Overtime Rules for Agencies and PR Firms

On May 18, 2016, the Department of Labor released new rules that determine which employees are exempt from overtime.  Under the old rules, employees in professional services firms fell under a variety of exemptions for professional, creative, or administrative jobs as long as they were paid at least $23,660.  Under the new rules, employers will be required to pay time-and-a-half overtime to any employee paid less than $47,476.

While many firms already pay more than the new minimums, for others these changes will involve a significant change.  For example, the average salaries at junior levels in Public Relations Firms are 37,500 for Account Coordinators and $40,750 for Assistant Account Executives.  Salaries in advertising agencies start out at $37,438 and, on average, don’t rise above the new threshold until employees have over four years of experience.

Based on our analysis, these changes could lead to a 10%-20% reduction in profits for many agencies, and a 2-5 percentage point decrease in margin.  Other groups have estimated the impact even higher.  As with any business decision with such a strong impact on firm financials, leaders need to examine their options and make the right decisions for their business.  To help, we’ve prepared this set of resources to help firms make the right decisions for their people, their clients, and their businesses about how to best adapt to these new rules.

Frequently Asked Questions

The new rule relates to the Fair Labor Standards Act,a federal law originally passed in 1938 that standardized the 40-hour work week, set standards for overtime pay, outlawed child labor, and established a federal minimum wage.  The law has been amended a number of times since, to cover things like employment discrimination or change how people were categorized by the law.

This new rule relates to who employers categorize as exempt from overtime.  The law provides a number of exemptions from overtime requirements for salaried employees in certain fields, but only if they made more than a certain amount.  In May, the Department of Labor raised that amount to $47,476, more than double the old limit of $23,660.  After December 1st, 2016, any employee who makes less than $47,476 per year will need to be paid overtime for any time worked past 40 hours in a given workweek.  

That depends.  If everyone in your agency is already paid more than $47,476 per year, probably not.  The same holds true if you keep everyone below this level to a firm 40-hour week.  In those cases, not much will change.

In most cases, this new rule will affect firms that have a large number of junior staff, who are typically paid less than the threshold and who work long hours.  In those cases, firms

Firms that restrict themselves to a 40-hour work week will probably have to adjust some of their time tracking and management policies to make sure they

Raising salaries to become compliant is the simplest solution, but it’s also the most costly.  Even if firms go this route, it’s likely that there are second-order conditions to consider.  For instance, when you raise junior salaries, you have to consider the next levels up as well.  Firms need to think through the entire dynamic this will have on their talent model, how to communicate it to employees, how to manage expectations with other stakeholders, and what it means for their work.
Not at all!  Compensation is one part of an interlinking talent management strategy.  A big change in how you compensate people will have ramifications throughout the firm.  Consider the following two questions:

  1. Should we have our junior team handle monitoring work, our outsource it to specialists? For many firms, entry-level work involves long hours doing monitoring or data collection that could be done more efficiently by specialists, but that helps the associates build knowledge about clients and practices.  Once associates are more expensive, will it still make economic sense to keep this work in house?
  2. Should we give middling performers time to develop?  Traditionally, the first few years in any agency were spent learning about the work, the clients, and most importantly, how to behave to a certain level of professional standards.  Low salaries meant it was possible to give people time to develop, which also meant that managers could be a little more lenient about performance.  When this situation changes, not only will firms have to be more disciplined about performance management, but managers and project leaders will need to be able to effectively provide feedback, help people grow, and make hard decisions if people aren’t working out.
No.  There are no exemptions based on firm size.  Whether you’re employing one person or one-million, the same rules apply.  There are also no exemptions based on industry: non-profits and public sector employers are held to the same standards.
Some firms might try to skirt the new rules by hoping they don’t get caught, that employees will be too timid to take action, or through fancy accounting tricks.  This is a bad idea for three reasons.  First, it’s wildly unethical – ethics breaches in one area of the business tend to seep into others, undermining client trust and your entire brand.  Second, the penalties can be significant: up to $10,000 per employee, plus double the overtime wages you originally owed.  Third, it’s not just employees who can report violations.  In addition to state and federal agencies tasked with enforcing the rules, there’s also the IRS, who will  come after you for unpaid payroll taxes with significant penalties.
Not necessarily.  While many firms will simply raise salaries, that can be an expensive proposition.  In our models, we’ve seen significant cost savings for some firms and lifestyle improvements for their employees when firms considered other options.  The three options firms have are:

  • Raising Salaries, usually at all levels, in order to meet the new threshold
  • Offering overtime makes sense at firms where long hours are minimal or seasonal, rather than an ongoing experience
  • Hiring more people makes sense if the work can easily be spread out among a larger number of junior staff and work life balance is important

Each of these approaches comes with different opportunities and trade-offs.  For instance, firms that opt to pay overtime will need to train managers and adjust how employee track time, but the end result may be more equitable treatment for employees and a better financial outcome for the firm.

Up to 10% of the new salary threshold ($4,747) can be met with non-discretionary bonuses or other forms of incentive compensation like performance bonuses or commissions.  This helps many firms that may have had lower salaries, but had generous incentive plans or profit sharing.

When using bonuses to meet the new threshold, there are two things to consider.  First, the bonuses must be non-discretionary, meaning whether or not an employee receives them is set by some sort of objective factor, such as a firm-wide profit target, revenue goal, or business development quota.

Second, if the bonus isn’t paid out, and the employee’s total compensation falls below the new threshold, you’ll owe the overtime for any time that they worked beyond 40 hours in any week.  That could create a compliance nightmare if you were relying on all of your employees being exempt.

As part of our general guidance around compensation, we also recommend keeping variable compensation smaller at lower levels in your firm.  Employees at this level have less influence over whether or not goals are hit, which makes it frustrating for them to see their compensation outside their direct control.  Further, a bonus can’t be used to pay for recurring monthly expenses like rent or meals, which means that the bonus isn’t as meaningful to their lifestyle as straight salary compensation.  Finally, early in their careers promotion possibility is a much stronger incentive than bonuses, especially if the bonuses are non-discretionary, which means that the bonus is more about the firm balancing risk (it’s only paid if the firm has enough money) than changing behavior.  Asking your most junior employees to take on that risk isn’t in their best interests or the interests of the firm.

What should I do?

The worst thing you can do is nothing – this is a legal requirement.  But simply raising one category of salaries won’t do the job either, because you’ll probably need to give raises further up in the organization.  There are other effects to consider, like, or how the change will impact your clients.

The best thing to do is to use this as an opportunity to think through your overall compensation structure and talent model and to make sure it’s the right fit for how your business operates.  If you’re going to raise salaries or start paying overtime, now is also a good time to make sure your policies and procedures are appropriate.

In consultation with employment attorneys, human resources professionals, accountants, and our own management consulting team, we’ve developed a holistic approach to helping firms analyze their options, make a decision, and implement the changes necessary to bring their firm into compliance.  Our methodology is unique in that we look beyond compensation to think through the impact these changes will have on your culture, your clients, and your business.

Our approach:

  • Uses your firms’ own compensation and time tracking data to estimate what it would take to bring your firm into compliance under three different scenarios
  • Audits your firm’s talent management practices to assess the impact any changes will have on your culture, development plans, and client work
  • Works with your senior leaders in two workshops to make the right decisions for your business
  • Helps you plan a communication strategy for rolling out any changes you plan to make

Still have questions?  We’re offering free consultations to interested agencies looking to understand the new rules.

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