Hiring cutbacks. Less travel. Benefit reductions. How agencies will deal with the new overtime rules

For the first time in a dozen years, agencies are preparing for new federal overtime rules. Many are getting creative about keeping their margins in check while not turning off junior staffers.

At the start of December, some agencies will reduce their junior-level hiring and offer fewer travel opportunities. Others will raise clients’ fees. And others still will scale back non-salary benefits.

The impetus: for the first time in 12 years and only the second time since 1975, the salary threshold at which businesses – including marketing and communications firms – will double, this time to $47,500. That means salaried staff taking home less than that amount will be entitled to time-and-a-half overtime when they work more than 40 hours a week.

More than a half-dozen small- to mid-size PR firms say they’re still coming to grips with the pending requirement.

"We’re still in the process of developing a solution that doesn’t penalize employees or clients for a regulatory move that we feel will negatively impact small business," wrote one agency president in an e-mail. (Several agency leaders who spoke with PRWeek asked not to be identified).

Realizing the cost, several organizations are pushing back against the impending rule change. In recent weeks, there have been legal challenges to the Fair Labor Standards Act update, including a lawsuit from 21 states that say it will be too much for their budgets to handle. The U.S. Chamber of Commerce has also filed a challenge, joined by individual businesses, local chambers, and other business associations. They claim doubling the threshold, currently at $23,600 (or $455 per week), is too much, too soon.

The rule change will cost businesses $338.5 billion over 10 years, or nearly $37 billion in the first year and $33.5 billion each following year, according to the Chamber. It says employers could be forced to lay off staffers.

The rule change is also facing political pushback. The House of Representatives approved a measure in September to delay the change by six months. President Barack Obama has issued a statement promising to veto any such bill.

Yet with the effective date looming and Democratic presidential nominee Hillary Clinton increasing her lead in the polls, PR agencies must be ready to comply with the new rules, say experts. If they fail to do so, they could expose themselves to investigation by the Labor Department or class-action litigation, says Michael Lasky, senior partner at the law firm of Davis & Gilbert, where he leads the PR practice group and co-chairs the litigation department. (Lasky is also a regular columnist for PRWeek).

"I would advise agencies to put none of their eggs [in the hope it gets squashed]," he says. "The idea [that it could be delayed before December 1] is beyond fantasy land."

Salary increases unlikely
The goal of the overtime pay change is to protect staffers from being taken advantage of by their employers – and many PR agencies are guilty of asking low-level teams to work 70- and 80-hour work weeks for no extra pay.

One option to avoid paying overtime is to bump up salaries to meet the threshold. This may be feasible in large markets such as New York, San Francisco, and Washington, D.C., where junior-level salaries are typically higher than in the rest of the country.  

The median PR salary nationally for an account coordinator is $37,500 and $40,700 for an assistant account executive, according to the 2016 PRWeek/Bloom, Gross & Associates Salary Survey. The median annual pay for an account executive is $48,800, which just clears the salary threshold by about $1,000.

Agency leaders say that unless an employee is very close to that threshold, boosting salaries is a short-sighted and problematic solution. More than likely, agencies will keep account coordinators and assistant account executives below that threshold and accept paying them overtime. They say putting assistant account executives and account executives in the same pay-scale ballpark would create animosity, recruiting and retention challenges, and an unintentional blurring of roles. Also, it could be a pay cut for staffers whose annual take-home pay and overtime far exceeds the threshold.

And if firms aren’t very careful, the strategy could inadvertently cost them much more money than just the difference to reach the threshold, lawyers say. In addition to salary, an employee’s job function also determines exempt vs. non-exempt employment status in the eyes of the Labor Department.

This is called the "duties test." An employee can only be considered exempt, for example, if he or she has the ability to use independent judgement and discretion when making decisions. By this reasoning, an account coordinator and or assistant account executive wouldn’t qualify for exemption from overtime pay, though it would depend on his or her official written job description.

"Having someone over the base salary minimum is not a safe harbor or get out-of-jail free option on overtime," explains Lasky. "If an agency spends more money to get them to that salary threshold but haven’t attended to the job function to meet that duties test, they’ll end up having to pay overtime on a higher salary. Now it becomes even more costly to the employer."

"Employers need to review their job descriptions," advises Lasky. "You don’t want an audit to come back and work against the agency."

The PR Council has recommended agencies gather their CEO, CFO, human resources leader, and legal counsel to determine the best course of action. Sara Ghazaii, the council’s VP and director of communications, says no one solution will work for all agencies.

"And to be honest, in another year’s time, agencies will probably have to re-evaluate it and determine if they did make the right approach," she says.

Ghazaii adds that agencies may find redundancies and opportunities to combine roles when reviewing job functions.

"If two jobs are similar, you could essentially merge them, and then account for the increase in salary," she says. "But this is where we stress the importance of having a deep knowledge of each job description to make sure it’s in line with the new law."

How agencies plan to deal
Agencies are considering several ways to keep overtime in-check and ensure it doesn’t erode profit margins. One common strategy is improving the tracking of employee hours through technology platforms, particularly at the non-exempt level.

Some agency leaders plan to offer more "comp days" to staff so they don’t incur overtime expenses during busy periods. Yet given the deadline-oriented nature of the business and client demands, executives concede they will have to pay more overtime than ever before, even if they shift staffers around based on hours worked.

Greg Matusky, president and founder of Gregory FCA, says his firm’s relatively new hires will be most negatively affected by the changes.

"We won’t be hiring as many people in [junior] roles, which is a sad thing, and we’re also going to tighten up on who we can send to trade shows and travel commitments," he says. "That is unfortunate because I want to get young people out there and exposed to new experiences."

He recalls recently traveling to New Orleans for businesses, which included a client dinner and walking up and down Bourbon Street.

"Young people love these opportunities, but if bringing them means having to pay an extra $3,000 because of overtime rules, that suddenly becomes a very expensive work dinner," he noted.

Several other agency leaders say work travel is a big concern. According to Jessica Golden Cortes, partner in the labor and employment practice group at Davis & Gilbert, there are nuances in the rule about what counts towards employee time not during business travel. For instance, if an employee is taking a train or flight to a business meeting during work hours, they are on-the-clock regardless of what they are doing during that time. Yet if the staffer is traveling off-hours and sleeping or reading a book, that does not count.

451 Marketing plans to offer comp time instead of overtime pay. "We’ve long had the policy that if you’ve worked overtime, then you can get some extra time off earlier or later in the week," says Nick Lowe, founding partner of the Boston agency.

He adds that the firm will also pay closer attention to employee hours.

"We’re trying to manage workloads for everybody, regardless if they’re exempt or non-exempt. Because if we have non-exempt workers who might have previously been doing some overtime, will that workload fall to people who are just slightly above that threshold? That is a fair question," notes Lowe. "We’re really trying to manage it so that doesn’t happen."

Another solution is passing increased staffing costs on to clients. Agency leaders are divided on that strategy. However, most say the onus should be on agencies to be creative about their staffing solution, rather than clients that are also preparing to comply with the measure.

Lowe says that on last-minute, intensive client requests, he’s willing to make the call.

"I think you can say to the client, ‘Look, we can make your deadline, but it will cost you more. Are you OK with that? Or do you want to revert to the prior timeframe?’ You just have to give them a choice," he says. "Just as we’ve been having conversations with our employees, we’re having the same conversation with our clients, as it is also affecting them. It comes down to managing client expectations, too."

Scott Allison, chairman and CEO of Allison+Partners, predicts the overtime rule "will require PR budgets to rise" over the long-term. He adds it could even result in more positions being created as agencies try to keep work-life balance in-check for all employees, a movement that gathers momentum year after year.

"Many firms took advantage of this situation [to overwork staff]," says Allison. "This might create more balance and more positions."

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