BARRETT BUSINESS SERVICES INC 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively. We believe this platform, delivered through a decentralized organizational structure, differentiates BBSI from our competitors. We report revenues in our financial results in two categories of services: professional employer services (“PEO”) and staffing. With our PEO clients, we enter into a co-employment arrangement in which we become the administrative employer while the client maintains physical care, custody and control of their workforce. Our PEO services are billed as a percentage of client payroll; the gross amount invoiced includes direct payroll costs plus an additional percentage amount to cover employer payroll-related taxes, workers’ compensation coverage (if provided), other service related costs and a margin. However, actual costs can be higher or lower than anticipated. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Revenues for PEO services exclude direct payroll billings because we are not the primary obligor for those payments. We generate staffing services revenues primarily from short-term staffing, contract staffing, on-site management and direct placement services. For staffing services other than direct placement, invoiced amounts include direct payroll, an amount intended to cover employer payroll-related taxes, workers’ compensation coverage, other service related costs and a margin. Staffing customers are invoiced weekly and typically have payment terms of 30 days. Direct placement services are billed at agreed fees at the time of a successful placement. Our business is concentrated in California, and we expect to continue to derive a majority of our revenues from this market in the future. Revenues generated in our California operations accounted for 73% of our total revenues in 2022, 73% in 2021 and 75% in 2020. Consequently, any weakness in economic conditions, changes in the regulatory or insurance environment, or natural disasters or other major events in California could have a material adverse effect on our financial results. Our cost of revenues for PEO services includes employer payroll-related taxes and workers' compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer's portion of Social Security and Medicare taxes, federal and state unemployment taxes and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers' compensation costs consist primarily of the costs associated with our workers' compensation program, including premiums for the insured program, claims reserves for the self-insured program, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, and costs associated with operating our two wholly owned insurance companies, AICE and Ecole. Selling, general and administrative expenses represent both branch office and corporate-level operating expenses. Branch operating expenses consist primarily of branch office staff payroll and personnel related costs, advertising, rent, office supplies, professional and legal fees and branch incentive compensation. Corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs, professional and legal fees, travel, occupancy costs, information systems costs, and executive and corporate staff incentive compensation. 23 Depreciation and amortization represent depreciation of property and equipment, leasehold improvements, software and internally developed software costs. Property, equipment, software and internally developed software costs are depreciated using the straight-line method over their estimated useful lives, which range from 3 to 39 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life. Critical Accounting Policies and Estimates We have identified the following accounting estimate as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of this and other accounting policies, see “Note 1 - Summary of Operations and Significant Accounting Policies” to the consolidated financial statements in Item 8 of Part II of this report. The preparation of this Annual Report on Form 10-K requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Workers' Compensation Reserves We recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by establishing a reserve that represents our estimates of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred. When a claim involving a probable loss is reported, our independent third-party administrator for workers’ compensation claims (“TPA”) establishes a case reserve for the estimated amount of ultimate loss. The estimate reflects a judgment based on established case reserving practices and the experience and knowledge of the TPA regarding the nature and expected amount of the claim, as well as the estimated expenses of settling the claim, including legal and other fees and expenses of claims administration. The adequacy of such case reserves depends in part on the professional judgment of the TPA to evaluate the economic consequences of each claim properly and comprehensively. Our reserves include an additional component for potential future increases in the cost to finally resolve open injury claims and claims incurred in prior periods but not reported (together, "IBNR") based on actuarial estimates provided by the Company’s independent actuary. IBNR reserves, unlike specific case reserves, do not apply to a specific claim but rather apply to the entire population of claims arising from a specific time period. IBNR primarily covers costs relating to: • Future claim payments in excess of case reserves on recorded open claims; • Additional claim payments on closed claims; and • Claims that have occurred but have not yet been reported to us. The process of estimating unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, modifications in reserve estimation procedures, changes in individuals involved in the reserve estimation process, inflation, trends in the litigation and settlement of pending claims, and legislative changes. Our estimates are based on actuarial analyses and informed judgment, derived from individual experiences and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves. 24 A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal company data and, if available and when appropriate, external data. Actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties. We believe that the amounts recorded for our estimated liabilities for workers’ compensation claims, which are based on informed judgment, analysis of data, actuarial estimates, and analysis of other trends associated with the Company’s historical universe of claims data, are reasonable. Nevertheless, adjustments to such estimates will be required in future periods if the development of claim costs varies materially from our estimates, and such future adjustments may be material to our results of operations. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements and their potential effect on the Company's results of operations and financial condition, see “Note 1 - Summary of Operations and Significant Accounting Policies” to the consolidated financial statements in Item 8 of Part II of this report. Forward-Looking Information Statements in this Item or in Items 1, 1A, 3 and 9A of this report include forward-looking statements, which are not historical in nature and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, discussion of economic conditions in our market areas and their effect on revenue levels, the lingering effects of the COVID-19 pandemic on our business operations, the competitiveness of our service offerings, the availability of certain fully insured medical and other health and welfare benefits to qualifying worksite employees beginning in 2023, our ability to attract and retain clients and to achieve revenue growth, the effect of changes in our mix of services on gross margin, the effect of tight labor market conditions, the adequacy of our workers' compensation reserves, the effect of changes in estimates of our future claims liabilities on our workers’ compensation reserves, including the effect of changes in our reserving practices and claims management process on our actuarial estimates, expected levels of required surety deposits and letters of credit, our ability to generate sufficient taxable income in the future to utilize our deferred tax assets, the effect of our formation and operation of two wholly owned licensed insurance subsidiaries, the risks of operation and cost of our insured program, the financial viability of our excess insurance carriers, the effectiveness of our management information systems, our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements, litigation costs, the effect of changes in the interest rate environment on the value of our investment securities, the adequacy of our allowance for doubtful accounts, and the potential for and effect of acquisitions. 25 All our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include: our ability to retain current clients and attract new clients; the effects of governmental orders, laws or regulations imposing requirements related to the COVID-19 pandemic; difficulties associated with integrating clients into our operations; economic trends in our service areas; the potential for material deviations from expected future workers’ compensation claims experience; changes in the workers’ compensation regulatory environment in our primary markets; security breaches or failures in the Company’s information technology systems; collectability of accounts receivable; changes in effective payroll tax rates and federal and state income tax rates; the carrying values of deferred income tax assets and goodwill (which may be affected by our future operating results); the effects of inflation on our operating expenses and those of our clients; the impact of and potential changes to the Patient Protection and Affordable Care Act, escalating medical costs, and other health care legislative initiatives on our business; the effect of conditions in the global capital markets on our investment portfolio; and the availability of capital, borrowing capacity on our revolving credit facility, or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insured employer for workers' compensation coverage or our insured program. Additional risk factors affecting our business are discussed in Item 1A of Part I of this report. We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Results of Operations The following table sets forth the percentages of total revenues represented by selected items in the Company's consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020, included in Item 8 of Part II of this report. Percentage of Total Net Revenues ($ in thousands) Years Ended December 31, 2022 2021 2020 Revenues: Professional employer services $ 937,363 88.9 % $ 843,815 88.3 % $ 777,430 88.3 % Staffing services 116,963 11.1 111,351 11.7 $ 103,394 11.7 Total revenues 1,054,326 100.0 955,166 100.0 880,824 100.0 Cost of revenues: Direct payroll costs 87,944 8.3 83,821 8.8 78,380 8.9 Payroll taxes and benefits 522,392 49.5 469,888 49.2 418,793 47.5 Workers’ compensation 209,145 19.8 196,949 20.6 200,744 22.8 Total cost of revenues 819,481 77.7 750,658 78.6 697,917 79.2 Gross margin 234,845 22.3 204,508 21.4 182,907 20.8 Selling, general and administrative expenses 169,642 16.1 155,259 16.3 141,916 16.1 Depreciation and amortization 6,228 0.6 5,326 0.6 4,844 0.5 Income from operations 58,975 5.6 43,923 4.6 36,147 4.1 Other income, net 6,328 0.6 6,738 0.7 6,449 0.7 Income before income taxes 65,303 6.2 50,661 5.3 42,596 4.8 Provision for income taxes 18,035 1.7 12,582 1.3 8,831 1.0 Net income $ 47,268 4.5 % $ 38,079 4.0 % $ 33,765 3.8 % 26 We report PEO revenues net of direct payroll costs because we are not the primary obligor for wage payments to our clients’ employees. However, management believes that gross billings and wages are useful in understanding the volume of our business activity and serve as an important performance metric in managing our operations, including the preparation of internal operating forecasts and establishing executive compensation performance goals. We therefore present for purposes of analysis gross billings and wage information for the years ended December 31, 2022, 2021 and 2020. Year Ended December 31, (in thousands) 2022 2021 2020 Gross billings $ 7,393,808 $ 6,569,986 $ 5,924,539 PEO and staffing wages 6,425,286 5,693,903 5,098,604 Because safety incentives represent consideration payable to PEO customers, safety incentive costs are netted against PEO revenue in our consolidated statements of operations. We therefore present below for purposes of analysis non-GAAP gross workers’ compensation expense, which represents workers’ compensation costs including safety incentive costs. We believe this non-GAAP measure is useful in evaluating the total costs of our workers’ compensation program. In July 2020, the Company began limiting its safety incentive offering in certain markets, resulting in a substantial reduction in safety incentive costs. Year Ended December 31, (in thousands) 2022 2021 2020 Workers' compensation $ 209,145 $ 196,949 $ 200,744 Safety incentive costs 1,852 2,985 23,544 Non-GAAP gross workers' compensation $ 210,997 $ 199,934 $ 224,288 In monitoring and evaluating the performance of our operations, management also reviews the following ratios, which represent selected amounts as a percentage of gross billings. Management believes these ratios are useful in understanding the efficiency and profitability of our service offerings. Percentage of Gross Billings Year Ended December 31, 2022 2021 2020 PEO and staffing wages 86.9 % 86.7 % 86.1 % Payroll taxes and benefits 7.0 % 7.2 % 7.1 % Non-GAAP gross workers' compensation 2.9 % 3.0 % 3.8 % Gross margin 3.2 % 3.1 % 3.1 % The presentation of revenue on a net basis and the relative contributions of staffing and PEO services revenue can create volatility in our gross margin as a percentage of revenue. A relative increase in PEO services revenue will result in a higher gross margin as a percentage of revenue. Improvement in gross margin percentage occurs because incremental client services revenue dollars are reported as revenue net of all related direct payroll and safety incentive costs. We refer to employees of our PEO clients as worksite employees (“WSEs”). Management reviews average and ending WSE growth to monitor and evaluate the performance of our operations. Average WSEs are calculated by dividing the number of unique individuals paid in each month by the number of months in the period. Ending WSEs represents the number of unique individuals paid in the last month of the period. Year Ended December 31, 2022 % Change 2021 % Change 2020 Average WSEs 122,001 8.0 % 112,928 4.3 % 108,249 Ending WSEs 122,306 5.3 % 116,154 6.3 % 109,292 27 Years Ended December 31, 2022 and 2021 Net income for 2022 was $47.3 million compared to net income of $38.1 million for 2021. Diluted net income per share for 2022 was $6.54 compared to diluted income per share of $5.00 for 2021. Revenue for 2022 totaled $1,054.3 million, an increase of $99.2 million or 10.4% over 2021, which reflects an increase in the Company’s PEO service revenue of $93.5 million or 11.1% and an increase in staffing services revenue of $5.6 million or 5.0%. The increase in PEO services revenues was primarily attributable to an increase in average number of WSEs as well as an increase in average billing per WSE. Gross margin for 2022 totaled $234.8 million or 22.3% of revenue compared to $204.5 million or 21.4% of revenue for 2021. The increase in gross margin as a percentage of revenues is primarily a result of the factors discussed within the separate components of gross margin below. Direct payroll costs for 2022 totaled $87.9 million or 8.3% of revenue compared to $83.8 million or 8.8% of revenue for 2021. The decrease in direct payroll costs as a percentage of revenues was primarily due to a decrease in staffing services within the mix of our customer base in 2022 as compared to 2021. Payroll taxes and benefits for 2022 totaled $522.4 million or 49.5% of revenue compared to $469.9 million or 49.2% of revenue for 2021. The increase in payroll taxes and benefits expense as a percentage of revenue was primarily due to the relative decrease in workers' compensation costs and an increase in federal payroll tax rates, partially offset by lower average state payroll tax rates in 2022. Workers’ compensation expense for 2022 totaled $209.1 million or 19.8% of revenue compared to $196.9 million or 20.6% of revenue for 2021. The decrease in workers’ compensation expense as a percentage of revenue was primarily due to favorable adjustments of $11.3 million related to prior period claims in 2022, compared to favorable adjustments of $9.2 million in 2021. Selling, general and administrative (“SG&A”) expenses for 2022 totaled $169.6 million or 16.1% of revenue compared to $155.3 million or 16.3% of revenue for 2021. The increase of $14.3 million in SG&A expense in 2022 was primarily attributable to increased employee related costs, as well as increased travel and marketing expenses due to more in-person meetings and events. Other income, net for 2022 totaled $6.3 million compared to other income of $6.7 million for 2021. The decrease was primarily attributable to a decrease in investment income in 2022. Our effective income tax rate for 2022 was 27.6% compared to 24.8% for 2021. Our income tax rate typically differs from the federal statutory tax rate of 21% primarily due to state taxes as well as federal and state tax credits. See “Note 8 - Income Taxes” to the consolidated financial statements included in Item 8 of Part II of this report for additional information regarding income taxes. A discussion of our financial condition and results of operations for 2021 compared to 2020 can be found in Part II, Item 7. Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 7, 2022. 28 Fluctuations in Quarterly Operating Results We have historically experienced significant fluctuations in our quarterly operating results, including losses or minimal income in the first quarter of each year, and expect such fluctuations to continue in the future. Our operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers’ compensation, demand for our services, and competition. Payroll taxes, as a component of cost of revenues, generally decline throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes and Social Security taxes are exceeded on a per employee basis. Our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers’ businesses in the agriculture, food processing and forest products-related industries. In addition, revenues in the fourth quarter may be reduced by many customers’ practice of operating on holiday-shortened schedules. Workers’ compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. In addition, positive or adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company’s estimated workers’ compensation expense. Liquidity and Capital Resources The Company's cash balance of $107.4 million, which includes cash, cash equivalents, and restricted cash, increased $28.7 million for the twelve months ended December 31, 2022, compared to a decrease of $155.2 million for the comparable period of 2021. The increase in cash at December 31, 2022 as compared to December 31, 2021 was primarily due to proceeds from the sales and maturities of investments and restricted investments, net income, increased accrued payroll, payroll taxes and related benefits, and increased other accrued liabilities, partially offset by decreased workers' compensation claims liabilities, repurchase of common stock, and purchase of property, equipment and software. Net cash provided by operating activities in 2022 amounted to $27.8 million, compared to net cash used of $15.5 million for the comparable period of 2021. In 2022, net cash provided by operating activities was primarily due to net income of $47.3 million, increased accrued payroll, payroll taxes and related benefits of $24.9 million and increased other accrued liabilities of $15.7 million, partially offset by decreased workers’ compensation claims liabilities of $64.2 million and increased trade accounts receivable of $8.1 million. Net cash provided by investing activities totaled $61.2 million in 2022, compared to net cash used of $112.9 million for the comparable period of 2021. In 2022, net cash provided by investing activities consisted primarily of proceeds from sales and maturities of investments and restricted investments of $81.5 million, partially offset by purchase of property, equipment and software of $16.0 million, and purchase of restricted investments of $4.3 million. Net cash used in financing activities in 2022 was $60.2 million compared to net cash used of $26.9 million for the comparable period of 2021. In 2022, net cash used in financing activities primarily consisted of repurchases of common stock of $47.2 million, dividend payments of $8.5 million and the payoff of the outstanding mortgage loan balance of $3.5 million. The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in a trust account (the “trust account”). The balance in the trust account was $188.2 million and $273.6 million at December 31, 2022 and December 31, 2021, respectively. The trust account balance is included as a component of the current and long-term restricted cash and investments in the Company’s consolidated balance sheets. See “Note 5 - Revolving Credit Facility and Long-Term Debt” to the consolidated financial statements included in Item 8 of Part II of this report for information regarding the Company’s credit agreement with Wells Fargo Bank, N.A. 29 Contractual Obligations The Company's contractual obligations as of December 31, 2022 are summarized below: As of December 31, 2022 Payments Due by Period (in thousands) Less than 1 - 3 4 - 5 After Total 1 Year Years Years 5 Years Operating leases (1) $ 24,624 $ 7,870 $ 10,303 $ 5,221 $ 1,230 Total contractual obligations $ 24,624 $ 7,870 $ 10,303 $ 5,221 $ 1,230 (1) As of December 31, 2022, the Company has additional operating leases that have not yet commenced of $1.7 million and remaining balances on short-term operating leases of $37,301. In January 2022, the Company paid off all of its long-term debt. Item 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates primarily relates to its investment portfolio and its outstanding borrowings on its line of credit. As of December 31, 2022, the Company’s investments consisted principally of approximately $104.0 million in corporate bonds, $57.3 million in U.S. treasuries, $53.1 million in mortgage backed securities, $41.0 million in money market funds, $31.4 million in U.S. government agency securities, $12.9 million in asset backed securities, $6.3 million in mutual funds and $2.0 million in emerging markets securities. Based on the Company's overall interest exposure at December 31, 2022, a 50 basis point increase in market interest rates would have a $5.9 million effect on the fair value of the Company's investment portfolio. At December 31, 2022, the Company had no outstanding borrowings on its line of credit. 30 Item 8. FINA NCIAL STATEMENTS AND SUPPLEMENTARY DATA REP ORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Barrett Business Services, Inc. Vancouver, Washington Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Barrett Business Services, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Workers' Compensation Claims Liabilities Workers’ compensation claims liabilities represent management’s estimate of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred as of a given 31 reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by the Company’s third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, IBNR). Workers’ compensation claims liabilities included case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, medical cost containment, legal costs, and unallocated loss adjustment expenses. The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes. The Company’s estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. The company considers significant facts and circumstances known both at the time that loss reserves are initially established, and as new facts and circumstances become known. Workers’ compensation claims liabilities as of December 31, 2022 were $216 million. Given the high degree of judgment required to estimate the value of the workers’ compensation claims liabilities, performing audit procedures to evaluate the workers’ compensation claims liabilities recorded for the year ended December 31, 2022, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the workers’ compensation claims liabilities included the following, among others: • We tested the effectiveness of controls related to workers’ compensation claims liabilities, including those involved in estimating the ultimate losses to be incurred for reported and unreported claims. • We tested the underlying data that is used as inputs into the actuarial analysis, including historical claims, to evaluate whether those inputs were reasonable. In addition, we assessed whether any changes in the business or environment, including legislative changes, interest rates, and claims handling practices, were appropriately considered in developing the estimate of ultimate losses to be incurred for reported and unreported claims. • With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by management to estimate the workers’ compensation claims liabilities by performing the following: o Compared management’s prior-year assumptions of expected claims development and ultimate loss to actuals incurred during the current year to identify and evaluate potential bias in the determination of the workers’ compensation claims liabilities. o Developed a range of independent estimates of the workers’ compensation claims liabilities, utilizing claim payment patterns, loss development factors, and future cost trends for workers’ compensation claims liabilities. We compared our estimated ranges to management’s estimates. o Read the Company’s reinsurance policies and compared the coverage and terms to the assumptions used by management. /s/ Deloitte & Touche LLP Portland, Oregon March 6, 2023 We have served as the Company's auditor since 2016. 32 Barre tt Business Services, Inc. Consolidated B alance Sheets December 31, 2022 and 2021 (In Thousands, Except Par Value) December 31, December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 91,423 $ 69,405 Investments 68,325 96,763 Trade accounts receivable, net 163,838 155,707 Prepaid expenses and other 19,787 17,606 Restricted cash and investments 110,989 67,238 Total current assets 454,362 406,719 Property, equipment and software, net 45,954 36,277 Operating lease right-of-use assets 19,804 20,697 Restricted cash and investments 104,277 232,965 Goodwill 47,820 47,820 Other assets 3,281 2,474 Deferred income taxes 11,440 - Total assets $ 686,938 $ 746,952 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ - $ 3,510 Accounts payable 8,264 4,485 Accrued payroll, payroll taxes and related benefits 222,331 199,067 Income taxes payable 610 1,673 Current operating lease liabilities 6,957 7,191 Other accrued liabilities 31,603 15,120 Workers' compensation claims liabilities 62,917 80,028 Safety incentives liability 2,049 4,322 Total current liabilities 334,731 315,396 Long-term workers' compensation claims liabilities 153,070 199,379 Deferred income taxes - 1,687 Long-term operating lease liabilities 14,225 14,598 Customer deposits and other long-term liabilities 7,070 7,362 Total liabilities 509,096 538,422 Commitments and contingencies (Notes 5, 7 and 11) Stockholders' equity: Common stock, $ .01 par value; 20,500 shares authorized, 6,871 and 7,415 shares issued and outstanding in 2022 and 2021, respectively 69 74 Additional paid-in capital 32,744 29,054 Accumulated other comprehensive (loss) income ( 27,594 ) 1,079 Retained earnings 172,623 178,323 Total stockholders' equity 177,842 208,530 Total liabilities and stockholders' equity $ 686,938 $ 746,952 The accompanying notes are an integral part of these consolidated financial statements. 33 Barrett Business Services, Inc. Consolidated Statem ents of Operations Years Ended December 31, 2022, 2021 and 2020 (In Thousands, Except Per Share Amounts) Year Ended December 31, 2022 2021 2020 Revenues: Professional employer services $ 937,363 $ 843,815 $ 777,430 Staffing services 116,963 111,351 103,394 Total revenues 1,054,326 955,166 880,824 Cost of revenues: Direct payroll costs 87,944 83,821 78,380 Payroll taxes and benefits 522,392 469,888 418,793 Workers' compensation 209,145 196,949 200,744 Total cost of revenues 819,481 750,658 697,917 Gross margin 234,845 204,508 182,907 Selling, general and administrative expenses 169,642 155,259 141,916 Depreciation and amortization 6,228 5,326 4,844 Income from operations 58,975 43,923 36,147 Other income (expense): Investment income, net 6,476 7,215 7,977 Interest expense ( 141 ) ( 372 ) ( 1,244 ) Other, net ( 7 ) ( 105 ) ( 284 ) Other income, net 6,328 6,738 6,449 Income before income taxes 65,303 50,661 42,596 Provision for income taxes 18,035 12,582 8,831 Net income $ 47,268 $ 38,079 $ 33,765 Basic income per common share $ 6.63 $ 5.05 $ 4.46 Weighted average number of basic common shares outstanding 7,130 7,540 7,577 Diluted income per common share $ 6.54 $ 5.00 $ 4.39 Weighted average number of diluted common shares outstanding 7,226 7,621 7,688 The accompanying notes are an integral part of these consolidated financial statements. 34 Barrett Business Services, Inc. Consolidated Statements of C omprehensive Income Years Ended December 31, 2022, 2021 and 2020 (In Thousands) Year Ended December 31, 2022 2021 2020 Net income $ 47,268 $ 38,079 $ 33,765 Unrealized (losses) gains on investments, net of tax of ($ 10,958 ), ($ 2,478 ), and $ 1,814 in 2022, 2021 and 2020, respectively ( 28,673 ) ( 6,485 ) 4,745 Comprehensive income $ 18,595 $ 31,594 $ 38,510 The accompanying notes are an integral part of these consolidated financial statements. 35 Barrett Business Services, Inc. Consolidated Statements of Stockholders' Equity Years Ended December 31, 2022, 2021 and 2020 (In Thousands) Accumulated Other Additional Comprehensive Common Stock Paid-in Income Retained Shares Amount Capital (Loss) Earnings Total Balance, December 31, 2019 7,514 $ 75 $ 20,227 $ 2,819 $ 148,678 $ 171,799 Common stock issued on exercise of options and vesting of restricted stock units 223 2 3,082 — — 3,084 Common stock repurchased on vesting of restricted stock units ( 27 ) — ( 1,417 ) — — ( 1,417 ) Share-based compensation expense — — 3,436 — — 3,436 Company repurchase of common stock ( 144 ) ( 1 ) ( 443 ) — ( 7,612 ) ( 8,056 ) Cash dividends on common stock ($ 1.20 per share) — — — — ( 9,121 ) ( 9,121 ) Unrealized gain on investments, net of tax — — — 4,745 — 4,745 Net income — — — — 33,765 33,765 Balance, December 31, 2020 7,566 $ 76 $ 24,885 $ 7,564 $ 165,710 $ 198,235 Common stock issued on exercise of options and vesting of restricted stock units 106 1 1,155 — — 1,156 Common stock repurchased on vesting of restricted stock units ( 20 ) — ( 1,465 ) — — ( 1,465 ) Share-based compensation expense — — 5,366 — — 5,366 Company repurchase of common stock ( 237 ) ( 3 ) ( 887 ) — ( 16,397 ) ( 17,287 ) Cash dividends on common stock ($ 1.20 per share) — — — — ( 9,069 ) ( 9,069 ) Unrealized loss on investments, net of tax — — — ( 6,485 ) — ( 6,485 ) Net income — — — — 38,079 38,079 Balance, December 31, 2021 7,415 $ 74 $ 29,054 $ 1,079 $ 178,323 $ 208,530 Common stock issued on exercise of options, purchase of ESPP shares and vesting of restricted stock units and performance awards 84 1 710 — — 711 Common stock repurchased on vesting of restricted stock units and performance awards ( 22 ) — ( 1,692 ) — — ( 1,692 ) Share-based compensation expense — — 7,390 — — 7,390 Company repurchase of common stock ( 606 ) ( 6 ) ( 2,718 ) — ( 44,444 ) ( 47,168 ) Cash dividends on common stock ($ 1.20 per share) — — — — ( 8,524 ) ( 8,524 ) Unrealized loss on investments, net of tax — — — ( 28,673 ) — ( 28,673 ) Net income — — — — 47,268 47,268 Balance, December 31, 2022 6,871 $ 69 $ 32,744 $ ( 27,594 ) $ 172,623 $ 177,842 The accompanying notes are an integral part of these consolidated financial statements. 36 Barrett Busi ness Services, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2022, 2021 and 2020 (In Thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 47,268 $ 38,079 $ 33,765 Reconciliations of net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,228 5,326 4,844 Non-cash operating lease expense 6,955 8,045 7,246 Investment amortization and losses recognized 1,859 1,433 587 Loss recognized on disposal of property and equipment 139 114 574 Deferred income taxes ( 2,169 ) ( 347 ) 5,492 Share-based compensation 7,390 5,366 3,436 Changes in certain operating assets and liabilities: Trade accounts receivable ( 8,131 ) ( 37,201 ) 45,055 Income taxes ( 1,063 ) 8,158 ( 5,150 ) Prepaid expenses and other ( 2,181 ) ( 1,645 ) ( 1,042 ) Accounts payable 3,779 ( 261 ) ( 1,247 ) Accrued payroll, payroll taxes and related benefits 24,916 49,739 ( 22,608 ) Other accrued liabilities 15,725 7,753 ( 1,671 ) Workers' compensation claims liabilities ( 64,222 ) ( 77,640 ) ( 80,783 ) Safety incentives liability ( 2,273 ) ( 14,505 ) ( 9,123 ) Operating lease liabilities ( 6,740 ) ( 7,886 ) ( 7,062 ) Other assets and liabilities, net 298 13 ( 228 ) Net cash provided by (used in) operating activities 27,778 ( 15,459 ) ( 27,915 ) Cash flows from investing activities: Purchase of property, equipment and software ( 15,973 ) ( 6,801 ) ( 8,610 ) Purchase of investments — ( 54,835 ) ( 65,738 ) Proceeds from sales and maturities of investments 18,732 75,256 47,922 Purchase of restricted investments ( 4,345 ) ( 253,781 ) ( 34,968 ) Proceeds from sales and maturities of restricted investments 62,740 127,298 65,535 Net cash provided by (used in) investing activities 61,154 ( 112,863 ) 4,141 Cash flows from financing activities: Proceeds from credit-line borrowings — 2,718 — Payments on credit-line borrowings — ( 2,718 ) — Payments on long-term debt ( 3,510 ) ( 221 ) ( 220 ) Repurchase of common stock ( 47,168 ) ( 17,287 ) ( 8,056 ) Common stock repurchased on vesting of stock awards ( 1,692 ) ( 1,465 ) ( 1,417 ) Dividends paid ( 8,524 ) ( 9,069 ) ( 9,121 ) Proceeds from exercise of stock options 711 1,156 3,084 Net cash used in financing activities ( 60,183 ) ( 26,886 ) ( 15,730 ) Net increase (decrease) in cash, cash equivalents and restricted cash 28,749 ( 155,208 ) ( 39,504 ) Cash, cash equivalents and restricted cash, beginning of period 78,629 233,837 273,341 Cash, cash equivalents and restricted cash, end of period $ 107,378 $ 78,629 $ 233,837 The accompanying notes are an integral part of these consolidated financial statements. 37 Barrett Business Services, Inc. Notes to Consolidated Financial Statements Note 1 - Summary of Operations and Significant Accounting Policies Nature of operations Barrett Business Services, Inc. (“BBSI” or the “Company”), is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively. We believe this platform, delivered through our decentralized organizational structure, differentiates BBSI from our competitors. The Company supports clients with a local presence in 68 markets throughout the United States. Approximately 73 %, 73 % and 75 %, respectively, of our revenue during 2022, 2021 and 2020 was attributable to our California operations. BBSI was incorporated in Maryland in 1965. The Company operates a wholly owned, fully licensed captive insurance company, Associated Insurance Company for Excess ("AICE") and a wholly owned, fully licensed insurance company, Ecole. AICE and Ecole provide access to more competitive and cost-effective insurance markets and provide cost-effective risk management. See “Note 4 - Workers’ Compensation Claims” for additional information in the Company’s insurance programs. Principles of consolidation The accompanying financial statements are prepared on a consolidated basis. All intercompany account balances and transactions between BBSI, AICE, and Ecole have been eliminated in consolidation. Reportable segment The Company has one operating and reporting segment. The chief operating decision maker (our Chief Executive Officer) regularly reviews the financial information of our business at a consolidated level in deciding how to allocate resources and in assessing performance. Revenue recognition Professional employer (“PEO”) services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Staffing revenues relate primarily to short-term staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related revenue is recognized, as services are rendered by our workforce. Our PEO client service agreements have a minimum term of one year , are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party. In addition, our client service agreements provide for immediate termination upon any payment default of the client regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Staffing customers are generally invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days. The amount of earned but unbilled revenue is classified as a receivable on the consolidated balance sheets. 38 We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. We also present revenue net of safety incentives, because these incentives represent consideration payable to customers. Cost of revenues Our cost of revenues for PEO services includes employer payroll-related taxes and workers' compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer's portion of Social Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers' compensation costs consist primarily of premiums paid to third-party insurers, claims reserves, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, as well as costs associated with operating our two wholly owned insurance companies, AICE and Ecole. Cash and cash equivalents We consider non-restricted short-term investments that are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three months to be cash equivalents for purposes of the consolidated statements of cash flows and consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration. Investments The Company classifies investments as available-for-sale. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders' equity. Investments are recorded as current on the consolidated balance sheets as the invested funds are available for current operations. Management considers available evidence in evaluating potential impairment of investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of investments are included in investment income in our consolidated statements of operations. 39 Restricted cash and investments The Company holds restricted cash and investments primarily for the future payment of insurance premiums and workers’ compensation claims. These investments are categorized as available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Restricted cash and investments are classified as current and noncurrent on the consolidated balance sheets based on the nature of the restriction. Management considers available evidence in evaluating potential impairment of restricted investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of restricted investments are included in investment income in our consolidated statements of operations. Restricted cash and investments also includes investments held as part of the Company’s deferred compensation plan. These investments are classified as trading securities and are recorded at fair value with unrealized gains and losses reported as a component of income (loss) from operations. Concentration of Credit Risk Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, investments, restricted cash and investments, and trade accounts receivable. We limit investment of cash equivalents and investments to financial institutions with high credit ratings. Credit risk on trade accounts is minimized as a result of the large and diverse nature of our customer base. Allowance for doubtful accounts The Company had an allowance for doubtful accounts of $ 893,000 and $ 460,000 at December 31, 2022 and 2021, respectively. We make estimates of the collectability of our accounts receivable for services provided to our customers based on future expected credit losses. Management analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers' payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates resulting in an impairment of their ability to make payments, additional allowances may be required. Our allowance for doubtful accounts activity is summarized as follows (in thousands): 2022 2021 2020 Balance at January 1, Allowance for doubtful accounts $ 460 $ 757 $ 888 Charges to expense 462 193 125 Write-offs of uncollectible accounts, net of recoveries ( 29 ) ( 490 ) ( 256 ) Balance at December 31, Allowance for doubtful accounts $ 893 $ 460 $ 757 40 Income taxes Our income taxes are accounted for using an asset and liability approach. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. A valuation allowance is recorded against deferred tax assets if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The factors used to assess the likelihood of realization include the Company’s forecast of the reversal of temporary differences, future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities. The tax benefit is measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement. As facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Goodwill and intangible assets Goodwill is recorded as the difference, if any, between the aggregate consideration paid for a business combination and the fair value of the net assets acquired. Goodwill is not amortized but is evaluated for impairment annually, or more frequently if circumstances indicate that it is more likely than not that the fair value of the reporting unit is below its carrying value. The Company has one reporting unit and evaluates the carrying value of goodwill annually at December 31. No impairment has been recognized in the periods presented. Property, equipment and software Property, equipment and software are stated at cost. Expenditures for maintenance and repairs are charged to selling, general and administrative expenses as incurred and expenditures for additions and improvements to property and equipment are capitalized. The cost of assets sold or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is reflected in the consolidated statements of operations. We capitalize software development costs incurred during the application development stage, which is the stage when preliminary project planning ends and software development begins. Capitalized costs generally include both internal and external costs associated with coding and testing. Capitalized costs are amortized on a straight-line basis over the estimated useful life, commencing when the software is placed into service. Costs incurred during the preliminary project stage and the postimplementation stage, as well as general and administrative and overhead costs, are expensed as they are incurred. Depreciation of property and equipment and amortization of software is calculated using the straight-line method over estimated useful lives of the related assets or lease terms, as follows: Years Buildings 39 Equipment, furniture and fixtures 7 - 15 Computer hardware, software and software development costs 3 - 10 Leasehold improvements 1 - 7 41 Impairment of long-lived assets Long-lived assets, such as property, equipment and software and acquired intangibles subject to amortization, are reviewed for impairment annually, or whenever events or changes in circumstances indicate that the remaining estimated useful life may warrant revision or that the carrying amount of an asset may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are not limited to, significant under-performance relative to expected and/or historical results, significant negative industry or economic trends, or knowledge of transactions involving the sale of similar property at amounts below the carrying value. Assets are grouped for measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows expected to be generated by the asset group, then an impairment charge is recognized to the extent the carrying amount exceeds the asset group’s fair value. In determining fair value, management considers current results, trends, future prospects, and other economic factors. Leases The Company leases office facilities and equipment under operating leases. We determine whether an arrangement is or contains a lease at inception. For all leases with a term greater than 12 months, we record our operating lease liabilities and right-of-use (ROU) assets at the lease commencement date. Operating lease liabilities are based on the present value of future minimum lease payments over the lease term, and include options to renew a lease in the future minimum lease payments if it is reasonably certain that the Company will exercise that option. ROU assets are based on the lease liability, adjusted for any lease prepayments and lease incentives. If a lease does not provide an implicit interest rate, we use our incremental borrowing rate on a collateralized basis from the information available at commencement date in determining the present value of lease payments. We recognize expense for lease payments on a straight-line basis over the lease term for operating leases. Leases with initial terms of 12 months or less are considered short-term lease costs and are not recorded as ROU assets on the consolidated balance sheets. ROU assets are reviewed for impairment in the same manner as long-lived assets. No impairment has been recorded in the periods presented. The Company has elected the practical expedient not to separate non-lease components from lease components for all classes of assets. Our lease agreements generally do not contain material variable lease payments or restrictive covenants. Workers’ compensation claims liabilities Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by our third-party administrator for workers’ compensation claims, coupled with an actuarial estimate of future loss development with respect to reported claims and incurred but not reported claims (together, “IBNR”). Workers’ compensation claims liabilities include case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, unallocated loss adjustment expenses and estimated future recoveries. The estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond one year is included in long-term liabilities on our consolidated balance sheets. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known. 42 The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes. Our estimates are based on actuarial analysis and informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves. A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties. Safety incentives We accrue for and present expected safety incentives as a reduction of revenue. Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers' compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third-party administrator. In July 2020, the Company began limiting its safety incentive offering in certain markets. The Company provided $ 2.0 million and $ 4.3 million at December 31, 2022 and 2021 , respectively, as an estimate of the liability for unpaid safety incentives. Customer deposits We require deposits from certain PEO customers to cover a portion of our accounts receivable due from such customers in the event of default of payment. Comprehensive income Comprehensive income includes all changes in equity during a period except those that resulted from investments by or distributions to the Company's stockholders. Other comprehensive income refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principles (“GAAP”) are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity. Our other comprehensive income comprises unrealized holding gains and losses on our available-for-sale investments. 43 Statements of cash flows Interest paid in 2022, 2021 and 2020 did not materially differ from interest expense. Income taxes paid by the Company totaled $ 21.0 mil lion, $ 4.7 million, and $ 8.5 million in 2022, 2021 and 2020, respectively. Bank deposits and other cash equivalents that are restricted for use are classified as restricted cash. The table below reconciles the cash, cash equivalents and restricted cash balances from our consolidated balance sheets to the amounts reported on the consolidated statements of cash flows (in thousands): December 31, December 31, December 31, 2022 2021 2020 Cash and cash equivalents $ 91,423 $ 69,405 $ 68,688 Restricted cash, included in restricted cash and investments 15,955 9,224 165,149 Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 107,378 $ 78,629 $ 233,837 Basic and diluted earnings per share Basic earnings per share are computed based on the weighted average number of common shares outstanding for each year using the treasury method. Diluted earnings per share reflect the potential effects of the issuance of shares in connection with the exercise of outstanding stock options, vesting of outstanding restricted stock units and performance share units, and the Company’s employee stock purchase plan. Basic and diluted shares outstanding are summarized as follows (in thousands): Year Ended December 31, 2022 2021 2020 Weighted average number of basic shares outstanding 7,130 7,540 7,577 Effect of dilutive securities 96 81 111 Weighted average number of diluted shares outstanding 7,226 7,621 7,688 Accounting estimates The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions. These affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are used for fair value measurement of investments, allowance for doubtful accounts, deferred income taxes, carrying values for goodwill and property, equipment and software, accrued workers' compensation liabilities and safety incentive liabilities. Actual results may or may not differ from such estimates. Recent accounting pronouncements There were no new or pending accounting pronouncements in 2022 that had, or will have, a material impact on our results of operations or financial condition. 44 Note 2 - Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All of our financial instruments are recognized in our consolidated balance sheets. Carrying values approximate fair value of most financial assets and liabilities. Investments and restricted cash and investments are recorded at market value. The interest rates on our investments approximate current market rates for these types of investments. In determining the fair value of our financial assets, the Company predominately uses the market approach. In determining the fair value of all its corporate bonds, mortgage backed securities, U.S. treasuries, U.S. government agency securities, mutual funds, money market funds, asset backed securities, and emerging markets, the Company utilizes non-binding quotes provided by our investment brokers. Factors used in determining the fair value of our financial assets and liabilities are summarized into three levels as established in the fair value hierarchy framework. The three levels of the fair value hierarchy are described below. Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 – Inputs to the valuation methodology include: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • Inputs other than quoted prices that are observable for the asset or liability; • Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. 45 In determining the fair value measurement of our financial assets, the fair value measurement level within the hierarchy is based on the lowest level input and is applied to each financial asset. Valuation techniques are used to maximize the use of observable inputs and minimize the use of unobservable inputs. The following table summarizes the Company’s investments at December 31, 2022 and 2021 measured at fair value on a recurring basis (in thousands): December 31, 2022 December 31, 2021 Gross Gross Unrealized Unrealized Gains Recorded Gains Recorded Cost (Losses) Basis Cost (Losses) Basis Current: Cash equivalents: Money market funds $ 40,296 $ — $ 40,296 $ 13,384 $ — $ 13,384 Total cash equivalents 40,296 — 40,296 13,384 — 13,384 Investments: Corporate bonds 38,489 ( 5,181 ) 33,308 41,954 ( 136 ) 41,818 Mortgage backed securities 16,135 ( 3,139 ) 12,996 18,089 ( 440 ) 17,649 Asset backed securities 13,709 ( 737 ) 12,972 29,533 ( 38 ) 29,495 U.S. government agency securities 7,369 ( 302 ) 7,067 7,383 418 7,801 Emerging markets 2,044 ( 62 ) 1,982 — — — Total current investments 77,746 ( 9,421 ) 68,325 96,959 ( 196 ) 96,763 Restricted cash and investments (1) : Corporate bonds 81,993 ( 11,296 ) 70,697 117,700 ( 17 ) 117,683 U.S. treasuries 66,479 ( 9,222 ) 57,257 67,614 ( 342 ) 67,272 Mortgage backed securities 46,138 ( 6,045 ) 40,093 64,217 764 64,981 U.S. government agency securities 26,479 ( 2,156 ) 24,323 32,898 1,281 34,179 Mutual funds 6,301 — 6,301 6,273 — 6,273 Money market funds 646 — 646 528 — 528 Asset backed securities 9 — 9 107 1 108 Total restricted cash and investments 228,045 ( 28,719 ) 199,326 289,337 1,687 291,024 Total investments $ 346,087 $ ( 38,140 ) $ 307,947 $ 399,680 $ 1,491 $ 401,171 (1) Included in restricted cash and investments within the consolidated balance sheets as of December 31, 2022 and 2021 is restricted cash of $ 15.9 million and $ 9.2 million, respectively, which is excluded from the table above. Restricted cash and investments are classified as current and noncurrent on the balance sheet based on the nature of the restriction. 46 The following table summarizes the Company's investments at December 31, 2022 and 2021 measured at fair value on a recurring basis by fair value hierarchy level (in thousands): December 31, 2022 December 31, 2021 Total Total Recorded Recorded Basis Level 1 Level 2 Level 3 Other (1) Basis Level 1 Level 2 Level 3 Other (1) Cash equivalents: Money market funds $ 40,296 $ — $ — $ — $ 40,296 $ 13,384 $ — $ — $ — $ 13,384 Investments: Corporate bonds 33,308 — 33,308 — — 41,818 — 41,818 — — Mortgage backed securities 12,996 — 12,996 — — 17,649 — 17,649 — — Asset backed securities 12,972 — 12,972 — — 29,495 — 29,495 — — U.S. government agency securities 7,067 — 7,067 — — 7,801 — 7,801 — — Emerging markets 1,982 — 1,982 — — — — — — — Restricted cash and investments: Corporate bonds 70,697 — 70,697 — — 117,683 — 117,683 — — U.S. treasuries 57,257 — 57,257 — — 67,272 — 67,272 — — Mortgage backed securities 40,093 — 40,093 — — 64,981 — 64,981 — — U.S. government agency securities 24,323 — 24,323 — — 34,179 — 34,179 — — Mutual funds 6,301 6,301 — — — 6,273 6,273 — — — Money market funds 646 — — — 646 528 — — — 528 Asset backed securities 9 — 9 — — 108 — 108 — — Total investments $ 307,947 $ 6,301 $ 260,704 $ — $ 40,942 $ 401,171 $ 6,273 $ 380,986 $ — $ 13,912 (1) Investments in money market funds measured at fair value using the net asset value per share practical expedient are not subject to hierarchy level classification disclosure. The Company invests in money market funds that seek to maintain a stable net asset value. These investments include commingled funds that comprise high-quality short-term securities representing liquid debt and monetary instruments where the redemption value is likely to be the fair value. Redemption is permitted daily without written notice. 47 The following table summarizes the contractual maturities of the Company’s available for sale securities at December 31, 2022 and 2021. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. The table also includes money market funds, which are classified as cash and cash equivalents on the Company’s consolidated balance sheets. December 31, 2022 (In thousands) Less than 1 Year Between 1 to 5 Years Between 5 to 10 Years After 10 Years Total Corporate bonds $ 646 $ 50,439 $ 52,920 $ — $ 104,005 U.S. treasuries 440 3,405 53,412 — 57,257 Money market funds 40,539 — — — 40,539 U.S. government agency securities 3,943 24,025 3,422 — 31,390 Asset backed securities — 9 2,113 10,859 12,981 Emerging markets — 1,982 — — 1,982 Total $ 45,568 $ 79,860 $ 111,867 $ 10,859 $ 248,154 December 31, 2021 (In thousands) Less than 1 Year Between 1 to 5 Years Between 5 to 10 Years After 10 Years Total Corporate bonds $ 24,601 $ 35,570 $ 99,180 $ 150 $ 159,501 U.S. treasuries 953 4,295 62,024 — 67,272 U.S. government agency securities — 25,171 16,809 — 41,980 Asset backed securities — 108 2,200 27,295 29,603 Money market funds 13,657 — — — 13,657 Total $ 39,211 $ 65,144 $ 180,213 $ 27,445 $ 312,013 The average contractual maturity of mortgage backed securities, which are excluded from the table above, was 24 years and 23 years as of December 31, 2022 and 2021 , respectively. Note 3 - Property, Equipment and Software Property, equipment and software consists of the following (in thousands): December 31, 2022 2021 Buildings $ 16,862 $ 16,857 Equipment, furniture and fixtures 24,407 14,671 Computer hardware and software 6,408 11,458 Software development costs 28,631 23,332 76,308 66,318 Less accumulated depreciation and amortization ( 31,844 ) ( 31,531 ) 44,464 34,787 Land 1,490 1,490 $ 45,954 $ 36,277 We recognized $ 3.4 million, $ 3.1 million and $ 3.4 million in depreciation expense associated with our property and equipment in 2022, 2021 and 2020 , respectively. We recognized $ 2.8 million, $ 2.2 million, and $ 1.4 million in amortization of capitalized software development costs in 2022, 2021 and 2020 , respectively. We capitalized $ 5.3 million, $ 5.0 million and $ 6.0 million of software development costs in 2022, 2021 and 2020 , respectively. 48 Note 4 - Workers' Compensation Claims The following table summarizes the aggregate workers' compensation reserve activity (in thousands): Years Ended December 31, 2022 2021 2020 Beginning balance Workers' compensation claims liabilities $ 279,407 $ 357,746 $ 438,986 Add: claims expense accrual Current period 19,146 75,786 147,097 Prior periods ( 11,337 ) ( 9,225 ) ( 6,383 ) 7,809 66,561 140,714 Less: claim payments related to Current period 4,450 15,063 22,877 Prior periods 67,581 129,138 198,620 72,031 144,201 221,497 Change in claims incurred in excess of retention limits 802 ( 699 ) ( 457 ) Ending balance Workers' compensation claims liabilities $ 215,987 $ 279,407 $ 357,746 Incurred but not reported (IBNR) $ 110,824 $ 153,838 $ 210,798 Ratio of IBNR to workers' compensation claims liabilities 51 % 55 % 59 % Insured program The Company provides workers’ compensation coverage for client employees primarily through arrangements with fully licensed, third-party insurers (the “insured program”). Under this program, carriers issue policies or afford coverage to the Company’s clients under a program maintained by the Company. Approximately 83 % of the Company’s workers’ compensation exposure is covered through the insured program. The Company entered into a new arrangement for its insured program effective July 1, 2021 whereby third-party insurers assumed all risk of loss for claims incurred from July 1, 2021 to June 30, 2022 (the “2021-2022 Policy”). The 2021-2022 Policy allows for premium adjustments depending on overall policy performance. If claims develop favorably, BBSI can participate in the savings up to $ 20.0 million for the twelve-month policy period. If claims develop adversely, additional premium may be charged up to $ 7.5 million for the twelve-month policy period. Effective July 1, 2022, the Company renewed the arrangement for its insured program, which now continues through June 30, 2023 (the “2022-2023 Policy”). Under the renewed arrangement, the Company can participate in savings up to $ 22.5 million for the twelve-month policy period. For the 2022-2023 Policy, no additional premium may be charged if claims develop adversely. The 2022-2023 Policy includes a renewal commitment through June 30, 2024. For claims incurred under the insured program prior to July 1, 2021, the Company retains risk of loss up to the first $ 3.0 million per occurrence on policies issued after June 30, 2020 and $ 5.0 million per occurrence on policies issued before that date. 49 On June 29, 2020, the Company entered into a loss portfolio transfer agreement (“LPT 1”) to remove all outstanding workers’ compensation claims obligations for claims incurred under its insured program between February 1, 2014 and December 31, 2017. This transaction reduced the Company’s outstanding workers’ compensation liabilities and trust account balances by $ 115.7 million. On June 30, 2021, the Company entered into a loss portfolio transfer agreement (“LPT 2”) to remove all remaining outstanding workers’ compensation claims obligations for client policies issued under its insured program up to June 30, 2018. This transaction reduced the Company’s outstanding workers’ compensation liabilities by $ 53.1 million. The following is a summary of the risk retained by the Company under its insured program after considering the effects of the loss portfolio transfers and current insurance arrangements: Year Claims risk retained 2014 No 2015 No 2016 No 2017 No 2018 (1) No 2019 (1) Yes 2020 Yes 2021 - Through June 30 Yes 2021 - July 1 and after No 2022 No ( 1) LPT 2 excluded approximately 10 % of claims from 2018 and included an approximately offsetting amount of claims from 2019. The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in a trust account (the “trust account”). The balance in the trust account was $ 188.2 million and $ 273.6 million at December 31, 2022 and December 31, 2021, respectively. The trust account balance is included as a component of the current and long-term restricted cash and investments in the Company’s condensed consolidated balance sheets. Self-insured programs The Company is a self-insured employer with respect to workers' compensation coverage for all employees, including employees of PEO clients that elect to participate in our workers’ compensation program, working in Colorado, Maryland and Oregon. In the state of Washington, state law allows only the Company's staffing services and internal management employees to be covered under the Company's self-insured workers' compensation program. The Company also operates a wholly owned, fully licensed insurance company, Ecole, which provides workers’ compensation coverage to client employees working in Arizona and Utah. Approximately 17 % of the Company’s workers’ compensation exposure is covered through self-insurance or Ecole (the “self-insured programs”). For all claims incurred under the Company’s self-insured programs, the Company retains risk of loss up to the first $ 3.0 million per occurrence, except in Maryland and Colorado, where the Company’s retention per occurrence is $ 1.0 million and $ 2.0 million, respectively. For claims incurred under the Company’s self-insured programs prior to July 1, 2020, the Company retains risk of loss up to the first $ 5.0 million per occurrence, except in Maryland and Colorado, where the retention per occurrence is $ 1.0 million and $ 2.0 million, respectively. The states of California, Maryland, Oregon, Washington, Colorado and Delaware required the Company to maintain collateral totaling $ 54.5 million and $ 58.4 million at December 31, 2022 and 2021, respectively, to cover potential workers’ compensation claims losses related to the Company’s current and former status as a self-insured employer. At December 31, 2022 , the Company provided surety bonds totaling $ 54.5 million, including a California requirement of $ 22.3 million. 50 Claims liabilities The Company provided a total of $ 216.0 million and $ 279.4 million at December 31, 2022 and 2021 , respectively, as an estimated future liability for unsettled workers' compensation claims liabilities. Of this amount, $ 3.0 million and $ 2.2 million on December 31, 2022 and 2021 , respectively, represent case reserves incurred in excess of the Company’s retention. The accrual for costs incurred in excess of retention limits is offset by a receivable from insurance carriers of $ 3.0 million and $ 2.2 million at December 31, 2022 and 2021 , respectively, included in other assets in the consolidated balance sheets. Note 5 - Revolving Credit Facility and Long-Term Debt The Company maintains an agreement (the “Agreement”) with Wells Fargo Bank, N.A. (the "Bank") for a revolving credit line of $ 50.0 million and a sublimit for standby letters of credit of $ 8.0 million. Advances under the revolving credit line bear interest, as selected by the Company, of (a) the daily Simple Secured Overnight Financing Rate ("SOFR") plus 1.75 % or (b) one-month Term SOFR plus 1.75 %. The Agreement also provides for an unused commitment fee of 0.30 % per year on the average daily unused amount of the revolving credit line, as well as a fee of 1.75 % of the face amount of each letter of credit reserved under the line of credit. The Company had no outstanding borrowings on its revolving credit line at December 31, 2022 and 2021. The credit facility is collateralized by the Company’s accounts receivable and other rights to receive payment. The Agreement requires the satisfaction of certain financial covenants as follows: • adjusted free cash flow [net profit after taxes plus interest expense (net of capitalized interest), depreciation, expense and amortization expense, less dividends/distributions] not less than $ 10 million as of each fiscal quarter end, determined on a rolling 4-quarter basis; and • tangible net worth [aggregate of total stockholders' equity plus subordinated debt less any intangible assets and less any loans or advances to, or investments in, any related entities or individuals] not less than $ 100 million at each fiscal quarter end. The Agreement imposes certain additional restrictions unless the Bank provides its prior written consent as follows: • incurring additional indebtedness is prohibited, other than purchase financing for the acquisition of assets, provided that the aggregate of all purchase financing does not exceed $ 1 million at any time; • the Company may not terminate or cancel any of the AICE policies; and • if an event of default would occur, and is continuing, including on a pro forma basis, no dividends or distributions would be permitted to be paid and redemptions and repurchases of the Company’s stock would be permitted only up to $ 15 million in any rolling 12-month period. The Agreement also contains customary events of default and specified cross-defaults under the Company's workers' compensation insurance arrangements. If an event of default under the Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Agreement to be immediately due and payable. At December 31, 2022, the Company was in compliance with all covenants. The Company maintained a mortgage loan with the Bank with a balance of approximately $ 3.5 million at December 31, 2021. On January 31, 2022, the Company paid the outstanding balance of the mortgage loan. 51 Note 6 - Benefit Plans We have a 401(k) Retirement Savings Plan for the benefit of our eligible employees. Employees covered under a PEO arrangement may participate in the plan at the sole discretion of the PEO client. We make matching contributions to the 401(k) plan under a safe harbor provision. The determination of any discretionary Company contributions to the plan is at the sole discretion of our Board of Directors. No discretionary Company contributions were made to the plan for the years ended December 31, 2022, 2021 and 2020 . We made matching contributions of $ 2.1 million, $ 1.9 million and $ 1.8 million in 2022, 2021 and 2020, respectively. The Company allows certain highly compensated employees of the Company to defer compensation under a nonqualified deferred compensation plan. The long-term portion of the deferred compensation plan liability was $ 5.8 million and $ 6.3 million at December 31, 2022 and 2021 , respectively, and is recorded in customer deposits and other long-term liabilities on the consolidated balance sheets. The current portion of the deferred compensation plan liability was $ 1.0 million and $ 0.2 million at December 31, 2022 and 2021 , respectively, and is recorded in other accrued liabilities on the consolidated balance sheets. The fair value of the long-term portion of this plan was $ 6.7 million and $ 6.3 million at December 31, 2022 and 2021 , respectively, and is recorded in noncurrent restricted cash and investments on the consolidated balance sheets. The fair value of the current portion of this plan was $ 1.0 million and $ 0.2 million at December 31, 2022 and 2021 , respectively, and is recorded in current restricted cash and investments on the consolidated balance sheets. Note 7 - Leases The Company primarily leases office buildings under operating leases which are included in Operating lease right-of-use (“ROU”) assets, Current operating lease liabilities, and Long-term operating lease liabilities on the consolidated balance sheets. The Company’s leases have remaining terms of 1 to 7 years . Information related to the Company's total lease costs was as follows (in thousands): Year Ended December 31, 2022 December 31, 2021 Operating lease cost $ 7,747 $ 8,957 Variable lease cost 1,310 689 Short-term lease cost 165 94 Total lease cost $ 9,222 $ 9,740 Information related to the Company's ROU assets and related lease liabilities was as follows (in thousands): Year Ended December 31, 2022 December 31, 2021 Cash paid for operating lease liabilities $ 7,607 $ 8,854 Right-of-use assets obtained in exchange for new operating lease obligations 6,591 5,717 December 31, 2022 December 31, 2021 Weighted-average remaining lease term 3.8 years 3.6 years Weighted-average discount rate 4.1 % 3.6 % 52 The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancellable operating leases with terms of more than one year to the total operating lease liabilities recognized on the consolidated balance sheets as of December 31, 2022 (in thousands): 2023 $ 7,624 2024 5,915 2025 3,747 2026 2,685 2027 1,859 Thereafter 1,027 Total undiscounted future minimum lease payments 22,857 Less: Difference between undiscounted lease payments and discounted operating lease liabilities 1,675 Total operating lease liabilities $ 21,182 Current operating lease liabilities $ 6,957 Long-term operating lease liabilities 14,225 Total operating lease liabilities $ 21,182 The Company has additional operating leases of $ 1.7 million that have not commenced as of December 31, 2022 , and as such, have not been recognized in the Company’s Consolidated Balance Sheets. These operating leases are expected to commence in 2023 with lease terms of 5 years. 53 Note 8 - Income Taxes The provision for income taxes is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Current: Federal $ 14,683 $ 9,527 $ 2,943 State 5,529 3,408 396 20,212 12,935 3,339 Deferred: Federal ( 1,096 ) 143 4,156 State ( 1,081 ) ( 496 ) 1,336 ( 2,177 ) ( 353 ) 5,492 Total provision $ 18,035 $ 12,582 $ 8,831 Deferred income tax assets and liabilities consist of the following components (in thousands): December 31, 2022 2021 Deferred income tax assets: Tax effect of unrealized losses (gains), net $ 10,565 $ ( 393 ) Workers' compensation claims liabilities 7,459 7,870 Deferred compensation 7,347 6,109 Operating lease liability 5,813 5,870 MCC accrual 2,173 167 Other 1,254 1,388 Equity based compensation 743 678 State credit carryforward 54 329 Customer incentives 6 12 Payroll tax deferral — 749 35,414 22,779 Less: valuation allowance — 163 35,414 22,616 Deferred income tax liabilities: Tax amortization of goodwill ( 9,377 ) ( 10,120 ) Tax depreciation in excess of book depreciation ( 8,914 ) ( 7,433 ) Operating lease right-of-use ( 5,316 ) ( 5,527 ) Other ( 367 ) ( 1,223 ) ( 23,974 ) ( 24,303 ) Net deferred income taxes $ 11,440 $ ( 1,687 ) The effective tax rate differed from the U.S. statutory federal tax rate due to the following: Year Ended December 31, 2022 2021 2020 Statutory federal tax rate 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit 5.4 4.5 3.2 Nondeductible expenses and other, net 1.5 0.5 0.7 Adjustment for final positions on filed returns 0.2 0.9 0.6 Federal and state tax credits ( 0.5 ) ( 2.1 ) ( 4.9 ) Other, net — — 0.1 Effective tax rate 27.6 % 24.8 % 20.7 % 54 Under ASC 740, “Income Taxes,” management evaluates the realizability of the deferred tax assets on a quarterly basis under a “more-likely-than-not” standard. As part of this evaluation, management reviews all evidence both positive and negative to determine if a valuation allowance is needed. One component of this analysis is to determine whether the Company was in a cumulative loss position for the most recent 12 quarters. The Company was in a cumulative income position for the 12 quarters ended at both December 31, 2022 and December 31, 2021. The Company’s realization of a portion of net deferred tax assets is based in part on our estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. The Company is subject to income taxes in U.S. federal and multiple state and local tax jurisdictions. The Internal Revenue Service is examining the Company’s federal tax returns for the years ended December 31, 2017 through 2021 . In November 2022, BBSI received notice that the IRS intends to disallow certain wage-based tax credits claimed for the years 2017 through 2020 , which could result in estimated total additional taxes of $ 5.5 million and penalties of $ 1.7 million. Tax year 2021 remains under audit, however, disallowance of similar wage-based credits would result in additional estimated tax due of $ 0.2 million. The Company disagrees with the IRS determination to disallow certain wage-based credits taken by the Company and believes that the Company has the technical merits to defend its position. Based on management’s more-likely-than-not assessment that the position is sustainable, no reserve for the aforementioned IRS notices of disallowance of wage-based tax credits or underpayment penalties has been recorded in the financial statements. In the major jurisdictions where it operates, the Company is generally no longer subject to income tax examinations by tax authorities for tax years before 2016. As of December 31, 2022, total gross unrecognized tax benefits, excluding interest and penalties, were $ 0.6 million, which would affect the Company's effective tax rate if recognized in future periods. The Company does not anticipate any material changes to the reserve in the next 12 months. As of December 31, 2021 and 2020, the Company had no material unrecognized tax benefits. A portion of the consolidated income the Company generates is not subject to state income tax. Depending on the percentage of this income as compared to total consolidated income, the Company's state effective tax rate could fluctuate from expectations. At December 31, 2022, the Company had no state operating loss carryforwards. At December 31, 2022 , the Company did no t have a federal general business tax credit carryforward or an alternative minimum tax credit carryforward. Note 9 - Stock Incentive Plans The Company's 2020 Stock Incentive Plan (the "2020 Plan"), which provides for share-based awards to Company employees, non-employee directors and outside consultants or advisors, was approved by stockholders on May 27, 2020. The number of shares of common stock reserved for issuance under the 2020 Plan is 375,000 , of which the maximum number of shares for which incentive stock options may be granted is 375,000 . The 2020 Plan replaced the Company’s 2015 Stock Incentive Plan (the “2015 Plan”), and no new share-based awards may be granted under the 2015 Plan. The number of shares available for grant at December 31, 2022 was 77,715 . Share-based compensation expense included in selling, general and administrative expenses during the years ended December 31, 2022, 2021 and 2020 , was $ 7.4 million, $ 5.4 million and $ 3.4 million, respectively. Related income tax benefits for the years ended December 31, 2022, 2021 and 2020 , were $ 1.2 million, $ 1.3 million and $ 0.8 million, respectively. 55 Stock Options Outstanding stock options generally vest over either four or eight years and expire ten years after the date of grant. A summary of the status of the Company’s stock options at December 31, 2022, together with changes during the periods then ended, is presented below: Weighted Weighted Average Aggregate Average Remaining Intrinsic Number Exercise Contractual Value of Options Price Term (Years) (In Thousands) Outstanding at December 31, 2021 104,875 $ 68.91 — — Options exercised ( 3,750 ) 17.55 — — Outstanding at December 31, 2022 101,125 70.81 4.56 2,272 Exercisable at December 31, 2022 41,125 $ 54.18 3.58 $ 1,608 No stock options were granted during the years ended December 31, 2022, 2021 and 2020. The intrinsic value of stock options exercised for the years ended December 31, 2022, 2021 and 2020 was $0 .2 million, $ 1.7 million, and $ 4.1 million, respectively. The fair value of stock options vested for the years ended December 31, 2022 and 2020 was $ 728,000 and $ 43,000 , respectively. No stock options vested during the year ended December 31, 2021. As of December 31, 2022 , unrecognized compensation expense related to stock options was $ 1.9 million with a weighted average remaining amortization period of 3.2 years. Restricted Stock Units Restricted stock units generally vest in four equal annual installments beginning one year following the date of grant. The following table presents restricted stock unit activity: Weighted Average Grant Date Units Fair Value Nonvested at December 31, 2021 196,064 $ 65.38 Granted 87,216 74.22 Vested ( 66,723 ) 68.01 Cancelled/Forfeited ( 5,575 ) 60.58 Nonvested at December 31, 2022 210,982 $ 68.33 The total fair value of restricted stock units vested during the years ended December 31, 2022, 2021 and 2020 was $ 4.5 million, $ 3.6 million and $ 3.8 million, respectively. As of December 31, 2022 , unrecognized compensation expense related to restricted stock units was $ 11.0 million with a weighted average remaining amortization period of 2.7 years. 56 Performance Share Units Performance share units (“PSUs”) are granted to key employees of the Company and are conditioned on attaining specified financial performance metrics. Awards are subject to upward or downward adjustments depending on whether the actual financial metrics are above or below the target level, with a maximum payout up to 200 % of a target number of shares. PSUs fully vest on the date that the Compensation Committee determines the level of attainment of specified performance goals, generally over a three-year period. The following table presents PSU activity: Weighted Average Grant Date Units Fair Value Nonvested at December 31, 2021 34,333 $ 69.54 Granted 24,147 60.15 Vested ( 3,592 ) 72.02 Cancelled/Forfeited ( 920 ) 72.02 Nonvested at December 31, 2022 53,968 $ 65.13 The total fair value of PSUs vested during the years ended December 31, 2022, 2021 and 2020 was $ 259,000 , $ 276,000 , and $ 743,000 , respectively. Employee Stock Purchase Plan The Company offers employees the right to purchase shares at a discount from the market price under the Company’s 2019 Employee Stock Purchase Plan. Subject to the annual statutory limit, employees are eligible to participate through payroll deductions of up to 15 % of their compensation. At the end of each six-month offering period, shares are purchased by the participants at 85 % of the fair market value at the end of the offering period. As of December 31, 2022 , approximately 273,000 shares were reserved for future issuance under the 2019 Employee Stock Purchase Plan. Note 10 - Stock Repurchase Program The Company maintains a stock repurchase program approved by the Board of Directors, which authorizes the repurchase of shares from time to time in open market purchases. On February 28, 2022, the Board of Directors authorized the repurchase of up to $ 75.0 million of the Company’s common stock over a two-year period beginning February 28, 2022 . The new repurchase program replaces the program approved in August 2019 . The Company repurchased 605,937 , 237,587 and 144,470 shares at an aggregate purchase price of $ 47.2 million, $ 17.3 million, and $ 8.1 million during 2022, 2021 and 2020, respectively. In addition, shares of restricted stock units withheld to satisfy tax-withholding obligations from the vesting of restricted stock units were 23,113 , 20,308 and 25,922 in 2022, 2021 and 2020 , respectively, which are not subject to the current repurchase program. See “Note 5. Revolving Credit Facility and Long-Term Debt” for related restrictions. 57 Note 11 - Litigation On November 21, 2012, David Kaanaana (“Kaanaana”), a former staffing employee, filed a class action wage and hour lawsuit against BBSI in the California Superior Court on behalf of himself and certain other employees who worked at County Sanitation District No. 2 of Los Angeles County (“the District”). The trial court ruled in plaintiffs’ favor regarding certain alleged meal break violations but ruled in favor of BBSI with respect to the application of the California prevailing wage law to the District and other claims. These latter rulings were appealed by the plaintiffs to the California Court of Appeal. On November 30, 2018, the California Court of Appeal for the Second Appellate District returned its decision in Kaanaana v. Barrett Business Services, Inc., overruling the trial court's decision to dismiss the prevailing wage claim, ruling that the work in question at the District constituted “public works” under the applicable law, and also ruling that plaintiffs’ were entitled to additional remedies with regard to the meal break violations under California law. On January 9, 2019, BBSI filed a petition of review to the California Supreme Court. On February 27, 2019, the California Supreme Court granted the petition to review the Court of Appeal’s decision with respect to the prevailing wage issue. A decision from the California Supreme Court was issued March 29, 2021 affirming the Court of Appeal decision and concluding that the recycling sorting work performed by the staffing employees in question was a “public work” and therefore would be subject to prevailing wage requirements. No damages were awarded in the appeals process. The case was remanded to Superior Court for any such determination with respect to both the prevailing wage issue and any additional remedies for the meal break violations. On December 7, 2021 the parties engaged in a mediation effort which resulted in a settlement agreement on December 22, 2021. The settlement is subject to customary court approval. On January 17, 2018 and January 18, 2018, respectively, suits were filed in the California Superior Court for the County of Santa Cruz by Sandra Gill, Robert Seth Gill Jr. and Alyssa Gill, individually and on behalf of the estate of Robert S. Gill, Sr., and by Stephen and Torrey Whitmire, against Hildebrand and Sons Trucking, Daniel Harrington, BBSI, the State of California, Department of Transportation, the State of California, California Highway Patrol, and Statewide Traffic Safety and Signs seeking monetary damages arising out of personal injuries and a fatality suffered after Messrs. Gill and Whitmire were struck by a truck at a California highway mudslide removal operation. Hildebrand was a PEO client of BBSI and operated the truck involved in the accident. The actions allege that the injuries and death were the result of, among other things, the negligent actions of a Hildebrand employee, and the unsafe conditions at the mudslide removal operation. In February 2023, BBSI and the plaintiffs reached an agreement to settle, which will remove BBSI from the suit. In addition to the matters above, BBSI is subject to other legal proceedings and claims that arise in the ordinary course of our business. There are significant uncertainties surrounding litigation. For the matters discussed above, as well as other cases, management has recorded estimated liabilities totaling $ 3.5 million in other accrued liabilities in the condensed consolidated balance sheets. Note 12 - Subsequent Events We have evaluated events and transactions occurring after the balance sheet date through our filing date and noted no events that are subject to recognition or disclosure. 58 Item 9. CHAN GES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CO NTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures” that are designed with the objective of providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of December 31, 2022. Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our ICFR is a process designed by, or under the supervision of, our CEO and our CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with GAAP in the United States of America. Management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of our ICFR based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022. The effectiveness of the Company’s internal control over financial reporting has also been audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in their report included below. Changes in Internal Control over Financial Reporting There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Inherent Limitations Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems' objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Control 59 systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Chief Executive Officer and Chief Financial Officer Certifications The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report. 60 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Barrett Business Services, Inc. Vancouver, Washington Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Barrett Business Services, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated March 6, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report over Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Portland, Oregon March 6, 2023 61 Item 9B. OT HER INFORMATION None. Item 9C. DIS CLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. P ART III Item 10. DI RECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information required by this item is incorporated by reference to the information set forth under the captions "Item 1-Election of Directors," “Background and Experience of Executive Officers” and "Code of Ethics" in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Proxy Statement”). Item 11. EXE CUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth under the captions “Director Compensation for 2022” and “Executive Compensation” in the Proxy Statement. Item 12. SE CURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to the information set forth under the caption "Stock Ownership of Principal Stockholders and Management – Beneficial Ownership Table" and “Additional Equity Compensation Plan Information” in the Proxy Statement. Item 13. CER TAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to the information set forth under the caption "Item 1-Election of Directors" and "Related Person Transactions" in the Proxy Statement. Item 14. PRIN CIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to the information set forth under the caption "Matters Relating to Our Independent Registered Public Accounting Firm” in the Proxy Statement. 62 PART IV Item 15. EXHIBITS AND FINA NCIAL STATEMENT SCHEDULES Financial Statements and Schedules The Financial Statements, together with the report thereon of Deloitte & Touche LLP, are included on the pages indicated below: Page Report of Independent Registered Public Accounting Firm-Deloitte & Touche LLP (PCAOB ID: 34 ) 31 Consolidated Balance Sheets as of December 31, 2022 and 2021 33 Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 34 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 35 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 36 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 37 Notes to Consolidated Financial Statements 38 No schedules are required to be filed herewith. Exhibits The following exhibits are filed or furnished herewith or incorporated by reference and this list is intended to constitute the exhibit index. Incorporated by Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 3.1 Charter of the Registrant, as amended, through May 31, 2018 . 10-Q 0-21886 3.1 8/8/2018 3.2 Bylaws of the Registrant, as amended through May 27, 2020 . 10-Q 0-21886 3.1 8/5/2020 4.1 Third Amended and Restated Credit Agreement between the Registrant and Wells Fargo Bank, National Association (“Wells Fargo”), dated as of March 1, 2022. 10-K 0-21886 4.1 3/7/2022 4.2 Amended and Restated Security Agreement: Business Assets, dated as of March 1, 2022, between the Registrant and Wells Fargo. 10-K 0-21886 4.2 3/7/2022 4.3 Amended and Restated Standby Letter of Credit Agreement dated as of June 20, 2018, between the Registrant and Wells Fargo . 10-Q 0-21886 4.4 8/8/2018 4.4 Fourth Amended and Restated Revolving Line of Credit Note dated March 1, 2022 of the Registrant. 10-K 0-21886 4.4 3/7/2022 63 4.5 Description of the Registrant's Capital Stock . 8-K 0-21886 4.1 6/26/2020 10.1 2009 Stock Incentive Plan of the Registrant (the “2009 Plan”) . 10-Q 0-21886 10.2 8/10/2009 10.2 2015 Stock Incentive Plan of the Registrant (the "2015 Plan") . 8-K 0-21886 10.1 6/2/2015 10.3 2020 Stock Incentive Plan of the Registrant (the "2020 Plan"). 8-K 0-21886 10.1 6/2/2020 10.4 Form of Performance Share Award Agreement for Executive Officers for awards granted beginning in 2018 under the 2015 Plan . 10-Q 0-21886 10.1 8/8/2018 10.5 Form of Performance Share Award Agreement under 2020 Stock Incentive Plan . 10-Q 0-21886 10.1 8/4/2021 10.6 Form of Non-Employee Director Nonqualified Stock Option Award Agreement under the 2009 Plan . 10-Q 0-21886 10.3 5/10/2010 10.7 Form of Employee Nonqualified Stock Option Award Agreement under the 2009 Plan . 10-Q 0-21886 10.2 5/9/2011 10.8 Form of Non-Employee Director Nonqualified Stock Option Award Agreement under the 2009 Plan . 10-Q 0-21886 10.3 5/9/2011 10.9 Nonqualified Stock Option Award Agreement between the Registrant and Thomas J. Carley dated July 1, 2016 . 10-Q 0-21886 10.5 11/9/2016 10.10 Form of Employee Nonqualified Stock Option Award Agreement for grants to Gerald R. Blotz and Gary E. Kramer effective March 28, 2018, under the 2015 Plan . 10-Q 0-21886 10.2 8/8/2018 10.11 Form of Incentive Stock Option Award Agreement relating to February 2, 2015, grants under the 2009 Plan . 10-K 0-21886 10.11 5/26/2016 10.12 Form of Restricted Stock Units Award Agreement for Executive Officers for awards granted beginning in 2018 under the 2015 Plan . 10-Q 0-21886 10.3 8/8/2018 10.13 Form of Restricted Stock Units Award Agreement for Executive Officers under the 2020 Plan . 10-Q 0-21886 10.1 11/4/2020 10.14 Form of Restricted Stock Units Award Agreement for Non-Employee Directors under the 2020 Plan . 10-Q 0-21886 10.2 11/4/2020 10.15 Summary of Compensatory Arrangements for Non-Employee Directors of the Registrant effective January 1, 2022. 10-K 0-21886 10.18 3/7/2022 10.16 Barrett Business Services, Inc., Nonqualified Deferred Compensation Plan . 10-Q 0-21886 10.8 8/9/2017 10.17 First and Second Amendments to the Barrett Business Services, Inc., Nonqualified Deferred Compensation Plan . 10-Q 0-21886 10.1 5/7/2019 64 10.18 Form of Restricted Stock Units Award Agreement under Nonqualified Deferred Compensation Plan . 10-Q 0-21886 10.1 5/8/2018 10.19 Form of Restricted Stock Units Award Agreement under Nonqualified Deferred Compensation Plan for grants beginning July 1, 2020 . 10-Q 0-21886 10.3 11/4/2020 10.20 Employment Agreement between the Registrant and Gary Kramer Jr., dated April 22, 2020 . 8-K 0-21886 10.2 4/24/2020 10.21 Employment Agreement between the Registrant and Gerald Blotz, dated April 22, 2020 . 8-K 0-21886 10.3 4/24/2020 10.22 Employment Agreement between the Registrant and Anthony Harris, dated April 22, 2020 . 8-K 0-21886 10.4 4/24/2020 10.23 Employment Agreement between the Registrant and James Potts, dated August 14, 2020 . 10-K 0-21886 10.30 3/8/2021 10.24 Amended Death Benefit Agreement entered into by the Registrant and Gerald L. Blotz effective October 30, 2020 . 10-K 0-21886 10.31 3/8/2021 10.25 Death Benefit Agreement entered into by the Registrant and Anthony Harris effective June 30, 2020 . 10-Q 0-21886 10.7 8/5/2020 10.26 Amended Death Benefit Agreement entered into by the Registrant and Gary Kramer effective June 30, 2020 . 10-Q 0-21886 10.8 8/5/2020 10.27 Death Benefit Agreement entered into by the Registrant and James Potts effective October 30, 2020 . 10-K 0-21886 10.34 3/8/2021 10.28 Barrett Business Services, Inc. Amended and Restated Annual Cash Incentive Award Plan . 10-K 0-21886 10.45 3/5/2019 10.29 Form of Indemnification Agreement with each outside director of Barrett Business Services, Inc. 10-Q 0-21886 10.2 8/4/2021 21. Subsidiaries of the Registrant . X 23.1 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. X 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a). X 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a). X 32. Certification pursuant to 18 U.S.C. Section 1350. X 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). X 101.SCH Inline XBRL Taxonomy Extension Schema Document. X 65 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X 104 Coverage Page Interactive Data File (embedded within the Inline XBRL document). X * Denotes a management contract or a compensatory plan or arrangement. Item 16. FORM 10-K SUMMARY None. 66 SIGN ATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BARRETT BUSINESS SERVICES, INC. Registrant Date: March 6, 2023 By: /s/ Anthony J. Harris Anthony J. Harris Executive Vice President and Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 6th day of March, 2023. Principal Executive Officer and Director: /s/ Gary E. Kramer President and Chief Executive Officer and Director Gary E. Kramer Principal Financial and Accounting Officer: /s/ Anthony J. Harris Executive Vice President and Chief Financial Officer and Treasurer Anthony J. Harris Majority of Directors: /s/ Thomas J. Carley Director Thomas J. Carley /s/ Joseph S. Clabby Director Joseph S. Clabby /s/ Thomas B. Cusick Director Thomas B. Cusick /s/ Jon L. Justesen Director Jon L. Justesen /s/ Anthony Meeker Chairman of the Board and Director Anthony Meeker /s/ Carla A. Moradi Director Carla A. Moradi /s/ Alexandra Morehouse Director Alexandra Morehouse /s/ Vincent P. Price Director Vincent P. Price 67