Jeremy Lin and Steve Novak will keep their so-called early Bird rights under a settlement reached Friday afternoon, giving the Knicks a huge boost on the eve of free agency.

The Knicks can now exceed the salary cap to re-sign Lin and Novak — for up to $5.3 million each — while maintaining maximum flexibility to pursue outside free agents.

Without the Bird rights, the Knicks would have been forced to use their midlevel exception to sign Lin and would almost certainly have lost Novak to free agency. Now they can retain both players and save the midlevel slot for another player.

The settlement is a victory for the players union, which has asserted all along that players who are claimed off waivers — as Lin and Novak were in December — should retain their Bird rights, just as a traded player does. The N.B.A. opposed that interpretation, but an arbitrator, Kenneth Dam, sided with the union in a ruling issued on June 22.