of the EFL, with each of the 72 member clubs of the EFL holding one share (see article 3.2 of the Football League Limited’s Articles of Association (“the Articles”)). Those shares are held by the member clubs’ company entities, e.g. Shrewsbury Town Football Club Limited. Further, the provisions of a company’s articles of association bind the company and its members ‘to the same extent as if there were covenants on the part of the company and of each member to observe those provisions’ (Companies Act 2006, s. 33).
Article 13A.2 of the Articles state that the Board of the Football League Limited has the power to propose regulations relating to the activities of, amongst others, the leagues, the member clubs and registered players of member clubs. Such regulations are the adopted EFL Regulations (see article 13A.2 of the Articles). The Regulations can be changed from time to time (see article 13A.4 of the Articles) but only by a resolution at a meeting of all clubs with (i) a simple majority (i.e. more than 50%) of the votes from all member clubs present; and (ii) also with a simple majority of the votes from the member clubs present that are in the Championship (see article 13A.4.5 of the Articles). Further, the quorum required for any such vote is 37 of all 72 member clubs and 13 of the 24 member clubs that are in the Championship (see article 13A.4.6 of the Articles).
Article 13A of the Articles was introduced for the EFL’s clubs to properly vote on the required changes to the EFL Regulations as the EFL responded to COVID-19. Article 13A.1 of the Articles states that Article 13A applies until the earlier of (i) the commencement of the 2020/2021 season (i.e. 12 September 2020); (ii) 31 December 2020; or (iii) following an ordinary resolution to amend the expiry date (although this would appear to be contrary to the Companies Act 2006, s. 21 which requires a special resolution to be passed for a company to amend its articles of association). An ordinary resolution is a simple majority (i.e. more than 50%) of votes from member clubs present at a general meeting, which only requires a quorum of 25 member clubs (see articles 9.5 and 10 of the Articles and Companies Act 2006, s. 282(1)). A special resolution requires not less than 75% of votes from member clubs present at a general meeting (Companies Act 2006, s. 283).
There has been no announcement from the EFL that Article 13A of the Articles has expired, no updated Articles of Association filed with Companies House and/or no change made to the EFL Regulations before 7 August 2020 allowing for divisional votes or otherwise for changes to the EFL Regulations that affect specific leagues of the EFL. Further, there is no suggestion that the Salary Cap Rules were ‘proposed’ by League One or League Two as required by EFL Regulations, regulation 18.2 to allow for divisional votes.
The EFL’s statement dated 7 August 2020 identifies that the vote that took place on 7 August 2020 was from ‘Clubs in League One and League Two’ only. Accordingly and in this author’s opinion, there has been no proper vote to validly change the EFL Regulations, which the Salary Cap Rules would amount to, in accordance with Article 13A of the Articles.
It is possible that the member clubs present for the vote held on 7 August 2020 passed a special resolution to amend the expiry date of Article 13A of the Articles (Companies Act 2006, s. 21). If Article 13A is no longer effective then Article 13 of the Articles applies for changes to the EFL Regulations. The notable difference between Article 13A and Article 13 of the Articles is that Article 13 does not include the additional quorum requirements seen in Article 13A.4.6. Therefore the voting process for changes to the EFL Regulations under Article 13 of the Articles only requires a quorum of 25 member clubs (see article 9.5 of the Articles). However, as noted above, there has been no announcement or updated articles of association filed with Companies House to indicate that Article 13A of the Articles has expired.
Considering the above and in this author’s opinion, if the EFL are taking the vote that took place on 7 August 2020 as the basis for introducing the Salary Cap Rules (as the EFL’s statement dated 7 August 2020 suggests) with Article 13A of the Articles seemingly still applying, then there is a possible argument that the EFL has not followed its own corporate framework for making changes to the EFL Regulations. If that argument can be established, the EFL’s breach of, or failure to comply with, the requirements in its Articles will mean that the introduction of the Salary Cap Rules to the EFL Regulations could be declared invalid.[8] However, this is an argument to be raised by a member club as a shareholder of the EFL, not the PFA.
Conclusion
There is an appreciation that the Salary Cap Rules have been introduced to, at the least, provide a more effective means of financial regulation than was offered by the League One SCMP and the League Two SCMP. However, it is strange that the EFL appears to have ignored the need to consult on the Salary Cap Rules with the PFNCC and/or the PFA, and has seemingly failed to follow its own corporate framework when voting on the Salary Cap Rules. The consequences of those failures could mean that the Salary Cap Rules do not yet come into effect.
With the transfer window currently open and the EFL’s 2020/2021 season only 32 days away, it would be prudent for the EFL to respond to and engage with the PFA promptly, not least to avoid any prejudice to EFL League One and League Two clubs and their players.
Footnotes
[1] Chitty on Contracts, (33rd edn, Sweet & Maxwell 2019) vol 1, para 2-160. Cf. EFL Regulations, regulation 3.1.6.
[2] Heritage Oil and Gas Limited, Heritage Oil PLC v Tullow Uganda Ltd [2014] EWCA Civ 1048 (CA), (Beaston LJ) [33].
[3] A copy of the decision is unavailable.
[4] Galatasaray v UEFA (CAS 2016/A/4492), [55]-[80].
[5] Nick De Marco QC, Tom Richards and Victoria Wakefield ‘Financial Regulation and Financial Fair Play’ in Nick De Marco QC (ed) Football and the Law (Bloomsbury Professional 2018), para 16.71-16.78.
[6] Premier Rugby Limited v Saracens Limited 4 November 2019, [12]-[111].
[7] Ibid, [32]-[33].
[8] Edwards v Halliwell [1950] 2 ALL ER 1064 (CA); Wise v Union of Shop, Distributive and Allied Workers[1996] ICR 691 (Ch), (Chadwick J) 700; Palmer’s Company Law vol. 2, para 7.901, 7.906 and 7.909.
11 August 2020