The NFL Network reported that Bailey got a five-year deal worth $17.5 million, including a $4.3 million signing bonus.
The 6-3, 235-pounder joins his older brother, Champ, to give Denver its third set of brothers in franchise history -- joining Eldon and William Danenhauer (1960) and Dave and Doug Widell (1990-92).
"I think this is a good deal for everyone involved," Bailey's agent, Jack Reale, told The Denver Post.
Boss Bailey, a second-round draft pick by the Detroit Lions in 2003 out of Georgia, started at least 11 games in each of the last three seasons.
In his four-year NFL career, he has compiled 265 tackles (195 solo), seven sacks and two interceptions.
In 2007, he made career-high 3 1/2 sacks and 47 tackles in 15 games.
The Bailey brothers sat together at Wednesday night's NBA contest between the Nuggets and Phoenix at Denver's Pepsi Center.
A knee injury forced Boss Bailey to miss the 2004 season.