What changed in this filing

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Item 1A. Risk Factors

2023-02-10 compared with 2022-02-11 · 57 added, 56 removed, 278 unchanged (29% of the section changed)

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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 may be restricted during periods of tight labor markets and economic slowdown, such as the high unemployment levels experienced during 2020, 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 negatively impacted during periods of tight labor markets, such as the low unemployment environment experienced during 2022, and during economic slowdowns, such as the high unemployment levels experienced during 2020.

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

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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:

The extent to which the COVID-19 pandemic or future pandemics impact 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;

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• 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 material 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 resulted in a sharp decrease in 2020 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.

For the full year 2020 and 2021, the average number of paid WSEEs declined 0.6% to 234,223 and increased 7.1% to 250,745, respectively.

If adverse economic conditions relating to the COVID-19 pandemic reoccur,

2021 Form 10-K

we may experience another 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.

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

While the COVID-19 pandemic is continuing and even after it has subsided, we may experience material adverse impacts to our business, operations and financial results due to any existing or continuing negative economic impact, including a recession, depression, or periods of supply shortages or high inflation, such as experienced in 2022.

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

We have experienced, and may continue to experience, changes in quarterly levels and timing of both medical and pharmaceutical health insurance claims and processing payment patterns.

For example, government imposed testing and/or vaccination and treatment mandates, restrictions on certain elective health care treatments;

costs associated with vaccination administration, testing, and treatment;

costs associated with vaccination administration, testing, and

2022 Form 10-K

and changes in treatment delivery options may continue to significantly alter our health care claim trends as compared to historic norms.

Our ability to estimate health care claim trends became more difficult due to the testing, vaccination and treatment costs and as participant utilization of health care services are deferred or canceled while stay-at-home orders and social distancing requirements are enacted or recommended by state and local governments.

Furthermore, our ability to predict the rate at which participants will increase utilization of health care services in future periods once stay-at-home orders and social distancing requirements or other recommendations are lifted, is also difficult.

Furthermore, our ability to predict the rate at which participants will increase utilization of health care services in future periods is also difficult.

The 2020 increase in U.S.

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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.

The economic disruptions caused by a pandemic 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 related payroll taxes associated with the WSEEs.

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however, the IRS has not yet clarified how such deferred amounts will be properly applied to companies utilizing a PEO and, if and when issued, such guidance may require further revisions to our systems or processes.

In addition, PEO clients are dependent on the PEO to process Employee Retention Tax Credits (“ERC”) on a consolidated basis, including amending previously filed payroll tax forms with the IRS.

The IRS has experienced significant backlogs of amended tax forms from employers seeking ERC refunds.

In addition, various states and localities and the federal government may enact 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 CPEO status, our results of operations and our ability to attract and retain clients.

If we experience extended IRS delays related to ERC credits on behalf of clients, or 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 CPEO status, our results of operations and our ability to attract and retain clients.

The nature of the COVID-19 pandemic or other future pandemic precludes any prediction as to its full adverse impact.

Nevertheless, the COVID-19 pandemic presents, and other future pandemics may present, material uncertainty and risk with respect to our business, and may have a material adverse effect on our financial condition, results of operations, cash flows and business.

2022 Form 10-K

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, and may have a material adverse effect on our financial condition, results of operations, cash flows and business.

Labor shortages and increasing competition for highly skilled workers could have a material adverse effect on our business, financial condition or results of operations.

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Several factors may limit the labor force available to us or increase our labor costs, including high employment levels, strong macroeconomic conditions, federal unemployment subsidies, and other governmental regulation.

As macroeconomic conditions improved throughout 2021, the labor market tightened, resulting in increased employee turnover and skilled labor shortages.

As macroeconomic conditions improved throughout 2022 and 2021, the labor market tightened, resulting in increased employee turnover and skilled labor shortages.

Increasing competition for highly skilled and talented workers may make it increasingly difficult and expensive for us to attract and retain a service team capable of supporting our clients or a sales team that is effective in selling our complex service offerings to clients.

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Our operating costs have increased, and may continue to increase, due to the recent growth in inflation.

We may not be able to fully offset these cost increases by raising prices for our services, particularly because our client agreements generally fix our pricing for a period of time, which could result in downward pressure on our sales margins.

Further, our clients may choose to reduce their business with us if we increase our pricing.

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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.

2022 Form 10-K

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

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

2022 Form 10-K

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

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The PPACA was subsequently amended on March 30, 2010 by the Reconciliation Act (collectively, the “Act”).

The Act entails sweeping

2021 Form 10-K

health care reforms with some provisions in the Act still requiring the issuance of additional guidance from the U.S.

The Act entails sweeping health care reforms with some provisions in the Act still requiring the issuance of additional guidance from the U.S.

Department of Health and Human Services (“HHS”) and the states.

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Transition relief permitted states to delay the effective date of some of these reforms.

In addition, various states have adopted or are considering reforms that may impact the requirements for or availability of PEO-sponsored health plans.

At this time, the insurance market reforms have not had a material adverse impact on our business operations, and if any future changes impact our ability to attract and retain clients, or our ability to increase service fees to offset any increased costs, then our business may be materially adversely affected.

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In order to qualify for favorable tax treatment under the Code, employee benefit plans must be established and maintained by an employer for the exclusive benefit of its employees.

Generally, an entity is an “employer” of individuals for federal employment tax purposes if an employment relationship exists between the entity and the individuals under the common law test of employment.

Generally, an entity is an “employer” of individuals for federal

2022 Form 10-K

employment tax purposes if an employment relationship exists between the entity and the individuals under the common law test of employment.

In addition, the officers of a corporation are deemed to be employees of that corporation for federal employment tax purposes.

The common law test of employment, as applied by the IRS, involves an examination of approximately 20 factors to ascertain whether an employment relationship exists between a worker and a purported employer.

2021 Form 10-K

Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual’s work.

Generally, the test is applied to determine whether an individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a “co-employer.” Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual’s work.

Among the factors that appear to have been considered more important by the IRS are:

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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.

2022 Form 10-K

The current workers’ compensation coverage with Chubb expires on September 30, 2023.

In the event we are unable to secure replacement coverage on competitive terms, significant disruption to our business could occur.

2021 Form 10-K

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

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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.

In addition, FUTA may be retroactively increased in certain states in the event the state fails to timely repay federal unemployment loans, as we recently experienced with California, Connecticut, Illinois, and New York in 2022.

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

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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 health care providers or facilities, such as the discontinuation of prominent hospital networks in key markets on occasion by United in connection with their ongoing negotiations with those networks, 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.

In addition, in the event that our primary health carriers in any key market make material changes to their network of health care providers or facilities, such as the discontinuation of prominent hospital networks in key markets on occasion by a carrier in connection with their ongoing negotiations with those networks, 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

2022 Form 10-K

with respect to wages and salaries we pay our WSEEs.

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:

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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 some state insurance codes and 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.

In addition, many of the states in which we operate have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship or PEO

However, many of these current laws (such as the Act, ERISA, and some state insurance codes and employment tax

2022 Form 10-K

health insurance plans.

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.

In addition, many of the states in which we operate have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship or PEO health insurance plans.

Any adverse application of, or adverse legislative/regulatory response to, new or existing federal or state laws to the PEO relationship with our WSEEs and client companies could have a material adverse effect on our results of operations or financial condition.

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

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 Covid Relief Programs.

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.

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

As new regulations are adopted, we must modify our systems to address these changes in the law, such as

2022 Form 10-K

decreased sales.

our recent efforts to implement the assistance provided to businesses and employees under the Covid Relief Programs.

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.

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.

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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, replacements or enhancements, to ensure that they continue to support our services.

We must manage all of these systems, and are dependent on third parties to manage the systems that we obtain from them, including any upgrades, replacements or enhancements, to ensure that they continue to support our services.

For example, we are currently working on a multi-year project to replace our sales force automation system and our customer relationship management (“CRM”) system with a single CRM solution to be used widely across the company.

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Any delays or failures resulting from network outages;

planned upgrades, enhancements, or replacements of software, hardware, or other systems, including in connection with our our CRM replacement project or any updated for compliance and modernization of systems;

planned upgrades, enhancements, or replacements of software, hardware, or other systems, including in connection with our CRM replacement project or any updated for compliance and modernization of systems;

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

The speed with which we, or third-party vendors, are able to address significant cybersecurity incidents may be influenced by the cooperation of certain government agencies.

We may also incur significant costs in the future to protect against damage or disruptions that could be caused by cybersecurity incidents.

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.

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.

In connection with our HR services offerings, we collect, use, transmit and store large amounts of personal and business information about our WSEEs and clients, including payroll information, personal and business financial data, social security numbers, bank account numbers, tax information and other sensitive personal and business information.

In connection with our offerings, we collect, use, transmit and store large amounts of personal and business information about our WSEEs, employees paid under our traditional payroll solution, and clients, including payroll information, personal and business financial data, social security numbers, bank account numbers, tax information and other sensitive personal and business information.

Attacks on information technology systems continue to grow in frequency and sophistication, and we and our third-party vendors are targeted by unauthorized parties using malicious tactics, code and viruses.

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As these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities.

We have limited ability to monitor the implementation of similar safeguards by our vendors and do not have the ability to monitor such implementation by our clients or WSEEs.

In addition, our services also involve the use and disclosure of personal and business information to us that could be used by a malicious party to commit identity theft or otherwise gain access to the data or funds of our clients or WSEEs.

We have limited ability to monitor the implementation of similar safeguards by our vendors and do not have the ability to monitor such implementation by our clients or their employees, including WSEEs.

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 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.

2022 Form 10-K

Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, denial of service attack, ransomware attack, corruption of data, theft of private or other sensitive information, or similar malicious act by a party (including our employees), or inadvertent acts or omissions by our vendors or our own employees, could result in the loss, 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.

2021 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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Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

For example, we incurred additional costs and reallocated internal resources in order to comply with the requirements of the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020, and we expect to incur additional costs and reallocate additional resources when the final regulations under the CCPA are released.

Other states are currently contemplating additional privacy requirements.

The future enactment of more restrictive laws, rules or regulations could have a material adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in regulatory penalties and significant liability.

For example, we incurred additional costs and reallocated internal resources in order to comply with the requirements of the California Privacy Rights Act (“CPRA”), which amended the California Consumer Privacy Act of 2018 (“CCPA”) and became effective on January 1, 2023, and we expect to incur additional costs and reallocate additional resources when the final regulations under the CPRA are released.

Other states have adopted or are currently contemplating additional privacy requirements.

The future enactment of similar laws, rules or regulations could have a material adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in regulatory penalties and significant liability.

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.

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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.

We have adopted a strategy to market and sell additional products and services within and outside of traditional PEO HR Outsourcing solutions.

As part of this strategy, periodically we make strategic long-term decisions to invest in and/or acquire new companies, business units or assets.

Acquiring new businesses involves a number of risks such as over-valuation of the acquired companies, entering markets or businesses in which we have no prior experience, integrating the technology, operations, and personnel, diversion of management’s attention from other business concerns and litigation resulting from the activities of the acquired company.

The occurrence of one or more of these events could result in the loss of existing or prospective clients or employees, not achieving anticipated revenues or profitability, or impairment of acquired assets.

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

2022 Form 10-K

We have adopted a strategy to market and sell additional solutions within and outside of our PEO HR Outsourcing Solutions.

As part of this strategy, periodically we make strategic long-term decisions to partner with, invest in and/or acquire new companies, business units or assets in order to offer new or enhanced solutions.

Offering new solutions involves a number of risks such entering markets or businesses in which we have no prior experience and that may be highly regulated;

failing to integrate the new solution into our product and service offerings;

diversion of technology, service, marketing, management and other teams from other business concerns;

in the case of an investment or acquisition, over-valuation of the targeted business;

and litigation or government action resulting from the activities of an acquired company or from offering the new solution in a non-compliant manner.

The occurrence of one or more of these events could result in the loss of existing or prospective clients or employees, not achieving anticipated revenues or profitability, impairment of acquired assets, and substantial liability.

Such developments could have a material impact to our financial condition, results of operations, and future growth rates.

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.

2022 Form 10-K

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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