What changed in this filing

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Item 1A. Risk Factors

2021-02-12 compared with 2020-02-12 · 149 added, 67 removed, 146 unchanged (60% of the section changed)

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The statements in this section describe the known material risks to our business and should be considered carefully.

Economic Risks

Adverse economic conditions could negatively affect our industry, business, and results of operations.

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In addition, during periods of weak economic conditions, current clients may have difficulty meeting their financial obligations to us and may select alternative HR services at more competitive rates than we offer.

Further, our growth is partially dependent on hiring of new employees by our existing clients, which growth may be restricted during periods of tight labor markets, such as the current period of historically low level of unemployment and resulting reduced hiring within our existing client base.

Further, our growth is partially dependent on hiring of new employees by our existing clients, which may be restricted during periods of tight labor markets and economic slowdown, such as the current period of high unemployment levels, and resulting reduced hiring within our existing client base.

Such developments could adversely impact our financial condition, results of operations and future growth rates.

We assume liability for WSEE payroll, payroll taxes, and benefits costs and are responsible for their payment regardless of the amount billed to or paid by our clients.

The economic impact of the COVID-19 pandemic is adversely affecting our business.

The current pandemic may have, and a future outbreak of other highly infectious or contagious diseases could have, a material and adverse impact on our business, results of operations, financial condition and cash flows.

The spread of the COVID-19 virus has created significant volatility, uncertainty and economic disruption, including actions taken by businesses and governments in response to the pandemic that have resulted or could result in a significant reduction in commercial activity.

The extent to which the COVID-19 pandemic impacts our business, operations, financial results and financial condition will depend on numerous evolving factors that are highly uncertain and that we may not be able to accurately predict, including:

• scope, severity and duration of the pandemic;

• varying impact that the pandemic has within each locality;

• actions taken by government authorities to contain the outbreak or address its impact;

• development, distribution, adoption and cost of safe and effective treatments or vaccines for COVID-19;

• direct and indirect economic effects of the pandemic and containment measures;

• scope, significance and duration of business disruptions on small and medium-sized businesses, including any reduction in employment levels, compensation levels and employee benefits;

• magnitude and extent of business failures among the small and medium-sized businesses that we serve;

• ability of our clients to pay for the outsourced HR services and solutions we provide;

• any resulting impact on the demand for our outsourced HR services and solutions.

While the COVID-19 pandemic is continuing and even after it has subsided, we may experience materially adverse impacts to our business, operations and financial results due to any existing or continuing reduction in economic activity, including a recession or depression.

The COVID-19 pandemic has resulted in a sharp decrease in employment levels throughout the United States.

During the second quarter of 2020, we began to experience a decline in the number of paid WSEEs due primarily to layoffs and temporary leaves of absence, resulting in a 1.8% year-over-year decline in the average number of paid WSEEs during the second quarter of 2020.

However, for the full year 2020, the average number of paid WSEEs declined 0.6% to 234,223.

Further, if the adverse economic conditions relating to the COVID-19 pandemic persist, we may continue to experience a decline in our paid WSEEs.

Accordingly, such declines in WSEEs would likely have a material adverse effect on our business, financial condition and results of operations.

2020 Form 10-K

The spread of the COVID-19 virus has changed how and when we incur health insurance costs under our health insurance contract with United.

We may experience changes in quarterly levels and timing of both medical and pharmaceutical health insurance claims.

For example, government imposed treatment mandates, restrictions on certain elective healthcare treatments, and changes in treatment delivery options may significantly alter our healthcare claim trends.

Our ability to estimate healthcare claim trends becomes more difficult as participant utilization of healthcare services are deferred or canceled while stay-at-home orders and social distancing requirements are enacted by state and local governments.

Furthermore, predicting the rate at which participants will increase utilization of healthcare services in subsequent periods once stay-at-home orders and social distancing requirements are lifted, is also difficult.

In addition, as the increased number of former WSEEs elect COBRA coverage to continue their benefits, we expect an increase in claim activity levels, resulting in higher benefits costs incurred and decreased profitability.

The Department of Labor and the Department of Treasury released a rule on April 29, 2020 that extends the period during which any former WSEE who became eligible for COBRA coverage in 2020 may elect such coverage and allows any former WSEEs electing COBRA coverage to defer payment of such coverage until a later date.

Depending on the number of participants electing COBRA and the resulting claim activity levels, COBRA-related claims have the potential to increase total plan costs in future periods as well.

The extended period during which former WSEEs may elect COBRA coverage, and their ability to defer payment of related premiums, or any future legislation that increased COBRA participation, may further result in increased costs to us and we may ultimately be unable to collect premiums from those former WSEEs or from our clients.

The recent increase in U.S.

unemployment levels has resulted in a significant increase in unemployment claims with state unemployment agencies.

A continuous increase in unemployment claims is likely to increase state unemployment insurance tax rates.

In addition, some states have the authority to increase unemployment tax rates retroactively.

Any such increases, which are reflected in our comprehensive service fee, may result in client attrition due to increased prices or we may have to reduce our overall pricing, which would adversely affect our profitability, to assist clients with these additional costs.

The COVID-19 economic disruptions may cause customers to have difficulty meeting their financial obligations to us or increase business failures.

As a co-employer, we assume the obligation to pay the salaries, wages and related benefits and taxes of the WSEEs.

An increase in the number of clients unable to pay us would result in an increase in bad debts, which could have a material adverse effect on our financial condition and results of operations.

In addition, we have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities.

While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to and employees may become sick themselves and be unable to work.

Further, our increased reliance on remote access to our information systems as our employees work remotely impacts our control over cybersecurity protection and service stability and performance, which increases our exposure to cybersecurity and privacy issues and to disruptions to employee productivity.

We may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, clients, partners and vendors.

There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our ability to perform critical functions could be harmed, and we may be unable to respond to the needs of our business.

The FFCRA, the CARES Act and the Consolidated Appropriations Act, 2021 created various programs and incentives to assist businesses and individuals managing through the COVID-19 pandemic.

Certain of these programs and incentives have required us to make changes to our systems that manage leave, payroll and payroll-related tax calculation and reporting and invoicing and collection of service fees.

In addition, various states and localities and the federal government are considering further legislation that may require further changes to our processes and systems or that may expand the coverage afforded to WSEEs under our health and workers’ compensation programs.

If we are unable to timely make these changes, incur substantial additional costs in doing so, or are otherwise adversely affected by these requirements, then we may face fines, penalties, other regulatory action, or litigation relating to such failure, which could further adversely impact our PEO state licenses or registrations, our certified PEO status, our results of operations and our ability to attract and retain clients.

The COVID-19 pandemic business interruptions and associated economic impact has adversely and disproportionately affected certain industries, including the oil and gas industry.

The substantial decrease in the global demand for oil contributed to a significant decline in its commodity price, which has materially and adversely impacted businesses dependent on oil production, including those with operations in Texas.

While our oil and gas related customers account for approximately 1% of our customer base, our Texas market accounts for approximately 20% of our revenues.

The impact of

2020 Form 10-K

the COVID-19 pandemic on oil prices and the resulting impact on regional economies with oil-focused businesses could aggravate our risk factors for clients operating in the oil and gas sector as well as other clients who operate in the Texas market.

The impact and evolving nature of the COVID-19 pandemic precludes any prediction as to its full adverse impact.

Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, including as a result of the forgoing reasons, and may have a material adverse effect on our financial condition, results of operations, cash flows and business.

Geographic market concentration makes our results of operations vulnerable to regional economic factors.

Our New York, California and Texas markets accounted for approximately 10%, 15% and 20% (including 8% in Houston), respectively, of our WSEEs for the year ended December 31, 2020.

Accordingly, while we have a goal of expanding in our current markets and into new markets, for the foreseeable future, a significant portion of our revenues may be subject to economic, statutory, and regulatory factors specific to New York, California and Texas.

We are subject to covenants under our credit facility that may restrict our business and financing activities.

Our failure to comply with these covenants may result in an acceleration of our indebtedness, which could have a material adverse effect on our business, financial condition or results of operations.

Our credit facility contains, and any future indebtedness of ours likely would contain, covenants that, subject to certain exceptions, impose significant operating and financial restrictions, including restricting our ability to:

• incur additional indebtedness,

• sell material assets,

• retire, redeem or otherwise reacquire our capital stock,

• acquire the capital stock or assets of another business,

• enter into new lines of business,

• make investments, and

• pay dividends.

In addition, we are required to maintain certain financial covenants.

Our ability to comply with the financial covenants may be affected by financial, business, economic, regulatory and other factors beyond our control.

Our failure to comply with these covenants, or any other terms of our indebtedness, could result in a default that may limit our ability to borrow additional amounts under our credit facility, which may adversely affect our liquidity.

In addition, a default may allow our lenders to accelerate our obligation to repay the outstanding amounts under our credit facility.

If we were unable to repay or refinance the accelerated indebtedness on favorable terms, then our business, financial condition and results of operations would be materially adversely affected.

PEO HR Outsourcing Solutions Risks

We assume liability for WSEE payroll, payroll taxes, benefits costs and workers’ compensation costs and are responsible for their payment regardless of the amount billed to or paid by our clients.

Under the CSA, we become a co-employer of WSEEs and assume the obligations to pay the salaries, wages and related benefits costs and payroll taxes of such WSEEs.

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• withholding and payment of federal and state payroll taxes with respect to wages and salaries reported by Insperity

providing benefits to WSEEs even if our costs to provide such benefits exceed the fees the client pays us

2020 Form 10-K

• providing benefits to WSEEs even if our costs to provide such benefits exceed the fees the client pays us and the amounts collected from WSEEs

• providing workers’ compensation coverage to WSEEs

If a client does not pay us, or if the costs of benefits we provide to WSEEs exceed the fees a client pays us, our ultimate liability for WSEE payroll and benefits costs could have a material adverse effect on our financial condition or results of operations.

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For additional information related to our health insurance costs, please read Item 7.

2019 Form 10-K

“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Benefits Costs.”

Geographic market concentration makes our results of operations vulnerable to regional economic factors.

Our New York, California and Texas markets accounted for approximately 10% , 16% and 21% (including 9% in Houston), respectively, of our WSEEs for the year ended December 31, 2019 .

Health care reform could affect our health insurance plan and could lead to a significant disruption in our business.

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Additionally, the pay or play penalties on Applicable Large Employers were fully phased-in by 2016.

As part of the Tax Cuts and Jobs Act enacted in December 2017, the requirements that individuals maintain health insurance coverage or pay a penalty, which was known as the individual mandate, was effectively eliminated beginning in 2019.

In addition, supporters in various states are advocating for adoption of healthcare-related reforms at the state level.

As part of the Tax Cuts and Jobs Act enacted in December 2017, the requirements that individuals maintain health insurance coverage or pay a federal tax penalty, which was known as the individual mandate, was effectively eliminated beginning in 2019.

In addition, supporters in various states are advocating for adoption of healthcare-related reforms at the state level, including those states that have enacted individual mandates.

Collectively, these items have the potential to significantly change the insurance marketplace for small and medium-sized businesses and how employers provide insurance to employees.

In addition, as a co-employer in the PEO relationship, we assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental regulations.

Generally, the Act and subsequently issued guidance by the IRS and HHS have not addressed or in some instances are unclear as to their application in the PEO relationship or whether such provisions should be applied at the PEO or client level.

Although we do not believe that the Act has had a material adverse effect on our benefit plans, business model, or operations to date, the elimination of the penalty associated with the individual mandate and subsequent changes resulting from action that may be taken at the federal or state level, including repeal or repeal and replacement of the Act as has been advocated by Congressional leaders and the administration of President Trump, may impact our benefit plans, business model and future results of operations.

2020 Form 10-K

operations, including repeal or repeal and replacement of the Act as has been advocated by Congressional leaders or as may result from a case pending before the U.S.

Supreme Court.

In future periods, changes may result in increased costs to us and could affect our ability to attract and retain clients.

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Workers’ Compensation Costs.”

2019 Form 10-K

Workers’ compensation costs are a significant portion of our direct costs.

Workers’ compensation costs are a significant portion of our direct costs and contractual arrangements with our clients limit or delay our ability to reflect in our service fees any increases associated with these costs.

If we were to experience an unexpected large increase in the number or severity of claims, our workers’ compensation costs could increase, which could have a material adverse effect on our results of operations or financial condition.

Further, if the overall pricing of our services includes cost assumptions based on inaccurate forecasts of our workers’ compensation costs, our profitability or our ability to attract and retain clients may be adversely impacted.

The current workers’ compensation coverage with Chubb expires on September 30, 2021.

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Our ability to adjust and collect service fees for increases in unemployment tax rates may be limited.

We record our SUI tax expense based on taxable wages and tax rates assigned by each state.

We record our SUI expense based on taxable wages and tax rates assigned by each state.

SUI tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state.

Prior to the receipt of final tax rate notices, we estimate our expected SUI tax rate in those states for which tax rate notices have not yet been received for purposes of pricing.

Certain states have indicated that 2021 unemployment tax rates will exclude COVID-19 related unemployment claims;

however, the determination of which claims qualify for exclusion and the impact of such a determination on future state unemployment rates has not been clarified.

Prior to the receipt of final rate notices, we estimate our expected SUI rate in those states for which rate notices have not yet been received for purposes of budgeting and pricing.

In a period of adverse economic conditions, state unemployment funds may experience a significant increase in the number of unemployment claims.

Accordingly, SUI tax rates would likely increase substantially.

Some states have the ability under law to increase SUI tax rates retroactively to cover deficiencies in the unemployment fund.

Accordingly, SUI rates would likely increase substantially.

Some states have the ability under law to increase SUI rates retroactively to cover deficiencies in the unemployment fund.

In addition, FUTA may be retroactively increased in certain states in the event the state fails to timely repay federal unemployment loans.

Generally, our contractual agreements allow us to incorporate such statutory tax increases into our service fees upon the effective date of the rate change.

However, our ability to fully adjust service fees in our billing systems and collect such increases over the remaining term of the clients’ contracts could be limited, resulting in a potential tax increase not being fully recovered.

Generally, our contractual agreements allow us to incorporate such statutory increases into our service fees upon the effective date of the rate change.

As a result, such increases could have a material adverse effect on our financial condition or results of operations.

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Our standard CSA can generally be canceled by us or the client with 30 days’ notice.

Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by existing PEO HR Outsourcing Solution clients, which could materially and adversely affect our financial condition or results of operations.

In addition, in the event we have a high proportion of terminating clients from our middle market client base (which are generally subject to CSAs with two-year terms), the financial impact of such an event could be significant due to the number of WSEEs involved and the longer time it takes to replace middle market clients.

Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by existing PEO HR Outsourcing solution clients, which could

2020 Form 10-K

materially and adversely affect our financial condition or results of operations.

During 2020, middle market accounts represented 24.4% of our average paid WSEEs and clients with an average number of WSEEs that exceed 1,000 WSEEs represented 4.7%.

In the event we have large clients that terminate or an increase in terminating clients from our middle market client base, the financial impact of such an event could be significant.

Also, our results of operations are dependent in part upon our ability to retain or replace our clients upon the termination or cancellation of the CSA.

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As a result, we typically experience our largest concentration of new client additions and attrition in the first quarter of each year.

Our loss of insurance coverage, the failure of our insurance carriers or increased insurance costs or deductibles could have a material adverse effect on us.

As part of our PEO HR Outsourcing solutions, in addition to our health insurance carriers, we contract with other insurance carriers to provide workers’ compensation insurance and employment practices liability insurance.

In addition, we obtain insurance coverage for various commercial risks in our business such as property insurance, errors and omissions insurance, cyber liability insurance, general liability insurance, fiduciary liability insurance, automobile liability insurance, and directors’ and officers’ liability insurance.

The failure of any insurance carrier, such as occurred in 2001 with respect to a previous workers’ compensation insurance provider, providing such coverage could leave us exposed to uninsured risk and could have a material adverse effect on our business and results of operations.

In addition, in the event that our primary health carriers in any key market make material changes to their network of healthcare providers or facilities, such as the recent temporary discontinuation of a prominent hospital network in Houston, Texas, by UnitedHealthcare in connection with their ongoing negotiations, then our ability to attract and retain clients in that market may be adversely affected, which could have a material adverse effect on our business and results of operations.

Further, we have experienced an increase in insurance premiums for our corporate policies as well as an increase in the deductible amounts for which we retain liability and a decrease in coverage limits.

If these premiums or deductible amounts continue to increase, or coverage limits continue to decrease we would have increased exposure with respect to costs and insurance claims, which could have a material adverse effect on our business and results of operations.

A determination that a client is liable for employment taxes not paid by a PEO may discourage clients from contracting with us in the future.

Under the CSA, we assume sole responsibility and liability for paying federal employment taxes imposed under the Code with respect to wages and salaries we pay our WSEEs.

There are essentially three types of federal employment tax obligations:

• income tax withholding requirements

Under the Code, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes.

The SBEA clarifies that a CPEO is treated as the employer for purposes of federal payroll taxes on wages it pays to WSEEs.

Most states impose similar employment tax obligations on the employer.

While the CSA provides that we have sole legal responsibility for making these tax contributions, the applicable state taxing authority could conclude that such liability cannot be completely transferred to us.

Accordingly, in the event that we fail to meet our tax withholding and payment obligations, the client may be held jointly and severally liable for those obligations.

While this interpretive issue has not, to our knowledge, discouraged clients from enrolling with Insperity, a definitive adverse resolution of this issue may discourage clients from enrolling in the future.

New and higher federal, state and local taxes could have a material adverse impact on our financial condition and results of operations.

In times of economic slowdowns, the federal government and states and municipalities in which we operate may experience reductions in tax revenues and corresponding budget deficits.

In response to budget shortfalls, such as those being experienced as a result of the COVID-19 pandemic, the federal government and many states and municipalities have in the

2020 Form 10-K

past and may in the future increase or enact new taxes on businesses operating within their tax jurisdiction, including business activity taxes and income taxes.

In addition, federal, state and local taxing agencies may increase their audit activity in an effort to identify additional tax revenues.

New tax assessments on our operations could result in increased costs.

Further, the Biden Administration and Congressional leaders have expressed support for reviewing federal taxes and potential increases in federal tax rates for businesses.

Our ability to adjust our service fees and incorporate additional tax assessments into our billing system could be limited.

As a result, such higher taxes could have a material adverse impact on our financial condition or results of operations.

We may be subject to liabilities for client and employee actions.

As a co-employer in the PEO relationship, we assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental regulations.

A number of legal issues remain unresolved with respect to the co-employment arrangement between a PEO and its WSEEs, including questions concerning the ultimate liability for violations of employment, payroll, discrimination, and workplace safety laws.

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As a major employer, our operations are affected by numerous federal, state and local laws and regulations relating to labor, tax, benefit, insurance and employment matters.

By entering into a co-employer relationship with employees assigned to

2019 Form 10-K

work at client locations, we assume certain obligations and responsibilities of an employer under these laws.

By entering into a co-employer relationship with employees assigned to work at client locations, we assume certain obligations and responsibilities of an employer under these laws.

However, many of these current laws (such as the Act, ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of “employer” under these laws is not uniform despite the SBEA having provided clarification under federal employment tax laws for CPEOs.

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In addition, should any state or federal regulators make a determination that we have operated as an unlicensed money services business or money transmitter, we could be subject to civil and criminal fines, penalties, costs, legal fees, reputational damage or other negative consequences, which could be material.

2020 Form 10-K

Competition and other developments in the HR services industry may impact our growth and/or profitability.

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In the event we were to experience a significant increase in the number of clients using the Workforce Synchronization offering or increased pricing pressures in the PEO marketplace without corresponding reductions in operating costs, our operating margins may decline, which could have a material adverse impact on our financial condition or results of operations.

Technology Risks

Evolving regulations, market trends and client expectations require us to constantly enhance and expand our service and technology offerings.

The HR services industry is experiencing rapid technological advances to meet client expectations and expanding regulations.

In order to effectively compete in this environment, we must identify and predict trends, and adapt our technology and service offerings accordingly.

In addition, as a larger portion of our client base falls within the middle market

2019 Form 10-K

segment, we must also develop different technology and services to meet the more complex needs and demands of this key group.

These efforts require us to devote substantial resources to develop new solutions, or to integrate third-party solutions, into our offerings.

If we fail to respond successfully to these developments or we may make investments in enhancements that are not accepted by the market, then the demand for our solutions and services may diminish .

Further, as new regulations are adopted, we must modify our systems to address these changes in the law, such as our recent efforts to transition our reporting and payroll tax processing methods for self-employed owners to those described in an Internal Revenue Service advice memorandum from the Office of Chief Counsel released in April 2019.

As new regulations are adopted, we must modify our systems to address these changes in the law, such as our recent efforts to implement the assistance provided to businesses and employees under the FFCRA and CARES Act.

In order to make these types of modifications, we may be required to reallocate resources, potentially resulting in delays to planned competitive improvements to our systems.

In addition, if we do not successfully or timely deploy these types of modifications, we may be unable to comply with regulations, which could subject us to penalties, damage our reputation or result in decreased sales.

If we do not successfully or timely deploy these types of modifications, we may be unable to comply with regulations, which could subject us to penalties, damage our reputation or result in decreased sales.

Further, in order to effectively compete in this environment, we must identify and predict trends, and adapt our technology and service offerings accordingly.

In addition, as a larger portion of our client base falls within the middle market segment, we must also develop different technology and services to meet the more complex needs and demands of this key group.

These efforts require us to devote substantial resources to develop new functionality, or to integrate third-party solutions, into our offerings.

If we fail to respond successfully to these developments or we may make investments in enhancements that are not accepted by the market, then the demand for our solutions and services may diminish.

Disruptions of our information technology systems could damage our reputation and materially disrupt our business operations.

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The processing of payroll, benefits and other transactions is dependent upon this complex infrastructure, some of which is provided by third-party vendors.

We must manage all of these systems, including any upgrades or enhancements, to ensure that they continue to support our services.

Any delays or failures caused by network outages, software or hardware failures, or other data processing disruptions, even for a brief period of time, could result in our inability to timely process transactions.

We must manage all of these systems, including any upgrades, replacements or enhancements, to ensure that they continue to support our services.

For example, we are currently finalizing a modernization of key portions of our proprietary system for our PEO HR Outsourcing solutions as well as commencing a project to replace our customer relationship management (CRM) system.

Any delays or failures resulting from network outages;

planned upgrades, enhancements, or replacements of software, hardware, or other systems, including in connection with our PEO Outsourcing solutions modernization project or our CRM replacement project;

or other data processing disruptions, even for a brief period of time, could result in our inability to timely process transactions.

If such failures cause us to not meet client service expectations or to breach our obligations to our clients, we may lose existing clients, have difficulty attracting new clients, incur regulatory penalties or liability to our clients, or suffer other financial losses, which may have a material adverse effect on our business and financial condition.

2020 Form 10-K

We could be subject to reduced revenues, increased costs, liability claims, or harm to our competitive position as a result of data theft, cyberattacks or other security vulnerabilities.

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If any person, including any corporate employee, misappropriates or misuses such funds, documents or data, we may have liability for damages, and our reputation could be substantially harmed and we may have other liabilities that could have a material adverse effect on our business.

Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, corruption of data, or theft of private or other sensitive information, or inadvertent acts by our own employees, could result in the disclosure or misuse of confidential or proprietary information, and could have a material adverse effect on our business operations or that of our clients, result in liability or regulatory sanction, or cause a loss of confidence in our ability to serve clients.

Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, corruption of data, or theft of private or other sensitive information, or inadvertent or malicious acts by our own employees, could result in the disclosure or misuse of confidential or proprietary information, and could have a material adverse effect on our business operations or that of our clients, result in liability or regulatory sanction, or cause a loss of confidence in our ability to serve clients.

We may not have adequate insurance coverage to compensate us for losses from a security incident.

Accordingly, the impact of a data security incident could have a material adverse effect on our business, results of operations and financial condition.

2019 Form 10-K

Failure to comply with privacy, data protection and cybersecurity laws and regulations could have a material adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences.

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In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs.

It is possible that these federal and states laws may be interpreted and applied in a manner that is inconsistent with our data practices.

It is possible that these federal and state laws may be interpreted and applied in a manner that is inconsistent with our data practices.

If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have a material adverse effect on our business.

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Additionally, any failure by us to comply with these laws and regulations, including as a result of a security or privacy breach, could result in significant penalties and liabilities for us.

Our loss of insurance coverage or the failure of our insurance carriers could have a material adverse effect on us.

In addition, in the event that our primary health carriers in any key market make material changes to their network of healthcare providers or facilities, such as the recent discontinuation of a prominent hospital network in Houston, Texas, by UnitedHealthcare in connection with their ongoing negotiations, then our ability to attract and retain clients in that market may be adversely affected, which could have a material adverse effect on our business and results of operations.

The failure of third-party providers, such as financial institutions, data centers or cloud-service providers, could have a material adverse effect on us.

In conjunction with providing services to clients, we rely on financial institutions to electronically transfer funds for the collection of our comprehensive service fee as well as the payment of wages and associated payroll tax withholdings.

Failure by these financial institutions, for any reason, to deliver their services in a timely manner could result in material interruptions to our operations, impact client relations, and result in significant penalties or liabilities to us.

In conjunction with providing services to clients, we communicate and rely on financial institutions to electronically transfer funds for the collection of our comprehensive service fee as well as the payment of wages and associated payroll tax withholdings.

Communication failures or other failures involving these financial institutions, for any reason, could cause material interruptions to our operations, impact client retention, and result in significant penalties or liabilities to us.

2020 Form 10-K

We lease hosting facilities for our data centers at two separate facilities, located in Bryan, Texas and The Woodlands, Texas, with the Bryan facility acting as our primary data center.

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Any failure by these service providers to deliver their services in a timely manner and in compliance with applicable laws could result in material interruptions to our operations, damage our reputation, and result in a loss of clients.

2019 Form 10-K

A determination that a client is liable for employment taxes not paid by a PEO may discourage clients from contracting with us in the future.

Under the CSA, we assume sole responsibility and liability for paying federal employment taxes imposed under the Code with respect to wages and salaries we pay our WSEEs.

There are essentially three types of federal employment tax obligations:

income tax withholding requirements

Under the Code, employers have the obligation to withhold and remit the employer portion and, where applicable, the employee portion of these taxes.

The SBEA clarifies that a CPEO is treated as the employer for purposes of federal payroll taxes on wages it pays to WSEEs.

Most states impose similar employment tax obligations on the employer.

Accordingly, in the event that we fail to meet our tax withholding and payment obligations, the client may be held jointly and severally liable for those obligations.

New and higher federal, state and local taxes could have a material adverse impact on our financial condition and results of operations.

In times of economic slowdowns, states and municipalities in which we operate may experience reductions in tax revenues and corresponding budget deficits.

In response to budget shortfalls, many states and municipalities have in the past and may in the future increase or enact new taxes on businesses operating within their tax jurisdiction, including business activity taxes and income taxes.

In addition, federal, state and local taxing agencies may increase their audit activity in an effort to identify additional tax revenues.

New tax assessments on our operations could result in increased costs.

Our ability to adjust our service fees and incorporate additional tax assessments into our billing system could be limited.

As a result, such higher taxes could have a material adverse impact on our financial condition or results of operations.

Other Operational Risks

Failure to integrate or realize the expected return on our acquisitions and investments could have a material adverse impact on our financial condition or results of operations.

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Based on market conditions or changes in operating plans, the fair value of our other acquired businesses or investments could decline, requiring us to record impairment charges for all or portions of the investments.

Our business could be disrupted as a result of actions of certain stockholders.

If any of our stockholders commence a proxy contest, advocate for change, make public statements critical of our performance or business, or engage in other similar activities, then our business could be adversely affected because we may have difficulty attracting and retaining clients due to perceived uncertainties as to our future direction and negative public statements about our business;

responding to proxy contests and other similar actions by stockholders is likely to result in us incurring substantial additional costs and significantly divert the attention of management and our employees;

and, if individuals are elected to our Board with a specific agenda, the execution of our strategic plan may be disrupted or a new strategic plan altogether may be implemented, which could have a material adverse impact on our business, financial condition or results of operations.

Further, any of these matters or any such actions by stockholders may impact and result in volatility of the price of our common stock.

2020 Form 10-K

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors