What changed in this filing

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Item 1A. Risk Factors

2024-02-09 compared with 2023-02-10 · 104 added, 104 removed, 231 unchanged (47% 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 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.

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 2023, 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.

The economic impact of the COVID-19 pandemic has adversely affected 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 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;

• 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 testing, 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;

• impact of the pandemic on our benefits costs;

• 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 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

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 is also difficult.

The 2020 increase in U.S.

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

A continuous increase in unemployment claims may increase state and/or federal 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 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.

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 to be more flexible in light of government restrictions and best practices encouraged by governmental and regulatory authorities.

While most of our operations can be performed remotely, there is no guarantee 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.

The remote work environment that was implemented during the pandemic also has had an impact on the expectations of our employees and, as a result, many of our departments have now switched to a “hybrid” mode in which remote work is permitted one or more days per week.

These changes may also impact productivity or have other impacts on our operations.

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 or the changes to the workplace resulting from the pandemic, 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 COVID Relief Programs 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 invoicing and collection of service fees, COBRA participation, and client reporting.

The CARES Act allowed companies to defer certain payroll taxes, which were reflected in the payrolls we processed for clients electing deferrals.

If we are unable to comply with or meet client expectations regarding certain COVID-19 relief programs, our business, financial condition, and results of operations could be materially adversely affected.

A number of governmental programs and incentives were created to assist businesses and individuals during 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, invoicing and collection of service fees, COBRA participation, and client reporting.

For example, the CARES Act allowed companies to defer certain payroll taxes, which were reflected in the payrolls we processed for those clients.

Client companies are liable for repaying the deferred amounts to the IRS;

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 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.

In addition, further legislation may be enacted at the federal, state or local level 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 insurance programs.

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

The IRS has experienced significant backlogs in processing amended tax forms from employers seeking ERC refunds and we are currently awaiting IRS review of a number of ERC claims with respect to our PEO clients.

Currently, the deadline to submit any ERC claims for relevant periods in 2020 is April 2024, and the deadline for relevant periods in 2021 is April 2025.

A pending federal bill, The Tax Relief for American Families and Workers Act of 2024 (H.R.

7024), however, would retroactively accelerate the deadline for all claims to January 31, 2024.

If any of the ERC claims that we made on behalf of our clients were denied or otherwise deemed insufficient, we may not be able to perfect our filings on a timely basis.

Further, eligibility for the ERC is dependent on certain operational information of our clients.

If the IRS were to determine that any of our clients were not eligible for the ERC requested on their behalf and conclude that we are responsible for those claims, or if the IRS were to otherwise challenge the claims we requested, we could face penalties or other liabilities.

In either of those events, our clients may seek recourse against us or choose not to renew.

If we experience rejection of any COVID-19 relief program claims on behalf of clients, are unable to timely make system changes needed to comply with other regulations, 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, and we may not have insurance coverage for all or some of these liabilities.

These events could further adversely impact our PEO state licenses or registrations, or our CPEO status, as well as our ability to attract and retain clients.

As a result of the foregoing, our business, results of operations and financial condition could be materially adversely affected.

Bank failures or other events affecting financial institutions could have a material adverse effect on our business, results of operations or financial condition, or have other adverse consequences.

We use a U.S.-based global systemically important bank (or G-SIB) for our PEO operations, including our cash balances associated with that portion of our business.

All of our cash deposits are held by Federal Deposit Insurance Corporation

2023 Form 10-K

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

(“FDIC”) insured banks, which amounts exceed the FDIC insurance limits.

Through various overnight “sweep account” programs, we also invest a significant portion of our cash balances in U.S.

Treasury-based funds, which are invested through brokerage firms affiliated with the banks at which our deposits are held.

The failure of a bank or related brokerage firm that we use, or events involving limited liquidity, non-performance or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, or concerns or rumors about such events, may lead to disruptions in access to our cash balances, adversely impact our liquidity, including our ability to borrow under our credit facility, or limit our ability to process transactions related to our clients.

In the event of a failure of a bank or other financial institution that holds our cash deposits, there can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be recoverable or, even if ultimately recoverable, there may be significant delays in our ability to access those funds.

Furthermore, bank failures, non-performance, or other adverse developments that affect financial institutions could impair the ability of one or more of the banks participating in our credit facility from honoring their commitments.

Such events could have a material adverse effect on our financial condition or results of operations.

Similarly, our clients may be adversely affected by any bank failure or other event affecting financial institutions.

For example, in early 2023, some of our clients had deposits with banks that were placed into receivership.

If those clients had been unable, or if our clients in the future are unable, to meet their obligations to us as a result of a bank failure or other event affecting financial institutions, we may be exposed to potential risks that could impact our financial condition or results of operations.

If we were to fail to pay the liabilities that we have assumed associated with our WSEEs, we may be subject to fines or other penalties.

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

The success of our business is heavily dependent on our ability to attract and retain a skilled workforce, including in our service and sales positions.

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 2022 and 2021, the labor market tightened, resulting in increased employee turnover and skilled labor shortages.

As macroeconomic conditions improved from 2021 through 2023, 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.

An overall or prolonged labor shortage, increased turnover, or labor inflation could have a material adverse impact on our growth plans, client service delivery, results of operations and financial condition.

In addition, following the remote work environment that we implemented during the COVID-19 pandemic and a resulting shift in the expectations of our employees, many of our departments have now switched to a “hybrid” mode in which remote work is permitted one or more days per week.

These changes may impact productivity or have other material impacts on our operations.

Inflation may reduce our profitability.

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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.

2023 Form 10-K

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:

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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

A future outbreak of 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 a highly infectious or contagious disease could create significant volatility, uncertainty and economic disruption, including as a result of actions taken by businesses and governments in response to such a pandemic that may result in a significant reduction in commercial activity, such as occurred during the COVID-19 pandemic that began in 2020.

The extent to which 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.

While such a 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 following the COVID-19 pandemic.

Additionally, future pandemics may change how and when we incur health insurance costs under our health insurance contract with United, such as changes in quarterly levels and timing of both medical and pharmaceutical health insurance claims and processing payment patterns.

Accordingly, 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.

PEO HR Outsourcing Solutions Risks

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• providing benefits to WSEEs

2023 Form 10-K

• providing workers’ compensation coverage to WSEEs

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

Further, the increase in remote work, including by WSEEs, has complicated the calculation of payroll and unemployment taxes applicable to those individuals.

We are dependent on our PEO Outsourcing Solutions clients to properly report the locations in which WSEEs perform services.

If a regulatory authority were to determine that we did not properly calculate or transmit these amounts, then we could be subject to fines, penalties, or other liabilities, which we may not be able to recover from our clients.

We may also need to devote additional resources and incur additional costs to modify our systems to address any such compliance issues.

If a client does not pay us, if the costs of services we provide to WSEEs exceed the fees a client pays us, or if we incur fines and penalties as a result of an adverse determination related to our payroll and unemployment tax calculations, our ultimate liability for WSEE payroll, payroll taxes, workers’ compensation and/or benefits costs, as well as any fines or penalties, could have a material adverse effect on our financial condition or results of operations.

Increases in health insurance costs or our inability to secure replacement health insurance coverage on competitive terms could have a material adverse effect on our business, financial condition or results of operations.

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Our primary health insurance contract expires on December 31, 2026, subject to cancellation by either party upon 180 days’ notice.

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

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

Health insurance costs are in part determined by our plans’ claims experience and comprise a significant portion of our direct costs.

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

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

The Patient Protection and Affordable Care Act (“PPACA”) was signed into law on March 23, 2010.

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

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.

The future impact of the following provisions or changes to the provisions of the Act, or future legislative actions, is unknown and, if any such developments were to reduce our ability to make health care benefits available to WSEEs or were to make our offerings less attractive to our clients, then our business, financial condition, and results of operations may be materially adversely affected.

Beginning in 2014, a number of key provisions of the Act took effect, including the Exchanges, insurance market reforms and the imposition of excise taxes on the health insurance industry and reinsurance taxes on insurers and third-party administrators.

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 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 health care-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.

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.

The Act also ushered in a number of insurance market reforms for the small group and individual markets.

The reforms required guaranteed issue and renewability of coverage, eliminated certain underwriting practices by issuers, consolidated the number of risk pools in each state and restricted the permissible factors and variable ranges of those factors that can be considered in determining health insurance premiums.

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.

Information contained in the Congressional Record, which specifically references PEOs, indicates that any pay or play penalties should apply separately to clients of a PEO and not at the PEO level.

However, the Act and subsequently issued IRS guidance do not expressly address the issue of whether the pay or play penalties apply only at the client level or whether the penalties can be applied at the PEO level.

If pay or play penalties were assessed against a PEO for coverage provided to WSEEs under a PEO sponsored plan, then our business, financial condition, and results of operations may be materially adversely affected.

As part of the Tax Extenders Act passed in 2019, the rules imposing excise taxes commencing in 2022 on employers and insurers who offer excessive health benefits under so-called “Cadillac plans” have been repealed.

At this time, we are unable to determine the effect that the repeal of these pending excise taxes will have on our business and whether such changes will make it more difficult for us to attract and retain and clients.

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 may impact our benefit plans, business model and future results of operations, including repeal or repeal and replacement of the Act as has been advocated by some Congressional leaders.

Many of our clients select a PEO Outsourcing Solution pursuant to which we offer the health and welfare benefit plans sponsored by us to the WSEEs co-employed by those clients.

The future impact and direction of healthcare reform, including future legislative actions, is unknown and, if any such developments were to reduce our ability to make health care benefits available to WSEEs or were to make our offerings less attractive to our clients, then our business, financial condition, and results of operations may be materially adversely affected.

Supporters in various states have advocated and continue to advocate for adoption of health care-related reforms at the state level, which has the potential to significantly change the insurance marketplace for small and medium-sized businesses and how employers provide insurance to employees.

Additionally, guidance by the IRS and the U.S.

Department of Health and Human Services (“HHS”) has not addressed or in some instances is unclear as to the application of certain aspects of federal health care reform laws in the PEO relationship or whether such provisions should be applied at the PEO or client level.

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

2023 Form 10-K

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.

Subsequent changes resulting from action that may be taken at the federal or state level may impact our benefit plans, business model and future results of operations, including repeal or repeal and replacement of current healthcare reform provisions as has been advocated by some Congressional leaders.

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

Additionally, contractual arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset any associated potential increased costs.

We are currently unable to determine whether potential future changes to the Act or other regulatory action, including at the state level, may adversely affect our business or market conditions.

We are currently unable to determine whether potential future healthcare reform changes or other regulatory action, including at the state level, may adversely affect our business or market conditions.

A determination that we are not the employer of our WSEEs and an inability to offer alternate benefit plans could have a material adverse effect on our business.

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

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.

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.

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

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However, if we were unable to promptly transition our benefit plans to a compliant structure with terms that were acceptable to our clients and at a comparable cost to us, then our business, financial condition, and results of operations could be materially adversely affected.

Increases in workers’ compensation costs or inability to secure replacement coverage on competitive terms could lead to a significant disruption to our business.

Increases in workers’ compensation costs or inability to secure replacement coverage on competitive terms could lead to a significant disruption and harm to our business.

Our workers’ compensation coverage has been provided through an arrangement with Chubb since 2007.

Under our current arrangement with Chubb for claims incurred on or before September 30, 2019, we have a financial responsibility to Chubb for the first $1 million layer of claims per occurrence and for claims over $1 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed the first $1 million.

Effective for claims incurred on or after October 1, 2019, our financial responsibility increased as we have financial responsibility to Chubb for the first $1.5 million layer of claims per occurrence and for claims over $1.5 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1.5 million.

Effective for claims incurred on or after

2023 Form 10-K

October 1, 2019, our financial responsibility increased as we have financial responsibility to Chubb for the first $1.5 million layer of claims per occurrence and for claims over $1.5 million, up to a maximum aggregate amount of $6 million per policy year for claims that exceed $1.5 million.

Chubb bears the financial responsibility for all claims in excess of these levels.

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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.

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The current workers’ compensation coverage with Chubb expires on September 30, 2024.

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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, 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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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.

In addition, we obtain insurance coverage for various commercial risks in our business such as property insurance, errors and

2023 Form 10-K

omissions insurance, cyber liability insurance, general liability insurance, fiduciary liability insurance and ERISA bond coverage, 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.

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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.

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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.

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Our CSA establishes the contractual division of responsibilities between Insperity and our clients for various human capital management matters, including compliance with and liability under various governmental regulations.

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Because we act as a co-employer, we may be subject to liability for violations of various employment, payroll, discrimination, and workplace safety laws despite these contractual provisions, even if we do not participate in such violations.

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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

2022 Form 10-K

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.

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 health insurance plans.

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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.

Further, if we were to be deemed to be subject to other regulatory requirements applicable to other businesses, such as rules or regulations applicable to new services that we may offer such as earned wage access, then we may need to hire additional personnel, incur additional costs in order to maintain compliance, or be subjected to fines, penalties, or other liabilities, which could be material.

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

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Our competitors include the PEO divisions of large business services companies, such as Automatic Data Processing, Inc.

and Paychex, Inc., and other national PEOs such as TriNet Group, Inc.

and Paychex, Inc., and other national PEOs such as TriNet Group, Inc., Vensure, and Rippling.

In many cases, these competitors offer a reduced service PEO offering at a lower price than our PEO HR Outsourcing Solutions.

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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

2022 Form 10-K

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

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 and Secure 2.0 Act of 2022.

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.

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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.

We may also incur significant costs in the future to

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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.

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Because the techniques used to obtain unauthorized access and disable or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party vendors may be unable to anticipate these techniques or implement adequate preventive measures.

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.

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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.

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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.

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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 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.

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, which has required us to reallocate additional resources in order to manage compliance in light of the changes implemented by the CPRA.

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.

Generally, these laws do not address the coemployment relationship, which requires us to make determinations as to the requirements applicable to our

2023 Form 10-K

WSEEs and our PEO Outsourcing Solutions clients.

The future enactment of similar laws, rules or regulations, or an adverse determination as to the applicability of these laws, rules, or regulations to us, 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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These facilities host the majority of our business applications, telecommunications equipment, information security infrastructure, and network equipment.

If our data centers experience any interruptions or outages, and our business continuity plan fails, then our operations may be materially impacted, which could result in our failure to meet our obligations to our clients, WSEEs, tax authorities, and/or other vendors, which could damage our reputation, subject us to liability and have a material adverse effect on our business and financial condition.

If our data centers experience any interruptions or outages, and our business continuity plan is delayed or fails, then our operations may be materially impacted, which could result in our failure to meet our obligations to our clients, WSEEs, tax authorities, and/or other vendors, which could damage our reputation, subject us to liability, and have a material adverse effect on our business and financial condition.

In addition, some of our systems and services rely upon third-party technology.

Examples include, the human capital management system on which our Workforce Acceleration solution is based, the data analytics solution on which our Insperity People Analytics solution is based, and the payroll tax calculation and reporting tools that provide the rates used to calculate payroll taxes for our PEO HR Outsourcing Solutions, among others.

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.

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;

subject us to substantial fines, penalties, and other liabilities;

damage our reputation;

and result in a loss of clients.

Other Operational Risks

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.

We may not fully realize the anticipated benefits of our strategic partnership and plans to develop a joint solution with Workday, Inc., which could have a material adverse impact on our financial condition or results of operations.

We have announced a strategic partnership and plans to develop a joint solution with Workday, Inc.

The success of the strategic partnership and joint solution will depend on many factors, and we may not realize all, or any, of the anticipated benefits.

We expect to devote substantial resources and incur significant costs to develop the joint solution.

The strategic partnership and plans to develop a joint solution involve numerous risks, including that we may be unable to complete the development and implementation of the joint solution, or that development and implementation of the joint solution may be more difficult, time-consuming, or costly than expected.

We may also not receive the expected sales, marketing, and other benefits from the strategic partnership.

The full benefit of the strategic partnership requires the cooperation of the two companies on sales, marketing, and technology matters, as well as our ability to successfully integrate and implement the Workday-based solution with our other processes and systems in a manner that allows us to maintain compliance as a professional employer organization and incorporate appropriate financial and management systems and controls.

In addition, we may fail to effectively market or sell the joint solution, or there may be less demand than anticipated for the joint solution.

The initiatives related to the strategic partnership, including the development of the joint solution, may divert the attention of our technology, service, compliance, marketing, sales, management, and other teams away from our existing business solutions, which could result in the loss of existing or prospective clients or fines, penalties, or other liabilities if our existing business solutions and compliance are disrupted.

We may also have conflicts or disagreements with Workday, which could disrupt the strategic partnership, could impact the development of the joint solution, and could lead to termination of the strategic partnership.

The occurrence of one or more of these events could result in our failure to achieve anticipated growth or revenues, or require us to devote additional resources to the strategic partnership or the development of the joint solution, any of which could result in a material adverse effect on our business, financial condition, and results of operations.

2023 Form 10-K

Failure to integrate or realize the expected return on future product offerings, including through acquisitions, strategic partnerships, 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 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;

Offering new solutions involves a number of risks such as 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;

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

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

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OTHER INFORMATION

Unresolved Staff Comments.

2022 Form 10-K

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