The BackPage Weekly | What can Premier League clubs learn from the Everton decision?
By Alex Harvey and Nii Anteson
Much has been said of the severity of the 10-point deduction imposed on Everton as a result of its breach of the Premier League’s Profitability and Sustainability Rules (the “PSR”). However, rather than summarising the PSR or the Commission’s decision as a whole, we thought it would be useful to take a closer look at some of the key insights and practical takeaways which Premier League clubs should be alive to.
The EFL also has a very similar Profit and Sustainability framework, so many of the principles discussed in this piece will be just as relevant to EFL clubs.
⚽ Approach to Sanctions – A Formulaic Approach?
For most EPL clubs, perhaps the most notable aspect of the decision is the Commission’s hardline approach to sanctions. The 10-point deduction is, in the Commission’s own words, a “significant penalty”, but how exactly did it reach that conclusion?
Firstly, it is worth noting that the Commission rejected an argument made by the Premier League that a formulaic approach should be taken. The EPL had advocated for a presumption that the appropriate penalty should always be a points deduction, with a fixed starting position of 6 points, and a further increase of one point for every £5m by which the club exceeded the PSR threshold of £105m.
Interestingly, the Commission “recognised the attraction of a regulator imposing a structured formula… which would fully inform clubs of the consequences of PSR breaches” – leaving the door open for the new independent regulator to take such an approach. It also noted that the Premier League could amend its own rules (to impose a mandatory structured formula) if it wanted to.
Nevertheless, it decided that, in this case, the Premier League’s formulaic approach would be inconsistent with the current rules (which allow for wide discretion).
Key Takeaway:
Following the significant 10-point deduction handed down to Everton, EPL clubs might prefer greater certainty in the form of a mandatory formulaic approach to sanctions (which a Commission would be required to comply with). EPL clubs may therefore consider pushing for such a change to the PSR, albeit it may soon be taken out of their hands by the incoming independent regulator in any event.
⚽ Approach to Sanctions – Punishing the Offending Club
So, what approach did the Commission take? Firstly, it considered the purpose of a sanction for breach of the PSR. In its view, the primary purpose is to “punish the transgressing club”. The Commission will not be “swayed by sympathy” in circumstances where clubs already have the benefit of a “generous threshold” of £105m, and the breaching club will have enjoyed a sporting advantage for each of the seasons on which the PSR calculations were based.
It then went on to consider the aggravating and mitigating factors (discussed further, below) before ruling on the nature and quantification of the sanction. As to the nature of the sanction, the Commission was in no doubt that a points deduction was appropriate:
“We have no doubt that the circumstances of this case are such that only a sporting sanction in the form of a points deduction would be appropriate. A financial penalty for a club that enjoys the support of a wealthy owner is not a sufficient penalty. We agree with the Premier League that the requirements of punishment, deterrence, vindication of compliant clubs, and the protection of the integrity of the sport demand a sporting sanction in the form of a points deduction.”
Key Takeaway:
The Commission did not view a financial penalty as sufficient “for a club that enjoys the support of a wealthy owner”, a factor which will likely be relevant if either Chelsea or Manchester City are found to have breached the PSR.
EPL clubs should also note the Commission’s conviction that a points deduction was necessary to meet the requirements “of punishment, deterrence, vindication of compliant clubs, and the protection of the integrity of the sport”.
In terms of the quantification of the sanction, the Commission relied on its broad discretion: “There is no fixed formula to be applied: we are required to determine the extent of the culpability, and from that to determine the points deduction. That requires the exercise of our discretion as a specialist panel.”
The Commission ultimately concluded that Everton’s breach of the PSR was entirely “of its own making” – it had overspent on new players and “taken chances with its PSR position”. In the Commission’s view, “this was a serious breach which requires a significant penalty”.
⚽ Mitigating Factors – Ukraine, Player X and Covid-19
As above, the Commission will have regard to any mitigating factors when deciding the appropriate sanction. Everton advanced several arguments, but there are three in particular which deserve further consideration:
Ukraine
Everton argued that the Russian invasion of Ukraine was a mitigating factor as it had led to the club pulling out of a £10m per year stadium naming rights agreement with a Russian company (which was caught by the UK government sanctions). The Commission rejected this argument and noted that “the loss of a proposed agreement, even when that agreement might have been thought likely, is the type of event that businesses experience. It is not something that can stand as diminishing Everton’s culpability”.
Key Takeaway:
EPL Clubs charged with a breach of the PSR are unlikely to be able to rely on ‘lost’ revenue from speculative commercial agreements as a mitigating factor. When planning for PSR compliance, clubs would therefore be well-advised to take a risk-averse approach and not place too much reliance on uncertain future-facing commercial revenue.
Player X
Everton also pointed to the fact that one of its star players, ‘Player X’, had been arrested in July 2021 and subsequently suspended by the FA from all football activity. Everton dismissed the Player in August 2021 and received advice from its lawyers that it could bring a £10m claim against Player X for breach of his employment contract.
The club ultimately decided not to pursue the claim out of concern for the player’s psychological wellbeing, but nevertheless argued that it should be entitled to credit for that decision not to sue. The Commission disagreed: “The circumstances surrounding Everton’s claimed losses are the sort of events that occur in the management of football clubs where a player’s services and value can be lost for a variety of reasons – most obviously because of injury, or a loss of form. It is not something that can stand as mitigation in these proceedings”.
Key Takeaway:
Player injuries, loss of form, and analogous events such as arrests or bans from football activity are, in the Commission’s view, part and parcel of running a football club. Clubs are therefore unlikely to be successful in arguing that loss of player services (or potential transfer fees) are a mitigating factor for a breach of the PSR. This may appear harsh, particularly as players can be a club’s most valuable asset, but the Commission’s decision makes it clear that clubs should nevertheless take a cautious approach and not place too much reliance on player transfer value.
Covid-19
Similarly, Everton also argued that it had planned to sell 8 players in the summer 2020 transfer window for a combined value in excess of £80m, and its failure to do so was a result of a depressed transfer market caused by Covid-19. The Commission rejected that proposition, and instead accepted the Premier League’s submission that Everton’s difficulties were caused by wider market forces, rather than the impact of Covid. The Commission also noted that EPL clubs had already benefitted from the Premier League’s Covid guidance, which allowed for certain Covid-related costs to be excluded from the PSR calculations.
Key Takeaway:
Clubs are expected to plan for untoward eventualities and will not be given much leeway by the Commission in respect of matters such as the wider transfer market. As the Commission put it, “the ability to sell players is inherently uncertain. Events and market forces (including the fact of a club’s PSR challenges) may operate against a selling club. Third, these are the types of events that a club is expected to have in mind when planning its expenditure: it needs to plan for untoward eventualities. The PSR threshold of £105 million provides clubs with a generous ceiling within which to operate, and, with prudent planning and budgeting, provides considerable protection against untoward events”.
Interestingly, the Commission acknowledged that “the fact of a club’s PSR challenges” may operate against that club in the transfer market. This was a point which Everton had raised, arguing that industry-wide knowledge that it was facing PSR difficulties caused potential purchasers for their players to drive a hard bargain (they specifically referenced Tottenham’s purchase of Richarlison for £60m, rather than their own £80m valuation).
EPL clubs should be alive to this – not only in terms of ensuring they do not devalue their players through encountering PSR difficulties – but also in terms of their own incoming transfer strategy, as clubs facing PSR challenges may be prepared to offload their players at below market value.
⚽ Transfer Levy
Under the PSR, clubs are permitted to exclude from the PSR calculation certain costs incurred on matters which the EPL recognises to be in the general interest of football. One of those permitted exclusions is for ‘Youth Development Expenditure’, which is defined as “expenditure by a Club directly attributable to activities to train, educate and develop Academy Players”.
Separately, EPL clubs are required to pay (to the Premier League) a 4% levy on transfer fees. This is used to fund a footballers’ pension scheme, and any surplus is distributed by the Premier League to the Professional Game Youth Fund.
Everton sought to argue that this surplus should fall within the definition of ‘Youth Development Expenditure’ and could therefore be excluded from the PSR calculation. The Commission roundly rejected this argument. Firstly, it noted that historically neither Everton nor any other club had sought to make a deduction from the PSR calculation in this way. Secondly, and perhaps more importantly, as a matter of pure construction, the payment made by Everton was the transfer levy; it was not expenditure in respect of youth development.
Key Takeaway:
This sets a clear precedent for all Premier League clubs when submitting their PSR calculations – there is no room for argument that the transfer levy surplus is a permitted exclusion.
The Commission was also critical of an Everton representative who stated under cross-examination that an element of his job was “to protect or interpret the PSR rules to the benefit of my employer”. Taking a somewhat ‘creative’ approach to PSR calculations is likely to be treated with short thrift by the Commission, which instead pointed to the obligation under Rule B.15 for all clubs (and their representatives) to act in utmost good faith.
⚽ Joinder of Third-Party Clubs
A number of clubs which were relegated from the Premier League during the relevant seasons (Leeds, Nottingham Forest, Southampton, Leicester and Burnley) made applications to become parties to the complaint.
They pointed to W.27 of the Premier League’s rules, which states that “the Commission may indicate…that if the complaint is upheld, it may wish to exercise its power under Rule W.51.5 to award compensation to any Person or to any Club… The Commission may then make appropriate directions as to the receipt of evidence of loss from the relevant Club”.
In an interim ruling back in May 2023, the Commission rejected those applications. It noted that W.27 only gave the Commission limited powers; it did not extend to admitting clubs claiming compensation as parties to the complaint. To do so would, in the Commission’s view, “lead to procedural chaos”.
Key Takeaway:
In the context of Manchester City’s and Chelsea’s alleged breaches of the P&S Rules, third party clubs which might be considering compensation claims would be well-advised not to incur time and costs applying to become parties to the initial complaint; an application which is, in light of the above, highly unlikely to succeed. Instead, the Commission has the power to award compensation to such third-party clubs and may invite such clubs to submit evidence as to their losses for consideration by the Commission at a separate, subsequent compensation hearing.
Of course, third party clubs may instead seek to recover their losses via a separate claim before the courts. Readers may recall that Sheffield United famously brought a court claim against West Ham after its acquisition of Carlos Tevez, who helped the club avoid relegation at Sheffield’s expense, was ruled a breach of third-party ownership rules. Sheffield’s claim was ultimately settled for a reported £15-20m.