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It's Arbitration Time

It's arbitration time again in baseball, a time when some baseball players and their teams negotiate with one another under the threat of having a third party render a binding decision if a dispute occurs.

The baseball player's labor market is often thought of as consisting of three tiers, tiers determined by the bargaining status of players. First, there are the reserved players, players with less than 3 years of major league service who are subject to the reserve clause, meaning they can only bargain with their current teams. Second, there are the arbitration eligibles, players with between 3 and 6 years of major league service who are subject to the reserve clause but who can elect to go through the arbitration process. The arbitration eligibles also contain some players called "super two's". These players have only amassed two years of major league service, but they amassed at least 86 days of service during the previous season and rank in the top 17% of service of all such players. Third, we have the free agents, players with more than 6 years of major league service who are no longer subject to the reserve clause.

BTW, "major league service" is defined in Article XXI Section A of the Major League Baseball Collective Bargaining Agreement. A player has to amass 172 days of service to be credited with a year of service. To be credited with a day of service, the player has to be on a team's active roster.

Most of the players who go through arbitration process are the "arbitration eligbles", but sometimes we see players eligible for free agency go through the process as well. During the offseason, teams who have players who have filed for free agency must offer those players arbitration by a certain date or they lose the right to bargain with their free agents until the following May. For all practical purposes, this means that the team and the free agent will part ways. When teams offer their free agents arbitration, they have to weigh the benefits of doing so to the costs, one of those costs being the risk that the free agent may actually accept the offer of arbitration. If this is the case, then the team is obligated to go through the arbitration process with the player. During this past offseason, Roger Clemens is one free agent who was offered arbitration and took this offer. He officially filed for arbitration last week.

If a case goes to arbitration, then both the player and his team go to what amounts to a hearing where they present their "final offers" to a panel of arbitrators (3 of them) and each side presents a case to the panel. Within 24 hours, the panel chooses one of the two offers as the binding settlement. This type of arbitration is frequently referred to as Final Offer Arbitration. In contrast, the National Hockey League (if it ever gets going again!!!) uses a form of arbitration referred to as "Conventional Arbitration" where arbitrators are not constrained to choose one of the "final offers".

These so-called final offers are not really final at all. They are exchanged in mid-to-late January of each year but the arbitration hearings may not occur until the mid-to-late part of February. During this time, the player and the team can continue to hammer away in negotiations. But none of the offers that are exchanged during these negotiations are admissible as evidence in an arbitration hearing. In any case, of all the players who file for arbitration, only about 15-20% of the cases actually end in dispute.

Teams aren't big fans of arbitration for two reasons. First, in the hearing, the player tries to make a case as to why he should be paid what he is asking. The team, on the other hand, essentially tries to minimize the player's contribution in order to make a case as to why the team's offer should be chosen. This can lead to some bad feelings. Second, the way the arbitration rules are set up, the arbitrator can compare the two final offers to the salaries that "comparable players" are making. So when some team, for example, signs a free agent shortstop to a lucrative contract, the terms of that contract make their way into the arbitration system.

In my next post, I'll write about the arbitral criteria: the sorts of things that arbitrators can and cannot consider when rendering a decision.