Part of the reason I find the Over-36 rule fascinating is that it meaningfully affects the league without many visible direct results since what it does is make certain contracts impractical. That said, understanding it can help explain some of the choices teams and players make towards the end of careers.
What is the Over-36 rule?
At its most basic, the Over-36 rule takes out the incentive for teams to offer four or five year contracts to players of a certain age.
Why does the NBA want or need the Over-36 rule?
While many pieces on the topic focus on the potential of a player retiring before the end of his contract and still being well-paid, I find the Over-36 rule more powerful when talking about players whose play could just get substantially worse over the life of the deal whether or not they retire.
Either way, the rule attempts to eliminate a way for teams to pay a player less now to overpay him later, presumably to fit into an existing exception. The NBA’s soft cap necessitates a different policy than Major League Baseball because a league without a salary cap at all does not have to deal with these sorts of issues and the NFL has contracts with much smaller guarantees.
How does the Over-36 rule work?
I strongly encourage you to read Larry Coon’s excellent work at CBAFAQ but the main idea is that the rule treats “zero years” in contracts (more nuanced than this but think of it generally as the final year of a four or five year contract signed by someone 33 or older) as deferred compensation rather than salary. This designation pushes the salary given in that “zero year” onto the earlier seasons of the contract.
What makes the Over-36 rule so interesting is how that affects the rules governing the salary cap. While shifting money around may seem like more of an accounting problem than anything else, deferred compensation in the earlier years of a contract counts against that season’s cap number. That means if you want to fit a player in with the Mid-Level Exception or a smaller amount of remaining cap space than you have adding in part of that final season, a team must cut the actual payout to the player in question to still work in that exception. While Larry does an excellent job breaking down how the mechanics work, the purpose and actual effect of the Over-36 rule is to functionally eliminate the usefulness of signing a player for any “zero year” if a franchise wants to fit him into a narrow cap spot. For example, if the fourth year of a contract worth the MLE is a zero year, signing that player to a three year contract starting at the full MLE and a four season contract worth the full MLE would yield the same total salary. As such, it creates a system where those longer deals are technically allowed but a player’s agent would never agree to it since getting the same money in fewer years allows for the possibility of signing a different contract for additional salary during what would otherwise be a zero year.
Should a team have enough room (cap space or within an exception) to make the modified contract work without reducing the value, the Over-36 rule serves as more of a near-term inconvenience than prohibition. While the same rules still apply in terms of counting the money at the outset, once a player gets within two years of a zero year, money begins going back into that season in a way that actually reduces that player’s cap hit in the non-zero seasons. These kinds of circumstances explain why the Over-36 rule makes long contracts difficult but not impossible.
How has the current Collective Bargaining Agreement changed the Over-36 rule?
Reducing contract lengths means there are far fewer circumstances where the rule applies. The new CBA blunted the impact because now players have to be signing deals at or close to the longest length at older ages- we cannot see 30 year olds agreeing to seven year contracts anymore. After all, the only way veteran free agents can sign even five year deals are with Bird rights.
Even with a reduced impact, the Over-36 rule still matters and I think it makes sense to discourage these kinds of contracts in a league where teams can and will attempt to use every advantage at their disposal.
If you have any further questions, do not hesitate to write it in the comments or ask me on Twitter.