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Overtime Overhaul Has Big Implications for Ad Agencies

Proposal to expand eligibility for overtime pay in the U.S. could mean higher costs for agencies

by Nathalie Tadena

Advertising agencies, whose margins are already thin, have been facing ongoing pressure from clients trying to drive down their fees. Now the agencies may be facing a new financial headache courtesy of the U.S. government.

The Department of Labor is proposing changes to overtime pay that would make millions more Americans eligible for the extra compensation. The new rule would double the annual salary threshold that determines who can and can’t get paid overtime when their work exceeds 40 hours a week.

Full-time employees making less than $50,440 a year would be eligible for overtime pay if the changes go into effect. The Labor Department last month submitted its final proposed changes, putting it on track to publicly release the rule by July.

The updates to overtime eligibility may bring significant costs to a number of industries. One of those is the ad agency business, which has traditionally been dependent on lower-salaried, usually entry-level employees who work long hours to deliver campaigns for clients. A higher threshold for overtime eligibility could mean that agencies will have to raise entry-level salaries or be required to shell out more in overtime pay.

Those additional staffing costs, while beneficial for individual employees, may cut into agencies’ profit margins at a time when they are already being squeezed by marketers who are fighting for better prices or cutting back on the number of agencies they work with. Companies will likely have only 60 to 90 days to ensure they are in compliance if and when the new rule goes into effect, leaving managers scrambling.

“The workflow changes that will follow are pretty significant,” said Pivotal Research analyst Brian Wieser. “Not that it can’t be managed, but it will create a real change to people’s day-to-day lives.”

Mr. Wieser estimates that the potential shift in overtime rules could result in a one-time hit to ad holding companies’ operating income of about 3% to 4%. That short-term impact could be mitigated if agencies adjust by reducing base salaries for some employees to account for the addition of overtime pay or by outsourcing or automating some functions more aggressively. Plus, some of the increased staff expenses could be passed on to clients, he added.

According to data from the American Association of Advertising Agencies, roughly 25% of salaries in the advertising industry fall below $50,400. The average starting salary for entry-level employees in the industry was approximately $35,500 last year, up from about $27,300 a decade ago, the trade group’s data shows. Campaign US has previously highlighted the potential impact of the overtime rule changes on the advertising industry.

“We’re supportive of this notion of trying to create greater wage equality and greater workplace treatment, but we want to do it in a more constructive way,” said Peter Kosmala, senior vice president for government relations at the 4A’s. “There’s going to be demonstrable changes in terms of money and also in terms of office morale and how organizations work. It will be highly destructive across the board.”

With talent recruitment and retention already a major issue facing the ad industry, the legislative change provides an opportunity for agencies to show how much they value young and new employees, said Jay Haines, the founder of Grace Blue, a search firm that focuses on the advertising and marketing industries.

“It presents to all these agencies a chance to make a big statement about how they’re going to invest in talent,” Mr. Haines said.

However, Mr. Kosmala of the 4A’s said the proposed changes could have unintended consequences such as employees losing out on other benefits like paid time off or flexible work schedules. Small- and medium-size agencies in areas such as the Midwest and South, where salaries tend to be lower compared with the major cities on the coast given the significantly lower cost of living, will be especially hard hit, he added.

The 4As has called for capping the salary level at which employees are eligible for overtime at $35,490. The 4A’s suggested that change be phased in over the course of several years as opposed to the current requirement for companies to be in compliance within 60 to 90 days after the rule is finalized.

The 4A’s is part of a coalition called the Partnership to Protect Workplace Opportunity, which has cited a 2015 poll finding that 65 percent of adults prefer increasing the salary limit to no more than that amount, which represents a 50% increase to the current limit of $23,660.

The change would mean that many employees who previously weren’t eligible for overtime pay would now find themselves forced to abide by an hourly framework.

According to a survey conducted last year by WorldatWork, a nonprofit human resources association, 79% of compensation professionals said the proposed rule would have a negative impact on the reclassified employees’ morale. Nearly half of the survey’s respondents said they believe employees will have less job flexibility.

For Elite SEM, a digital marketing agency in New York City, a flexible work schedule and unlimited paid time off are among the agency’s major selling points to attract talent. The proposed changes would “disrupt the culture we’ve built,” said Jennifer Garrison, Elite SEM’s director of human resources.

“The impact would be so widespread as to what it might do to our flexibility as well as the profitability of the business,” Ms. Garrison said, adding that the agency is looking at changing the job descriptions of certain roles to prepare for the proposed changes. “A lot of the hands-off ability to let people manage themselves and take whatever vacation they need to take to get the right work-life balance might end up having to be re-evaluated.”

Agencies may opt to raise the base salaries of their employees to meet the minimum overtime threshold or keep salaries as they are and incur increased overtime costs. They could also cut base salaries to offset the costs or move some of the work that has traditionally been done by entry-level employees to the next tier of employees who aren’t eligible for overtime.

“It is challenging because the margins are becoming thinner and thinner,” Grace Blue’s Mr. Haines said.

Corrections & Amplifications

The 4As has proposed capping the salary for which employees must be paid overtime at $35,490. An earlier version of this article incorrectly stated that the 4As made the counter proposal with a coalition called the Partnership to Protect Workplace Opportunity. The 4As is part of the PPWO coalition but the PPWO has not endorsed a particular salary threshold.

Wall Street Journal