The qualifying offer is a competitive balance measure that was implemented as part of the 2012-16 Collective Bargaining Agreement and restructured under the 2017-21 Collective Bargaining Agreement.
Note: Teams became subject to the following parameters beginning between the 2017 and 2018 seasons.
Clubs wishing to receive compensatory Draft picks for the loss of a free agent can make a one-year "qualifying offer," worth the mean salary of MLB's 125 highest-paid players, to their impending free agents prior to the onset of free agency if and only if:
1. That player has never received a qualifying offer previously in his career.
2. That player spent the entire season on that team's roster (in-season acquisitions are ineligible).
A player will have 10 days to accept or decline the qualifying offer, during which time he can negotiate with other teams to survey his market value. Should a player decide to accept the qualifying offer, he is signed for the following year at that predetermined rate (i.e., the mean salary of the league's 125 highest-paid players). If a player rejects the qualifying offer, he is free to further explore the free-agent market.
Any team that signs a player who has rejected a qualifying offer is subject to the loss of one or more Draft picks. While a team's highest first-round pick is exempt from forfeiture, any additional first-round picks are eligible. Three tiers of Draft pick forfeiture -- which are based on the financial status of the signing team -- are in place to serve as a penalty for signing a player who rejected a qualifying offer:
• A team that exceeded the luxury tax in the preceding season will lose its second- and fifth-highest selections in the following year's Draft as well $1 million from its international bonus pool. If such a team signs multiple qualifying offer free agents, it will forfeit its third- and sixth-highest remaining picks as well. The only two clubs that exceeded the threshold in 2018 are the Nationals and Red Sox.
Examples: A team with one pick in each round of the 2019 Rule 4 Draft would lose its second- and fifth-round picks. A team with two first-round picks and one pick in each subsequent round would lose its second-highest first-round pick and its fourth-round pick.
• A team that receives revenue sharing will lose its third-highest selection in the following year's Draft. If it signs two such players, it will also forfeit its fourth-highest remaining pick. If that team loses a free agent, it will be awarded a pick between the first round and Competitive Balance Round A if -- and only if -- the lost player signs for at least $50 million. If the lost player signs for less than $50 million, the team's compensation pick would come after Competitive Balance Round B, which follows the second round.
The following 16 teams qualify for these picks during the 2018-19 offseason: A's, Braves, Brewers, D-backs, Indians, Mariners, Marlins, Orioles, Padres, Pirates, Rays, Reds, Rockies, Royals, Tigers and Twins.
Examples: A team with one pick in each round of the 2019 Rule 4 Draft would lose its third-round pick. A team with two first-round picks and one pick in each subsequent round would lose its second-round pick.
• A team that neither exceeded the luxury tax in the preceding season nor receives revenue sharing will lose its second-highest selection in the following year's Draft as well as $500,000 from its international bonus pool. If it signs two such players, it will also forfeit its third-highest remaining pick. The 12 clubs that fall into this category during the 2018-19 offseason are the Angels, Astros, Blue Jays, Cardinals, Cubs, Dodgers, Giants, Mets, Phillies, Rangers, White Sox and Yankees.
Examples: A team with one pick in each round of the 2019 Rule 4 Draft would lose its second-round pick. A team with two first-round picks would lose its second-highest first round-pick.
The Draft-pick compensation is also based on the financial status of the free agent's former team.
If a free agent who rejected a qualifying offer signs a contract that is worth at least a guaranteed $50 million in total value, and his previous club is one of the teams that receives revenue sharing, said club will be given a compensatory pick immediately following Round 1 in the next year's Draft. If such a club loses a free agent for a contract worth less than a guaranteed $50 million in total value, the club will receive a compensatory pick after Competitive Balance Round B (which follows the second round).
If a qualifying-offer free agent's previous team is over the luxury-tax threshold, said team will receive a compensation pick after the fourth round has been completed. If a team neither exceeded the luxury tax in the preceding season nor receives revenue sharing, its compensatory pick will come after Competitive Balance Round B. The value of the free agent's new contract has no impact on the compensation pick in both of these cases.
Like standard Draft picks, compensatory picks in a given tier are ordered in accordance with the previous season's standings. If a team with MLB's worst record and a team with a .500 record both lose a free agent that signs for more than $50 million, the team with the worst record would receive the higher of the two compensatory picks.
Players who are unsigned after the start of the Rule 4 Draft in the year that follows the rejection of their qualifying offer are no longer tied to draft pick compensation and can be signed without their new club needing to forfeit a draft pick.
History of the rule
Under the 2012-16 Collective Bargaining Agreement, players had one week to accept or decline the qualifying offer.
A club that signed a player who rejected a qualifying offer had to surrender its best unprotected pick -- any pick that didn't fall in the top 10 -- in the subsequent Rule 4 Draft. If the club's best pick fell in the top 10, it had to surrender its next-best pick instead. If a club signed more than one player that rejected a qualifying offer, it had to surrender its best and second-best unprotected picks.
Free-agent compensation picks were awarded after the natural first round of the Draft and before Competitive Balance Round A.