Why small agencies outside NY and LA are the real losers in overtime expansion

With more workers below the threshold, and less financial wiggle room, smaller agencies in secondary markets see new rules as an existential threat.

In a move that will have enduring consequences for both the ad industry and American business in general, last week the Department of Labor doubled the salary threshold for overtime pay for all U.S. workers. A quarter of employees at American ad agencies could be owed more compensation, and agencies have only 6 months to give it to them.

Holding companies and large agencies have mobilized their legal teams and human resources departments to scrutinize all 508 pages of the new rule to develop plans for implementation. But the agencies that might end up being the most affected are small or independent shops, particularly those in markets outside of New York and Los Angeles.

Not only are such agencies likely to have far more employees with salaries under the new threshold of $47,476, they tend to have less financial wiggle room to make the large-scale changes that the new rules will require, say agency owners and industry observers.

"Agencies are being squeezed on margins these days, and that's particularly true of the smaller shops," said Peter Kosmala, SVP for government relations at the American Association of Advertising Agencies. "Everything that's being endured by the marketplace as a whole is only exacerbated at the smaller scale that indie shops operate within."

Kosmala, who’s been lobbying against the new rules in Washington, cited smaller operating budgets and "less latitude in distributing costs or cushioning certain expense increases" that can’t just be shifted to subsidiaries or endured for a few quarters.

"Ours is a small business," said Matt White, chairman and CEO of White64, an agency in Tysons Corner, Virginia, outside Washington, D.C. "Our margins are thin. It’s not like I’ve got money sitting around to pay people for that. It’s not like our clients are going to jump up and say, ‘Hey, I’ll pay you another 10% or 15%’ for services they’re already receiving. That isn’t going to happen."

One size does not fit all
Not surprisingly, salaries at agencies outside of major cities also tend to be lower than those in New York or Los Angeles. For example, assistant art directors in New York City averaged salaries of $57,004 last year, while their counterparts in the D.C. area, Detroit, and all throughout the South and Southwest averaged around $40,000, according to 4As data. (The cost of living in Detroit, for example, is 42% of Manhattan’s, according to the Council for Community and Economic Research, which compiles cost-of-living data.)

"$47,000 in New York City and $47,000 in Rochester, New York, are two very different things," said Sharon Napier, CEO of Partners + Napier, a Project Worldwide shop based in Rochester, with an office in New York City. The cost of living in Rochester is 44% of NYC’s, and average ad industry wages are 50% lower, according to the US Bureau of Labor Statistics.

The data shows large agencies tend to pay higher starting salaries than small agencies, as well. In 2015, the average salary for an assistant copywriter at an agency with more than 500 employees was $53,309, according to the 4A’s — well above the new threshold. But the average salary for the same position at agencies with 50 or fewer employees was only $40,188.

Taken together, being small and located outside of a major U.S. city means bad news for agencies playing catch-up to the new rules. Though the adjustment will be painful for agencies of all size, it is the more obscure shops in less-visible parts of the country that may end up paying the greatest cost for the industry’s failure to stay competitive on entry-level salaries.

"Businesses that choose to operate in lower-cost states will be disproportionately penalized," said David Bohan, chairman of Bohan Advertising in Nashville. "This in effect sets a national salary floor. No consideration was given for a variation in the cost-of-living index."

The path forward
Though companies have until December 1 to comply with the new rules, ad agencies have a variety of plans for accommodating them. Napier plans to keep salaries below the threshold the same and pay the overtime, diverting funds from perks or spot bonuses.

"Something’s going to have to go," she said, though she denied that the additional costs would affect pitches or the agency’s competitiveness. "It’ll come out of human costs — it’ll come out of the cost-to-income ratio that agencies have to live with it."

Bohan Advertising has 23 employees below the threshold and is considering cutting back on some client services, like all-day marketing events that quickly rack up overtime hours.

"Being unable to provide these types of services could lead to layoffs," Bohan warned.

But he’s more concerned about employees just above the threshold.

"The real impact will be for the person with a couple of years experience that is making $58,000," he said. "Now, in order to make them feel valued, you need to invest another $10,000 per year."

At SmithGifford, an agency in Falls Church, Virginia, three of the 15 employees have salaries below the threshold. Founder Matt Smith plans to give raises to those who are just below it.

"But I’m going to be a lot more diligent about those in the $25,000 to $35,000 range, those people you’re going to take a risk on," he said.

For future hires, he may "change the structure of how I employ those people," he added, possibly starting some off as freelancers.

"Or I wouldn’t employ them. That’s the scary part of all this." (White is also considering freelancers at the entry level. Currently, 10% of White64’s 52 employees are below the threshold.)

Higher salaries, less training
Like seemingly all agency owners, Smith admits that the overtime laws were in need of an update. But he and many of his colleagues are concerned that the changes his company must make to accommodate the new reality will end up hurting those employees the most. Deservedly or not, small agencies are often seen as fertile training grounds for talent. But proper training takes patience and time — two things small agencies may struggle to afford after December 1.

Smith spoke of hard workers who might need more time to get up-to-speed than they would be allowed at a larger shop.

"I have a young starter, first time out of school, and he spent 10 hours on something that would have taken me an hour. I can’t bill the client 10 hours for that. Yet neither should I have to pay that kid eight hours of overtime."

Napier worries about the young talent that wants to stay late at the office.

"That great work ethic someone might have — they want to learn, be around, explore — we have to tell them to go home," she said. "We’re going to manage their time like it’s a McDonald’s or something, and that makes no sense."

Some small-agency owners also noted that they have long used generous benefit packages to compensate for their lower salaries. And while the new overtime rule does allow businesses to apply commissions and bonuses to account for up to 10% of the threshold, it doesn’t factor in other benefits like health insurance or vacation time.

"My frustration is this government mandate of salaries without any consideration for benefits or commitment to work-life balance that we offer our people," said White. Employees at White64 get unlimited paid-time-off, three months paid maternity leave, and paid sabbaticals. "It forces companies like ours that offer competitive salaries with exceptional benefits to reevaluate our benefits package."

Clients 'don’t give a shit'
Of course, the new rules were never intended to benefit small-business owners. Fifty years ago, 60% of Americans qualified for overtime compensation. Today, that number has dipped to a mere 8%, a number the Obama administration and labor advocates have long called unacceptable. If small agency owners can’t find the money to pay their most junior workers what the government says they are entitled to, they could have an even harder time finding people to feel bad for them.

"Will some small employers and potentially even nonprofits be under strain at first as they're adjusting to this? I think that's a real possibility," said Angela Cornell, clinical professor of law at Cornell Law School. "But on the other hand, having somebody making $25,000 working 60 hours a week, that's just unconscionable. It's an invitation for exploitation."

And not every small agency is worried about the impact of the new rules. Of the 72 employees at Tank Design, a marketing agency based in Cambridge, Massachusetts, only two have salaries below the threshold.

"My hunch is that we will be able to manage workflow to mitigate much, if not all, of the effect of the policy," said Scott Watts, principal at Tank. "And when not possible, a shared burden between client and Tank will make the impact nominal."

But the idea that clients will consider the new rules "a shared burden" is one of the major question marks hovering over the industry. While some are confident that clients will foot the bill for the talent assigned to their account, others point to the decades-long trend of advertisers applying downward pressure on their agencies to provide more and more value, with little regard to the health of the agency business itself.

White, for one, is skeptical of those who say personnel costs can be passed along to clients.

"They are not going to pay," he said. "I can guarantee clients are not going to pay more. I either absorb it and work at a loss, or I resign the business."

"You know that they’re going to say? ‘I don’t give a shit’ is what they would say."

This story originally appeared on Campaign.

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