UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 20192021
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36373
TRINET GROUP, INC.INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 95-3359658 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| One Park Place, | Suite 600 | ||||||||||
| Dublin, | CA | 94568 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (510) (510) 352-5000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock par value $0.000025 per share | TNET | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
| Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2019,2021, was $3.0$2.9 billion.
The number of shares of Registrant’s Common Stock outstanding as of February 6, 20207, 2022 was 68,750,437.65,700,174.
Portions of the Registrant’s Definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders, scheduled to be held on June 4, 2020,May 24, 2022, are incorporated by reference into Part III of this Form 10-K.
| TABLE OF CONTENTS | |||||
TRINET GROUP, INC.
Form 10-K - Annual Report
For the Year Ended December 31, 20192021
TABLE OF CONTENTS
Form 10-K Cross Reference | Page | |||||||
| Part I, Item 1. | ||||||||
| Part I, Item 1A. | ||||||||
| Part I, Item 1B. | ||||||||
| Part I, Item 2. | ||||||||
| Part I, Item 3. | ||||||||
| Part I, Item 4. | ||||||||
| Part II, Item 5. | ||||||||
| Part II, Item 7. | ||||||||
| Part II, Item 7A. | ||||||||
| Part II, Item 8. | ||||||||
| Part II, Item 9. | ||||||||
| Part II, Item 9A. | ||||||||
| Part II, Item 9B. | ||||||||
| Part II, Item 9C. | ||||||||
| Part III, Item 10. | ||||||||
| Part III, Item 11. | ||||||||
| Part III, Item 12. | ||||||||
| Part III, Item 13. | ||||||||
| Part III, Item 14. | ||||||||
| Part IV, Item 15. | ||||||||
| Part IV, Item 16. | ||||||||
| GLOSSARY | |||||
Glossary of Acronyms and Abbreviations
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Business; Part 1,I, Item 1A. Risk Factors; Part II, Item 7. MD&A; Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 8. Financial Statements and Supplementary Data.
| Our $425 million term loan A executed in June 2018 and repaid in 2021 | ||||||||
| 2021 Credit Program | Our 2021 program to provide eligible clients with credits, subject to predefined conditions and based on certain pandemic related excess health care cost savings achieved. | |||||||
| 2021 Credit Agreement | Our credit agreement dated February 26, 2021, including our $500 million revolving line of credit. | |||||||
| 2029 Notes | Our $500 million senior unsecured notes maturing in March 2029 | |||||||
| AB5 | Assembly Bill 5 | |||||||
| ACA | The Patient Protection and Affordable Care Act | |||||||
| ACH | Automated Clearinghouse Transaction | |||||||
| AFS | Available-for-sale | |||||||
| American Rescue Plan Act | ||||||||
| ASC | Accounting standards codification | |||||||
| Administrative Services Organization | ||||||||
| ASU | Accounting standards update | |||||||
| Coronavirus Aid Relief and Economic Security Act | ||||||||
| CCPA | California Consumer Privacy Act | |||||||
| Chief Executive Officer | ||||||||
| CFO | Chief Financial Officer | |||||||
| COBRA | Consolidated Omnibus Budget Reconciliation Act | |||||||
| COPS | Cost of providing services | |||||||
| COVID-19 | Novel coronavirus | |||||||
| CPRA | California Privacy Rights Act | |||||||
| D&A | Depreciation and amortization expenses | |||||||
| DOL | U.S. Department of Labor | |||||||
| EBITDA | Earnings before interest expense, taxes, depreciation and amortization of intangible assets | |||||||
| EPLI | Employment Practices Liability Insurance | |||||||
| EPS | Earnings Per Share | |||||||
| ERISA | Employee Retirement Income Security Act | |||||||
| ESPP | Employee stock purchase plan | |||||||
| ETR | Effective tax rate | |||||||
| FASB | Financial Accounting Standards Board | |||||||
| Families First Coronavirus Response Act | ||||||||
| FLSA | Fair Labor Standards Act | |||||||
| G&A | General and administrative | |||||||
| GAAP | Generally Accepted Accounting Principles in the United States | |||||||
| HIPAA | Health Insurance Portability and Accountability Act | |||||||
| HITECH Act | Health Information Technology for Economic and Clinical Health Act | |||||||
| HR | Human Resources | |||||||
| IBNP | Incurred but not yet paid | |||||||
| IBNR | Incurred but not yet reported | |||||||
| Insurance cost ratio | ||||||||
| IGP | Indemnity Guarantee Payment | |||||||
| Integrated Open Market | ||||||||
| IRS | Internal Revenue Service | |||||||
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| GLOSSARY | |||||
| ISR | Insurance service revenues | |||||||
| LDF | Loss development factor | |||||||
| LIBOR | London Inter-bank Offered Rate | |||||||
| MCT | Medical cost trend | |||||||
| MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| PFC | Payroll funds collected | |||||||
| PHI | Protected Health Information | |||||||
| PPP | Paycheck Protection Program, a loan program administered by the U.S. Small Business Administration | |||||||
| PPPFA | Paycheck Protection Program Flexibility Act | |||||||
| PSR | Professional service revenues | |||||||
| Reg FD | Regulation Fair Disclosure | |||||||
| ROU | Right-of-use | |||||||
| RSA | Restricted Stock Award | |||||||
| RSU | Restricted Stock Unit | |||||||
| SBA | U.S. Small Business Administration | |||||||
| SBC | Stock Based Compensation | |||||||
| S&M | Sales and marketing | |||||||
| S&P | Standard & Poor's | |||||||
| SD&P | Systems development and programming | |||||||
| SEC | U.S. Securities and Exchange Commission | |||||||
| SMB | Small and medium-size business | |||||||
| TCJA | ||||||||
| Tax Cuts and Jobs Act | |||||
| U.S. | United States | ||||
| WSE | Worksite employee | |||||||
| YTD | Year to date |
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Cautionary Note Regarding Forward-Looking Statements
For purposes of this Annual Report on Form 10-K (Form 10-K), the terms “TriNet,” “the Company,” “we,” “us” and “our” refer to TriNet Group, Inc., and its subsidiaries. This Annual Report on Form 10-K (Form 10-K) contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as, but not limited to, “ability,” “anticipate,” “believe,” “can,” “continue,” “could,” “design,” “estimate,” “expect,” “forecast,” “hope,” “impact,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” “value,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Examples of forward-looking statements include, among others, TriNet’s expectations regarding: the execution of a definitive agreement to acquire Zenefits; our ability to support the economic recovery of our clients and SMBs; market acceptance of our new support, service and product offerings, including our Connect 360 service model and Financial Services Preferred and IOM products; the impact of our annual TriNet PeopleForce conference; our expectations regarding medical utilization rates by our WSEs; the impact of the COVID-19 pandemic on regulations and government programs; the impact of our 2020 Recovery Credit program and our 2021 Credit Program and their suitability for generating client loyalty and retention; our ability to modify or develop service offerings to assist clients affected by COVID-19; the impact of our vertical approach,approach; our ability to leverage our scale and industry HR experience to deliver vertical product and service offerings; the growthimpact of our customerplans to continue to grow our client base; planned improvements to our technology platform; our ability to drive operating efficiencies and improve the customerclient experience; the impact of our customerclient service initiatives; our continued ability to provide access to a broad range of benefit programs on a cost-effective basis; the volume and severity of insurance claims and the impact of COVID-19 on those claims; the effectiveness of our risk strategies for, and management of, workers' compensation and health benefit insurance costs and deductibles; the metrics that may be indicators of future financial performance; the relative value of our benefit offerings versus those SMBs can independently obtain; the impact that our benefit offerings have for SMBs seeking to attract and retain employees; the effectiveness of our strategies for mitigation of EPLI risk; the principal competitive drivers in our market; our plans to retain clients and manage client attrition; our investment strategy and its impact on our ability to generate future interest income, net income, and Adjusted EBITDA; seasonal trends and their impact on our business;business, including due to COVID-19; fluctuations in the period-to-period timing of when we incur certain operating expenses; the estimates and assumptions we use to prepare our financial statements; and other expectations, outlooks and forecasts on our future business, operational and financial performance.
Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements are discussed above and throughout this Form 10-K, including under Part I, Item 1A. Risk Factors, and Part II, Item 7. MD&A, and in the other periodic filings we make with the SEC, and including risk factors associated with: the economic, health and business disruption caused by the COVID-19 pandemic; the impact of the COVID-19 pandemic on our ability to mitigateclients and prospects, insurance costs and operations; the business risks we face as a co-employer;impact of the COVID-19 pandemic on the laws and regulations that impact our industry and clients; our ability to manage unexpected changes in workers’ compensation and health insurance claims and costs by worksite employees; our ability to mitigate the business risks we face as a co-employer; the effects of volatility in the financial and economic environment on the businesses that make up our client base; loss of clients for reasons beyond our control; the short-term contracts we typically use with our clients; the impact of the concentration ofregional or industry-specific economic and health factors on our clients in certain geographies and industries;operations; the impact of failures or limitations in the business systems we rely upon; the impact of our 2020 Recovery Credit program and 2021 Credit Program; adverse changes in our insurance coverage or our relationships with key insurance carriers; our ability to manageimprove our client attrition; our ability to improve ourservices and technology to satisfy regulatory requirements and meet the expectations of our clients;clients and manage client attrition; our ability to effectively integrate businesses we have acquired or may acquire in the future; our ability to effectively manage and improve our operational processes; our ability to attract and retain qualified personnel; the effects of increased competition and our ability to compete effectively; the impact on our business of cyber-attacks and security breaches; our ability to secure our information technology infrastructure and our confidential, sensitive and personal information from cyber-attacks and security breaches;information; our ability to comply with constantly evolving data privacy and security laws; our ability to manage changes in, uncertainty regarding, or adverse application of the complex laws and regulations that govern our business; changing laws and regulations governing health insurance and employee benefits; our ability to be recognized as an employer of worksite employees under federal and state regulations; changes in the laws and regulations that govern what it means to be an employer, employee or independent contractor; our ability to comply with the laws and regulations that govern PEOs and other similar industries; the outcome of existing and future legal and tax proceedings; fluctuation in our results of operation and stock price due to factors outside of our control, such
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| BUSINESS | |||||
as the volume and severity of our workers’ compensation and health insurance claims and the amount and timing of our insurance costs, operating expenses and capital expenditure requirements; our ability to comply with the restrictions of our credit facility and meet our debt obligations; and the impact of concentrated ownership in our stock. Any of these factors could cause our actual results to differ materially from our anticipated results.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this Form 10-K and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from our current expectations and any past results, performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The information provided in this Form 10-K is based upon the facts and circumstances known atas of the date of this time,Form 10-K, and any forward-looking statements made by us in this Form 10-K speak only as of the date of this Form 10-K. We undertake no obligation to revise or update any of the information provided in this Form 10-K, except as required by law.
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PART I
Item 1. Business
TriNet is a leading provider of HR expertise, payroll services, employee benefits and employment risk mitigation services for SMBs. Since our founding in 1988, TriNet has served, and continues to serve, thousands of SMBs. For the year ended December 31, 2019,In 2021, we processed $41.7$55 billion in payroll and payroll taxes for our clients and ended 2019the year with approximately 18,90016,300 clients and 340,000364,900 WSEs, primarily in the U.S.
Our Products and Services
We deliver a comprehensive suite of products and services that facilitates the administrationhelp our clients administer and management ofmanage various HR-related needs and functions, for our clients, includingsuch as compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR needs using our technology platform and HR, benefits and compliance expertise. We empower SMBs to focus on what matters most - growing their business.
We also leverage our scale and industry HR experience to deliver product andour service offerings tailored for SMBs in specific industries.industry verticals. We believe our approach, which we call our vertical approach is a key differentiator for us and creates additional value for our clients by allowing our product and service offerings to addressaddressing their industry-specific HR needs in different client industries.needs. We offer six industry-tailored vertical products,services: TriNet Financial Services, TriNet Life Sciences, TriNet Main Street, TriNet Nonprofit, TriNet Professional Services, and TriNet Technology.
Our comprehensive HR products and solutions include the following capabilities:
 |  |  |  |  | ||||||||||||||||||||||
| HR CONSULTING EXPERTISE | BENEFIT OPTIONS | PAYROLL SERVICES | RISK MITIGATION | TECHNOLOGY PLATFORM | ||||||||||||||||||||||
HR Consulting ExpertiseWe use the collective knowledge and experience of our teams of HR, benefits, risk management and compliance professionals to help clients manage many of the administrative, regulatory and practical requirements associated with being employers. Our HRWe do this by incorporating our knowledge and experience into our services and our technology platform and by making our professionals and services helpavailable to consult with clients addresson a variety of HR issues,needs, including consulting on talent management, retention and terminations, benefits enrollment, immigration and visas, payroll tax credits, laboremployment law and regulatory developments and many other industry-specific and general HR topics. Depending on their needs, our clients and WSEs have access to varying levels of service and support from our HR professionals, ranging from call center support for basic questions to pooled HR resources, to onsite consulting and services.resources. Our HR professionals also provide additional specialized HR consulting and services upon request.
Benefit OptionsWe utilize our scale to provide our clients and WSEs access to a broad range of cost-effective, TriNet-sponsored employee benefit and insurance programs at a costcosts that we believe most of our clients would be unable to obtain on their own. We believe that our TriNet-sponsored programs help clients compete for talent against larger businesses. Our benefit and insurance programs are designed to comply with federal, state and local regulations, and our benefit and insurance service offerings include plan selection and administration, enrollment management, leave management, plan document distribution and WSE and client communications.
Under our benefit and insurance programs, we pay third-party insurance carriers for WSE insurance benefits and reimburse insurance carriers or third-party administrators for claims payments within our insurance deductible layer, where applicable.
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We sponsor and administer several fully insured employee benefit plans for our WSEs through a broad range of carriers, including group health, dental, vision, short- and long-term disability, and life insurance as an employer plan sponsor under Section 3(5) of ERISA. We also offerprovide for other benefit programs to be made available to WSEs, including flexible spending accounts, health savings accounts, retirement benefits, COBRA benefits, supplemental insurance, commuter benefits, home insurance, critical illness insurance, accident insurance, hospital indemnity, pet insurance, and auto insurance. For further discussion of our fully insuredinsurance programs, including policies where we reimburse our carriers for certain amounts relating to claims, refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Payroll ServicesWe help clients manage all aspects of their employee compensation by providing multi-state payroll processing, tax administration services and other payroll-related services, such as time and attendance management, time off and overtime tracking, and expense management solutions. Our clients and WSEs can access payroll and tax information using our online and mobile tools. Our tax administration services include calculating, withholding, remitting and reporting certain federal, state and local payroll and unemployment taxes on behalf of clients and WSEs.
Risk MitigationWe monitor employment-related legal and regulatory developments at the federal, state, and local levels to help our clients comply with employment laws and mitigate many of the risks associated with being an employer. We provide HR guidance on employment laws and regulations, including those relating to minimum wage, unemployment insurance, family and medical leave and anti-discrimination. We also ensure that our TriNet-sponsored benefit plans comply with applicable laws and regulations, like the ACA, reducing this compliance burden to our clients.
We provide fully insuredfully-insured workers' compensation insurance coverage for our clients and WSEs through insurance policies that we negotiate with our third-party insurance carriers. We manage the deductible risk that we assume in connection with these policies by being selective in the types of businesses that we take on as new clients, and by monitoring claims data and the performance of our carriers and third-party claims management service providers. In addition, we advise clients on workers’ compensation best practices, including by performing workplace assessment consultations and assisting with client efforts to identify conditions or practices that might lead to employee injuries.
We also provide EPLI coverage for our clients through an insurance policiespolicy that we obtain from a third-party EPLI carrier. These policies provideThis policy provides coverage for certain claims that arise in the course of the employment relationship, such as discrimination, harassment, and certain other employee claims, with a per-claim retention amount. The retention amount under this policy, which functions like a deductible, is splitallocated on a pre-determined basis between the client and TriNet. Our HR professionals assist our clients in implementing HR best practices to help avoid and reduce the cost of employment-related liabilities. Litigation defense is conducted by ourOur preferred outside employment law firms.firms defend covered EPLI claims.
Technology PlatformOur technology platform includes online and mobile tools that allow our clients and WSEs to store, view, and manage HR information and administer a variety of HR transactions, such as payroll processing, tax administration, employee onboarding and termination, compensation reporting, expense management, and benefits enrollment and administration. Our online tools also incorporate workforce analytics, allowing clients to generate HR data, payroll, total compensation and other custom reports.
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Our Co-Employment Model
We operate using a co-employment model, under which employment-related responsibilities are allocated by contract between us and our clients. This model allows WSEs to receive the full benefit of our services, including access to TriNet-sponsored employee benefit plan offerings. Each of our clients enters into a client service agreement with us that defines the suite of professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our clients as co-employers. WSEs also separately acknowledge the co-employment relationship and the allocation of employment-related responsibilities between TriNet and our clients. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
We generally assume responsibility for, and manage certain risks associated with:
•payments of salaries, wages and certain other compensation to WSEs from our own bank accounts (based on client reports and payments), including the processing of garnishment and wage deduction orders,
•reporting of wages, withholding and deposit of associated payroll taxes as the employer of record,
•provision and maintenance of workers' compensation insurance and workers' compensation claims processing,
•access to, and administration of, group health, welfare, and retirement benefits to WSEs under TriNet-sponsored benefit plans,
•compliance with applicable law for certain TriNet-sponsored employee benefits offered to WSEs,
•administration of unemployment claims, and
•provision of various HR policies and agreements, including employee handbooks and worksite employee agreements describing the co-employment relationship.
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not specifically assume, generally including:
•day-to-day management of their worksites and WSEs,
•compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance,
•accurate and timely reporting to TriNet of compensation and deduction information, including information relating to hours worked, rates of pay, salaries, wages and other compensation, and work locations,
•accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination, and certain other information relevant to TriNet’s services,
•provision and administration of any employee benefits not provided by TriNet such as equity incentive plans,
•compliance with all laws and regulations applicable to the clients' workplace and business, including work eligibility laws, laws relating to workplace safety or the environment, laws relating to family and medical leave, laws pertaining to employee organizing efforts and collective bargaining and employee termination notice requirements,
•payment of TriNet invoices, which include salary, wages and other relevant compensation to WSEs and applicable employment taxes and service fees, and
•all other matters for which TriNet does not assume responsibility under the client service agreement, such as intellectual property ownership and protection and liability for products produced and services provided by the client company to its own customers.clients.
As a result of our co-employment relationships, we are liable for payment of salary, wages and certain other compensation to the WSEs as reported and paid to us by the client, and are responsible for providing specified employee benefits to such persons to the extent provided in each client service agreement and under federal and state law. In most instances, clients are required to remit payment prior to the applicable payroll date by wire transfer or ACH.
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We also assume responsibility for payment and liability for the withholding and remittance of federal and state income and employment taxes with respect to salaries, wages and certain other compensation paid to WSEs, although we reserve the right to seek recourse against our clients for any liabilities arising out of their conduct. We perform these functions as the statutory employer for federal employment tax purposes, since our clients transfer legal control over these payroll functions to us. The laws that govern the payment of salaries, wages and related payroll taxes for our WSEs are complex and the various federal, state and local laws that govern such payments can vary significantly. Based on applicable law in any jurisdiction, we or our client may be held ultimately liable for those obligations if we fail to remit taxes.
Despite the continuation of the COVID-19 pandemic, the U.S. economy saw substantial recovery in 2021 due to the easing of COVID-19 restrictions, consumer demand and continued federal and state legislative efforts to help businesses and employees. We observed the following PEO industry trends in 2021:
•SMB Economic Recovery. The U.S. economy saw substantial recovery from the pandemic driven economic downturn in 2020, however the extent of the recovery for SMBs differed based on their industry and geographic region. For example, SMBs in the financial services, technology and professional services industries generally experienced shallower headcount declines in 2020 and have recovered headcount more quickly in 2020 and 2021 as their workforces were better able to transition to remote work. Meanwhile, SMBs in the retail, leisure and hospitality industries generally experienced significant headcount freezes, furloughs and terminations in 2020, and these headcount declines have been slow to recover in 2020 and 2021. Similarly, SMBs in geographic regions that saw significant increases in COVID-19 cases in 2021 from the Delta and Omicron variants have generally experienced more significant economic headwinds.
•Continued Insurance Cost Variability and Volatility. The volume of medical claims, including COVID-19 testing, treatment and vaccination costs, increased in 2021, however medical claim volume remained below pre-pandemic levels. Access to medical services and systems remained constrained in 2021, particularly in regions that saw increases in COVID-19 hospitalizations that reduced preventative and elective procedures.
•Laws and Regulations. Numerous laws and regulations were created or modified in 2021 that had an impact on our business and the businesses of our clients and SMBs across the country. For example, the PPPFA and ARPA, were passed in 2021 to augment and extend 2020 programs intended to assist SMB’s and their employees to recover from the impacts of COVID-19. The paid leave and corresponding employer tax credit under the FFCRA was modified and extended through the third quarter of 2021, and the employee retention credit program under the CARES Act was also extended and modified before being retroactively terminated effective at end of the third quarter of 2021. Additional provisions of the CCPA became effective in 2021, and the DOL issued regulatory guidance regarding cybersecurity measures applicable to retirement plans. Federal and state views on employees and independent contractors remained in flux during 2021 as we saw a California state court find that Proposition 22, which was a modification of an earlier law that reclassified certain independent contractors as employees, was unconstitutional and unenforceable. The National Labor Relations Board (NLRB) also announced plans to create a new rule for determining whether two business are joint employers or co-employers and is expected to announce this new rule in 2022. We do not believe we are a joint employer, but changes in regulations determining joint employer status could lead to increased legal claims against us or our clients, increase our compliance costs, or require changes to how we operate our business and the services we provide to our clients and WSEs.
For more information regarding the developments above, including the impact of COVID-19 on our business and operations, refer to Part II, Item 7. MD&A in this Form 10-K, and Part I, Item 1A. Risk Factors under the subheading "Risks Related to the COVID-19 Pandemic".
Our Service Development Efforts
We continued to make significant investments in our technology platform with projects intended to provide our users with improved functionality, HR management options, and security. We intend to continue to invest in our technology platform to improve its functionality, ease of use, security and the overall user experience for our clients and WSEs. We believe the continued investment in improving our technology platform will drive operating efficiencies over the long term and improve our client experience.
In 2021, we distributed $86 million to customers under our 2020 Recovery Credit program under which eligible clients received one-time reductions against fees for services. Our Recovery Credit program is designed to promote
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| BUSINESS | |||||
client loyalty, incentivize client retention, and to differentiate TriNet from its peers in the PEO industry and in other competing HR services industries. Similarly, in March 2021, we created our 2021 Credit program, which was designed to return $25 million to eligible customers based on the performance of our health insurance costs for the year.
Throughout 2021 we continued to modify the programs we created in 2020 to support several important funding and payroll tax incentive programs for SMBs created under the FFCRA, CARES Act and PPFA, including PPP, mandatory employee leave requirements, payroll tax deferral and tax credit programs and other employment- and employment tax-related incentives. Changes to these programs in 2021, including guidance from the state and federal agencies managing these programs, required us to create new services, or redesign our existing services, to support these programs for our SMB clients and we expect to continue to make changes to these programs as laws and regulatory guidance change over time.
To engage with our clients and SMBs, we hosted the 2nd annual TriNet PeopleForce conference in the third quarter of 2021, our showcase customer and prospect conference focused on business transformation, agility and innovation for SMBs.
In December 2021, we entered into a definitive agreement to acquire Zenefits, a leading cloud HR platform which provides innovative and intuitive HR, benefits, payroll and employee engagement software purpose-built for SMBs. We believe the acquisition of Zenefits, once completed, will allow us to diversify our product offering to include an Administrative Services Organization (ASO), enabling us to dynamically service SMBs throughout their lifecycle and expand the customers we serve.
Our Clients and Geographies
Our clients are distributed across a variety of industries, including technology, professional services, financial services, life sciences, not-for-profit, property management, retail, manufacturing, and hospitality. We generally support these different clients using our industry-tailored vertical approach. Our clients generally execute annual service contracts with us that automatically renew. In most cases, our clients may cancel these contracts with 30 days' notice to us and we may cancel these contracts with 30 days' notice.
Nearly all of our revenues are generated within the United States and its territories and substantially all our long-lived assets are located in the United States.
Our Competitors
We face competition from:
•PEOs that compete directly with us,
•HR and information systems departments and personnel of companies that administer employee benefits, payroll and HR for their companies in-house,
•providers of certain endpoint HR services, including payroll, employee benefits, business process outsourcers with high-volume transaction and administrative capabilities, and other third-party administrators, and
•insurance brokers who allow third-party HR systems to integrate with their technology platform.
Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc., the PEO operations of Paychex, Inc. and Insperity, Inc., as well as numerous specialized and smaller PEOs and similar HR service providers with PEO operations.
We believe that our services are attractive to many SMBs in part because of our ability to provide access to a broad range of TriNet-sponsored workers compensation, health insurance and other benefits programs on a cost-effective basis. We compete with insurance brokers and other providers of insurance and benefits coverage, and our offerings must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.
We believe that we also compete based upon the breadth and depth of our benefit plans, vertical market expertise, total cost of service, brand awareness and reputation, ability to innovate and respond to client needs rapidly, access to online and mobile solutions, and subject matter expertise. We believe that we are competitive across these factors. For additional information about our competition, please refer to Part I, Item 1A. Risk Factors, of this Form
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10-K, under the heading – "We must continue to work to improve our services to meet the expectations of our clients and regulators, or we may lose our clients and materially harm our business".
Our Sales Organizationand Marketing Organizations
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization by industry vertical with the goal of growing profitable market share in our targeted industries. This vertical approach deepens our network of relationships and gives us an understanding of the unique HR needs facing SMBs in those industries. Our sales representatives are supported by marketing, lead generation efforts, and referral sources and networks. While the COVID-19 pandemic made it difficult to engage with prospects face-to-face, the use of technology and communication tools created new opportunities for us to engage with customers and prospects virtually.
We typically sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets. We responded to the unique challenges posed by the COVID-19 pandemic by shifting between virtual and in-person events. Events include our 2nd Annual TriNet PeopleForce conference, and informational webinars periodically throughout the year on a wide variety of COVID-19 and business topics relevant to our SMB prospects and clients. We also generate sales opportunities within key industry verticals, through marketing alliances and other indirect channels, such as accounting firms, venture capital firms, incubators, insurance brokers, and vertical market industry associations. Additionally, we utilize digital marketing programs, including digital advertising, search and email marketing, to create awareness and interest in our products.
Our marketing and corporate communications organization is charged with driving overall brand awareness, managing lead generation, creating and managing our website and other online properties, creating content for all marketing and communication channels including our outbound and inbound marketing efforts, media relations, and managing our sponsorships, major marketing events, and clientinternal and external communications. Prospects changed the way they engaged with us during COVID-19 by using more digital tools like tele-presence and web engagements. In 20192021, we launched numerous digital channels for engagement, including conversational marketing enhancements on our website in response to customers' changing preferences. In 2021, our marketing team also focused on strategic marketing, communications andsocial media, branding initiatives, and crisis communication plans, in part by augmenting our comprehensive company re-brandingbrand campaign, Incredible Starts Here, with our marketing campaign, People Matter, that included omni channel initiatives using social media, and advertising across digital, television, radio and out-of-home media.
Our business operates in a complex legal and regulatory environment due to a myriad of federal, state and local laws and regulations that impact our business. Below is a summary of what we believe are the most important legal and regulatory issues for our business. For additional information on the impact of these and other laws and regulations on our business and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "Legal and Compliance Risks.Risks".
Employer Status
We sponsor our employee benefit plan offerings as the employer of our WSEs under the Internal Revenue Code of 1986, as amended (the Code), ERISA and applicable state law. The multipleterm “employer” has different definitions of “employer”for different purposes under both the Code and ERISA, and for most purposes are not clear and most are defined in part byinterpreted under complex multi-factor tests under common law. We believe that we qualify asare an “employer” of our WSEs in the U.S. under both the Code and the employer of our WSEs in the U.S. for the purposes of ERISA, as well as qualifying as an employer under various state laws, but this status could be subject to challenge by various regulators. For additional information on our employer status and its impact on our business and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "If we are not recognized as an employer of worksite employees under federal and state regulations, we and our clients could be adversely impacted.impacted".
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Health Insurance and Health Care Reform
Our sponsored employee health planand welfare offerings are an important component of the products and services that we provide. The future of health care reform continues to evolve in the U.S. For example, the passage of the ACA in 2010 implemented sweeping health care reforms with staggered effective dates from 2010 through 2022, and many provisions in the ACA are still requiresubject to the issuance of additional guidance from the DOL, the IRS, the U.S. Department of Health and Human Services and various U.S. states. Passage of the TCJA in 2017 eliminated the individual mandate tax penalty under the ACA beginning in 2019, while retaining employer ACA mandate obligations. States have developed, and will continue to develop, varying approaches to state-based health exchanges.exchanges and mandates. Further significant changes to health care statutes, regulations and policy at the federal, state and local levels could occur in 20202022 and beyond, including the potential further modification amendment or repealamendment of the ACA, and we may need to adapt the manner in which we conduct our business as a result of any such changes. For additional information on the ACA and its impact on our business and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "Changing laws and regulations governing health insurance and other traditional employee benefits at the federal, state and local level could negatively affect our business.business".
Data Privacy and Security Regulations
We collect, , store, use, retain, disclose, transfer and otherwise process a significant amount of confidential, sensitive and personal information from and about our actual and potential clients, WSEs and corporate employees, and we are subject to a variety of federal, state and foreign laws, rules, and regulations in connection with such activities. As a sponsor of employee benefit plans, we also have access to certain protected health information (PHI) of our WSEs and corporate employees. Management of PHI is subject to several regulations at the federal level, including HIPAA and the HITECH Act. HIPAA contains restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure of PHI. Further, there are penalties and fines for HIPAA violations. Because TriNet sponsored health plans are covered entities under HIPAA, we are required to comply with HIPAA's portability, privacy, and security requirements. We are also subject, among other applicable federal laws, rules and regulations, to the rules and regulations promulgated under the authority of the Federal Trade Commission. The U.S. Congress has considered, but not yet passed, several comprehensive federal data privacy bills over the past few years, such asyears. Additionally, several federal agencies have issued rules, regulations or other forms of guidance that may impact the CONSENT Act, which was intendedprivacy and security obligations that apply to be similar to the landmark 2018 European Union General Data Protection Regulations.our operations. We expect that the federal government’s approach to data privacy laws toand security will continue to evolve.evolve in the coming years.
At the state and local level, there is increased focus on regulating the collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information. In recent years, we have seen significant changes to data privacy regulations across the U.S., including the enactment of the California Consumer Privacy Act of 2018 (CCPA), which went into effect in January 2020. The CCPA increases privacy rights for California residents and imposes obligations on companies that process their personal information, including an obligation to provide certain new disclosures to such residents. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA was amended in September 2018 and October 2019, and further amendments may be enacted. In November 2020, California approved the California Privacy Rights Act (CPRA), which creates a new privacy oversight agency and further amends the CCPA to provide additional rights to consumers to access, edit and control the sale and sharing of personal information. The provisions of the CPRA go into effect in January 2023.
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In 2021, two additional states—Virginia and Colorado—enacted comprehensive data privacy laws that will go into effect in Illinois, Massachusetts, New Jersey, New York, Rhode Island, Washington and other2023, while legislatures in several additional states including a proposed right toconsidered data privacy amendment to the Vermont Constitution,laws. These laws impose, or hashave the potential to impose, additional obligations on companies that collect, , store, use, retain, disclose, transfer and otherwise process confidential, sensitive and personal information, and will continue to shape the data privacy environment nationally. In addition,Although there are similarities between the data privacy laws enacted in California, Virginia and Colorado (along with the laws that have been proposed in other states), there are also substantive aspects of the laws that differ markedly. This lack of uniformity, which we expect to continue as other states enact data privacy laws, creates significant legal complexities for companies (such as TriNet) that operate nationwide and are required to comply with a patchwork of privacy laws. Moreover, all 50 U.S. states, the District of Columbia, Guam, Puerto Rico, the Virgin Islands and Canada have enacted data breach notification laws that may require us to notify WSEs, clients, employees, third parties or regulators in the event of unauthorized access to or disclosure of personal or confidential information. Complying with existing and new data privacy and security regulations could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure to comply with existing and new data privacy and security regulations could result in significant penalties, damage our reputation and otherwise have a material adverse effect on our business. For additional information on the privacy and security of the confidential, sensitive and personal information and PHI we possess and the potential impact to our business if we fail to protect such information, refer to each of the risk factors included in Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "Data Privacy and Security Risks.Risks".
PEO Licensing Laws
Nearly all states have adopted laws and regulations for licensing, registration, certification or recognition of PEOs and the IRS has implemented a voluntary federal licensingcertification program for PEOs. We expect states without such laws and regulations to adopt them in the future. While these laws and regulations can vary widely, most regulators monitor the financial health and other relevant business information of PEOs on an annual or quarterly basis. In some cases, these laws and regulations codify and clarify the co-employment relationship for certain payroll, unemployment, workers' compensation and other employment-related purposes or require specific client contractual terms and/or WSE disclosures. We believe we comply in all material respects with the applicable PEO laws and regulations in each state and jurisdiction in which we operate. For additional information, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading -
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Payroll andTaxes, Unemployment Taxes and Payroll Tax Credits
We must also comply with the federal and state payroll tax and unemployment tax requirements that apply where our clients are located. Tax reform efforts, and other payroll tax changes, at the federal, state and local level can impact our payroll tax reporting obligations for our clients and the products and services we can provide. State unemployment tax rates vary by state based, in part, on prior years’ compensation and unemployment claims experience and may also vary based on the overall claims experience of a PEO. As a result, depending on where clients are located, the fees we charge for unemployment taxes can be higher or lower than a client could obtain alone. In some cases, taxing authorities can retroactively increase the unemployment taxes we pay can also be retroactively increased to cover deficiencies in the unemployment tax funds. We also rely on our clients to accurately report their WSEs' work locations and inaccurate reporting, due to work from home policies during the COVID-19 pandemic or otherwise, can impact our payroll tax obligations and the obligations of our clients and WSEs.
We have seen a growing trend, particularly at the federal level, of using payroll tax credits, deferrals and other related payroll tax programs as a mechanism for incentivizing SMB development and/or economic recovery. These programs are popular because they allow SMBs, which often have income tax losses, to realize benefits via payroll tax reductions, rather than income tax reductions. As a result, many of our SMB clients demand that we support these programs. Examples of these programs include the 2015 PATH Act, which allows SMBs to use research and development tax credits submitted on the SMB’s income tax return to reduce payroll taxes, and the CARES Act and FFCRA Act payroll tax credit and payroll tax deferral programs enacted in 2020 and 2021, which allow SMBs to defer certain payroll tax obligations to a later date or to receive payroll tax reductions and refunds based on SMB employment practices that are beyond a PEO’s control. These programs have generally not been designed with the PEO industry in mind and these programs are subject to broad agency interpretations given their complexity. For additional information tax credit programs, and the risks they post to our operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business."
Other Employment Regulations
We must also comply with labor and employment laws, which can change frequently at the federal, state and local level. In particular, regulatory focus on the classification of employers, employees and independent contractors has the potential to significantly change how we and other PEOs operate and the products and services that we and other PEOs can provide to our clients and WSEs. For example, in September 2019, California passed AB5, a law that could potentially reclassify client independent contractors as employees. Similarly,employees by establishing the ABC test to determine if a worker is an employee or independent contractor for most occupations. On September 30, 2021, and effective January 1, 2022, California expanded the number of occupations exempt from the ABC test. In November 2020, California voters passed Proposition 22, which supersedes AB5 for certain types of contractors. On August 20, 2021, a California state court found that portions of Proposition 22 were unconstitutional and further held that the entirety of Proposition 22 was unenforceable. Effective July 1, 2021, Alabama adopted the IRS’s 20-factor test to determine whether a worker is an employee or an independent contractor, while on August 1, 2021, Louisiana started using an 11-factor test under its unemployment law to determine worker classification.
The legal landscape is also in Januaryflux at the federal level. In 2020, the DOL issued a new rule broadeningchanging the definition of joint employer used under the Fair Labor Standards Act (FLSA). which was later rescinded in 2021. The National Labor Relations Board (NLRB) announced plans to create a new rule in 2022 for determining whether two businesses are joint employers under the National Labor Relations Act (NLRA), while the DOL plans to start on a new rule to raise the salary required for the executive, administrative and professional exemptions under the FLSA. We do not believe that we are, or will be, a joint employer under the new DOL rule,FLSA rules, but the impact of new regulations like these could lead to increased legal claims against us or our clients, increase our compliance costs, or require changes to how we operate our business and the products and services we provide to our clients and WSEs. For additional information, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "The definition of employers, employees and independent contractors is evolving. Changes to the laws and regulations that govern what it means to be an employer or an employee may require us to make significant changes in our operations and may negatively affect our business.business".
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Our Human Capital Resources
As of December 31, 2021, we had approximately 364,900 WSEs and 2,800 corporate employees, or colleagues.
Oversight and Management
At TriNet, we rally around a shared vision of improving humanity through business growth and innovation. We recognize the incredible opportunity that can only be realized by working together, with a shared view of how we support our clients and WSEs. This is illustrated in our core values:
•Lead with the customer - We are accessible, responsive and empowered to serve our customers. We are successful when our customers are successful.
•Stand together - We bring together diverse backgrounds, experiences and ideas to create better outcomes. We collaborate across boundaries, communicate openly and respect each other.
•Act with integrity - We are honest, transparent, ethical and fair. We take pride in always doing what’s right for our customers and colleagues.
•Make an impact - We act with purpose, are deliberate in our planning and quick in execution. We are accountable to each other and empowered to make decisions.
•Be incredible - We invest in the development of our colleagues. We push the boundaries of what's possible, lead the way and innovate to accomplish the extraordinary.
We regularly conduct surveys to seek feedback from our colleagues on a variety of topics, including confidence in company leadership, competitiveness of our compensation and benefits package, career growth opportunities and opportunities to improve the attractiveness of our company with existing and potential colleagues. The results are shared with our colleagues and reviewed by senior leadership, who analyze areas of progress or deterioration and prioritize actions and activities in response to this feedback to drive meaningful improvements in colleague engagement. None of our corporate colleagues are covered by a collective bargaining agreement.
Attracting and Retaining Our Colleagues
We must attract, develop and retain highly motivated and qualified colleagues to continue to provide the services that our clients need, to achieve our strategic objectives, and to grow our business. We do this by:
•offering competitive compensation and benefits packages, including comprehensive health benefits and our 401(k) retirement savings plan, with an immediately vested employer match of up to 4% of cash compensation,
•supporting a pay for performance culture through the use of cash and equity incentives tied to the performance of our company and individual performance,
•offering an employee stock purchase plan that allows our colleagues to purchase our shares at a discount to market value, which fosters a stronger sense of ownership and aligns the interests of our colleagues with our stockholders,
•investing in the professional growth of our colleagues with tuition and continuing education reimbursement, wellbeing programs, and comprehensive training and development activities and opportunities both inside and outside of our company,
•creating and maintaining a diverse and inclusive colleague base by, for example, the use of colleague-led resource groups and by launching a new diversity and inclusion training curriculum for our colleagues in 2020, and
•supporting our colleagues during the COVID-19 pandemic by adopting work-from-home policies, halting non-critical travel, and providing additional paid time off, employee assistance plans, and access to telemedicine services.
We refer to our employees that are co-employed with our clients as our worksite employees (WSE). For more information about how we help our clients manage their own human capital resources and satisfy their own HR-related needs, see the section above titled “Our Services”.
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Our Approach to Acquisitions
Historically, we have pursued acquisitions to both expand our productservice capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included PEOs and other HR solution providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. In December 2021, we entered into a definitive agreement to acquire Zenefits, a leading cloud HR platform which provides innovative and intuitive HR, benefits, payroll and employee engagement software purpose-built for SMBs. We intend to continue to pursue acquisitions, where appropriate, that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more attractive products and services.
The Impact of Seasonality on Our clients are distributed across a variety of industries, including technology, professional services, financial services, life sciences, not-for-profit, property management, retail, manufacturing, and hospitality. Our clients execute annual service contracts with us that automatically renew. Generally, our clients may cancel these contracts with thirty days' notice to us and we may cancel these contracts with thirty days' notice.
Our business is affected by seasonality in client business activity and WSE productbenefit selection, health claims costs and payroll taxes:
•Clients generally change their payroll service providers at the beginning of the payroll tax year; as a result, we have historically experienced our highest volumes of new clients and exitingterminating clients in the month of January.
•WSEs select our benefit productsplans during their respective open enrollment periods, which occur throughout the year. We have historically experienced the largest proportion of WSE benefit changes in the first quarter and fourth quarters.quarter.
•Health claims costcosts tend to increase throughout the year as the utilization of medical services above each WSE's deductible causes our insurance costs to increase. In addition, the overall use of medical services by WSEs, including elective procedures, tends to increase later in the calendar year. During the COVID-19 pandemic, we observed significant fluctuations in the typical seasonal use of medical services by our WSEs. The COVID-19 pandemic and emerging variants may continue to cause variability in our WSE's medical services utilization that may result in changes in this seasonal trend in our business.
•Certain payroll tax related billings are based on the WSE's annual taxable wage base up to a set cap. WSEs frequently meet these wage base caps in the first two quarters of the year, depending on the WSE's compensation level, resulting in lower related billing contributions to PSR in the latter half of the year.
Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc., the PEO operations of Paychex, Inc.Owned and Insperity, Inc., as well as specialized and smaller PEOs and similar HR service providers with PEO operations. To the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry.
Licensed Intellectual Property
We own or license from third parties various computer software, as well as other intellectual property rights, used in our business. Generally, we protect our intellectual property rights through the use of confidentiality and non-disclosure agreements and policies with our employees and third-party partners and vendors. We also own registered trademarks in the United States, Australia, Canada, the United Kingdom, and the European Union covering our name and other trademarks and logos that we believe are materially important to our operations.
We refergenerally protect our trademarks through federal registration or through the commercial use of our trademarks. Trademark registrations must generally be renewed every five to ten years and we renew the registration of trademarks that we deem to have continuing value to our employees that are not co-employed with our clients as our corporate employees. We had approximately 2,900 corporate employees as of December 31, 2019. Our corporate employees are not covered by a collective bargaining agreement.business.
Corporate and Other Available Information
We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet Merger Corporation, a Delaware corporation, in 2000 and during that year changed our name to TriNet Group, Inc. Our principal executive office is located at One Park Place, Suite 600, Dublin, CA 94568 and our telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained in or accessible through our website is not a part of this report.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge at investor.trinet.com as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Alternatively, the public may access these reports at the SEC's website at www.sec.gov. The contents of these websites are not incorporated into this report and are not part of this report.
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Item 1A. Risk Factors
Below is a discussion of the risks that we believe are significant to our business. These risks are not the only ones we face. We may face additional risks that we do not currently consider to be significant or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results. You should carefully consider these risks along with the other information provided in this Annual Report,Form 10-K, including the information in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our accompanying consolidated financial statements, as well as the information under the heading "Cautionary"Cautionary Note Regarding Forward-Looking Statements" before investing in any of our securities. We may amend, supplement or add to the risk factors described below from time to time in future reports filed with the SEC.
The COVID-19 pandemic has resulted in an economic slowdown and, while there have been signs of economic recovery in 2021, the pandemic continues to disrupt our business risks.
Actual and potential impact on clients and hiringprospects
The change in the economic environment due to the COVID-19 pandemic has had, and retainingmay continue to have, an adverse economic impact on our clients and potential clients. We have seen, and expect to continue to see, affected businesses freeze headcount, furlough and terminate employees, and partially or completely shut down business operations. Impacted businesses have faced and we expect many will continue to face liquidity issues, reduced budgets, or an inability to pay for our services or the same level of our services. For example, in the second quarter of 2020, our new sales growth declined and we experienced higher WSE attrition than prior periods. See the risk factor titled “Our clients are particularly affected by volatility in the financial and economic environment, which could harm our business” below for more details.
Actual and potential impact on insurance costs
The COVID-19 pandemic has changed how and when our WSEs incur health expenses. We have experienced and expect to continue to experience higher than normal volatility and variability in the amounts that we pay for group health insurance expenses incurred by WSEs within our deductible layer under our risk-based health insurance policies.
For example, during the third quarter of 2021, we saw increased constraints on access to medical services and systems, particularly in regions that saw increases in COVID-19 hospitalizations. These constraints reduced preventative and elective procedures, resulting in a decrease in our MCT, defined as changes in participant use of services, including the introduction of new treatment options, changes in treatment guidelines and mandates, and changes in the mix, unit cost and timing of services provided to plan participants. This decrease resulted in a lower than normal Insurance Cost Ratio during that period.
It is difficult to predict the rate at which the use of medical services will change as new variants emerge and individual, provider network and government reactions to those variants change. COVID-19 testing, treatment and vaccination costs also make it more difficult to predict future health claims costs, and actual claims patterns and cost trends may differ significantly from our historical experience. Because we assume the risk of variability in future health claims costs for our enrollees under our risk-based health insurance policies, this unpredictability could result in higher-than-expected insurance costs, which could have a material adverse effect on our business, results of operations and financial condition.
As we set our benefit services fees for health and welfare benefits in advance for a fixed benefit period, if actual MCT exceeds our projections, this would result in a higher Insurance Cost Ratio, which could have a material adverse effect on our business, results of operations and financial condition. For details on how the volume and
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severity of insurance claims and MCT impact our insurance costs, refer to Critical Accounting Judgments and Estimates in Part II, Item 7. MD&A and the risk factor titled “Unexpected changes in workers’ compensation and health insurance costs and claims by worksite employees could harm our business” below.
In response to COVID-19, many states have adopted standards intended to extend workers’ compensation coverage to claims based on a diagnosis of COVID-19. Most states have focused on providing coverage for first responders, frontline healthcare workers and other essential workers. We are responsible for the deductible layer under our workers’ compensation policies, and our insurance costs are affected by our WSEs' workers’ compensation insurance claims experience. Any law or legal standard that increases the number of covered workers’ compensation claims under our insurance policies could have a material adverse effect on our insurance costs and financial condition. See the risk factor titled “Unexpected changes in workers’ compensation and health insurance costs and claims by worksite employees could harm our business” below for more details.
Actual and potential impact of the laws affecting our industry and clients
New laws and programs have been enacted, and may continue to be enacted, at every level of government to help the economy, employers and employees. For example, the 2020 FFCRA and CARES Act and the 2021 PPPFA and ARPA, and subsequent agency guidance related to those acts, created the paycheck protection program (PPP), mandatory employee leave requirements, payroll tax deferral and tax credit programs, COBRA premium assistance facilitated via employer payroll tax credits, and other employment- and employment tax-related incentives. SMBs must rely on PEOs to help take advantage of these programs, and new and amended laws adding programs or changing existing programs may be passed at the federal, state, and local level at any time.
Most of these laws and programs have not been, and we do not anticipate will be, enacted with the PEO industry in mind. As a result, we cannot guarantee we will be able to support any of these laws and programs in a timely and cost effective manner or at all, which could reduce or eliminate the attractiveness of our services and/or affect the ability of our clients and WSEs to fully realize the benefits of these laws and programs, which would have a material adverse effect on our business, financial condition and results of operations. See the risk factor titled “Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business” below for more details.
Operational Risks
Unexpected changes in workers' compensation and health insurance costs and claims by worksite employees could harm our business.
Our insurance costs, which make upcomprise a significant portion of our overall costs, are significantly affected by our WSEs’ health and workers' compensation insurance claims experience. Our fully insured insurance plans are provided by third-party insurance carriers under risk-based or under guaranteed-cost insurance policies. Refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further discussion of these policies.
Under our risk-based health insurance policies, we assume the risk of variability in future health claims costs for our enrollees. We have experienced variability, and may experience variability in the future, in the amounts that we are required to pay for group health insurance expenses incurred by WSEs within our deductible layer under these risk-based policies, based on changing trends in the volume and severity of medical and pharmaceutical claims. This variability arises from changes to the components of medical cost trend (MCT), defined as changes in participant use of services, the introduction of new treatment options, changes in treatment guidelines and mandates, and changes in the mix and unit cost of services provided to plan participants.MCT. These trends change, and other seasonal trends and variability may develop, which makes it difficult for us to predict this aspect of our business and which mayour failure to accurately predict these trends could have a material adverse effect on our business.business, financial condition and results of operations.
Under our fully insuredfully-insured workers' compensation insurance policies, we assume the risk for losses up to $1 million per claim occurrence (deductible layer). Refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further discussion of these policies. The ultimate cost of the workers’ compensation services provided will not be known until all the claims are settled. If we do not accurately predict the risks that we assume, we may not charge adequate fees to cover our costs, which could reduce our net income and result in a material adverse effect on our business. Our ability to predict these costs is limited by unexpected increases in frequency or severity of claims, which can vary due to changes in the cost of treatments or claim settlements.
We accrue for the estimated future costs of reimbursing our workers' compensation and health insurance carriers under our insurance policies, using external actuaries and our own experience to develop the estimates, but the volume and severity of claims activity is inherently unpredictable. Estimating these accrued costs requires us to consider a number of factors and requires significant judgment.judgment and if our estimates are wrong, that could result in a material adverse effect on our business, financial condition and results of operations.
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If we subsequently receive updated information indicating that the volume and severity of insurance claims were higher or lower than previously estimated and reported, our insurance costs could be higher or lower, respectively, in that period or subsequent periods as we adjust our accrued costs accordingly, which could have a material adverse effect on our business.business, financial condition and results of operations. We have experienced both favorable and unfavorable insurance cost variability due to claims activity in the past and could have similar or worse experiences in the future. Refer to Critical Accounting Judgments and Estimates in Part II, Item 7. MD&A, of this Form 10-K for further discussion of these estimates.
Our co-employment relationship with our worksite employees exposes us to unique business risks.
We are the co-employer of our WSEs. As the co-employer of our WSEs, we assume some of the risks and obligations of an employer. For instance, we may need to provide access to health benefits to our WSEs even if the cost of providing benefits exceeds the service fees received from our clients. The extent of our responsibility for other aspects of our co-employer relationship with our WSEs remains subject to regulatory uncertainty at the federal, state and local levels. For example, under certain circumstances, we may be responsible for paying salaries, wages and related payroll taxes of our WSEs, even if our clients have not timely remitted payments to us.
Our WSEs work in our clients' workplaces. Our ability to control the workplace environment of our clients is limited. Yet, we may be subject to liability for violations of labor and employment laws, workers' compensation laws, industry-specific laws that apply to the businesses our clients operate, and other laws that apply to our clients or to employers generally. We may also be liable for acts, omissions or violations by our clients or WSEs, even if we do not participate in such acts, omissions or violations.
We seek to mitigate these risks through agreements and insurance coverage and by requiring certain clients to pre-fund certain obligations. Our agreements with our clients divide responsibilities between us and our clients and provide that our clients will indemnify us for any liability attributable to their own or our WSEs' conduct. However, we may not be able to effectively enforce or collect on these obligations. In addition, we maintain insurance coverage, including workers’ compensation and EPLI coverage, to limit our and our clients' exposure to various WSE-related claims. Subject to split by contract, we are still responsible for any deductible layer under such insurance and such insurance generally excludes coverage for claims relating to the classification of employees as exempt or non-exempt, other wage and hour issues, and employment contract disputes. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients.
Negative publicity relating to events or activities attributed to us or our corporate employees as a result of the actions of our clients and WSEs, or others associated with them, whether or not justified, may tarnish our reputation and reduce the value of our brand. In addition, if our brand is negatively impacted, it may have a material adverse effect on our business, including creating challenges in retaining clients or attracting new clients and hiring and retaining employees.
In addition, federal and state positions regarding co-employment relationships can change, and have frequently changed in the past, with varying degrees of impact on our operations. We cannot predict when changes will occur or forecast whether any particular future changes will be favorable or unfavorable to our operations. Any such changes could increase our potential liability for the risks outlined above, or otherwise reduce or eliminate the attractiveness of using a PEO, or significantly increase our compliance costs and the cost to provide our services, which could result in a material adverse effect on our financial condition and results of operations.
Our SMB clients are particularly affected by volatility in the financial and economic environment, which could harm our business.environment.
Our clients are small and mid-sizedmedium-size businesses that we believe can beare particularly susceptible to changes in the level of overall economic activity in the markets in which wethey operate. These businesses are often exposed to credit and cash liquidity risks that larger businesses may be able to avoid, and during periods of weak economic conditions, small business failures tend to increase and employment levels tend to decrease. During these periods, our clients have in the past and may in the future reduce employee headcount, compensation and/or benefits levels, which could negatively affect our revenues and margins if we are unable to reduce our operating expenses sufficiently or quickly enough.
We lose clients for many reasons that we chargecannot control or easily predict and, generally, our customersclients sign service agreements that they can cancel on short notice.
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Our standard client service agreement can generally be canceled by our clients (or us) with 30 days’ prior written notice. We regularly experience client attrition and decreases in these situations.new client sales due to a variety of factors that are difficult for us to control or predict, including the overall national economic conditions, client mergers and acquisitions, increases in our administrative and benefit services fees, client business failure and liquidity issues, the effects of competition, and client decisions to administer HR in-house or via a non-PEO solution. If we were to experience WSE or client attrition for any of the above reasons in excess of historic or expected rates, or if we incorrectly estimate the impact of the above factors on WSE or client attrition rates, it could have a material adverse effect on our business, financial condition and results of operations.
Geographic and industry market concentration makes our results of operations vulnerable to regional and industry-specific economic and health factors.
Our top five markets, California, New York, Florida, Texas and Georgia, accounted for approximately 60% in aggregate of our paid WSEs for the year ended December 31, 2021. If any of those geographic regions suffers a downturn, even if the economy at the national level remains strong, or experience higher than expected medical services utilization, due to regional health issues, including as a result of the COVID-19 pandemic, the portion of our business attributable to clients in that region could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.
In addition, most of our clients are concentrated in certain geographic regions and operate in a relatively small number of industries, including the technology, professional services, financial services, life sciences not-for-profit, professional services and financial servicesnot-for-profit industries. As a result, if any of those geographic regions or specific industries suffers a downturn, even if the economy at the national level remains strong, the portion of our business attributable to clients in that region or industry could be adversely affected, which could have a material adverse effect on our business, financial condition or results of operations.
Any failure in our business systems, or in any third-party business systems or service provider that we rely upon, could reduce the quality of our business services, harm our reputation and expose us to liability.
Our business is highly dependent on in-house and third-party data processing centers and systems that rely on the complex integration of numerous hardware and software subsystems to manage on a daily basis, a large volume of daily client and WSE transactions, including the processing of employee, payroll and benefits data. In addition, weWe also rely on third-party systems to provide services for our clients and WSEs, including insurance carrier networks and databases that manage the benefits provided to, and claims made by, our clients and WSEs and electronic banking systems and payroll tax systems that transmit payments and data to clients, WSEs and taxing agencies. These centers and systems have been, and could be disrupted by among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems, power failures, natural disasters, terrorist actions or similar events. We have also experienced office closures on the East Coast on multiple occasions over the past few years due to hurricane threats, and in California due to increased wildfire threats in the state. Our offices and data processing centers in these and other locations will continue to face the risk of closure or damage in the future due to climate change.
Any delay or failure in our business continuity response to these events, or in the response of our third-party service providers, even if only for a short period of time, can have a significant impact on our clients and WSEs. This could cause clients to leave us, result in reduced revenues, increase our liability to our clients and WSEs, any of which could result in a materially adverse effect on our reputation and business.
We also rely on enterprise software applications licensed from third parties that are updated from time to time. Any failure of these systems for any reason could delay or prevent us from providing services to our clients, which would have a material adverse effect on our business and results of operations.
Our client recovery programs have significant costs. These costs will not be recovered if these programs fail to achieve the business goals for which they are designed, which could result in a material adverse effect on our business, results of operation and/or financial condition.
In response to the COVID-19 pandemic, we created several programs to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these clients. These programs are designed to promote client loyalty, incentivize client retention, and to differentiate TriNet from its peers in the PEO industry and in other competing HR services industries. However, these programs are also associated with significant costs, and we cannot guarantee that we will recover these costs, or achieve our intended client loyalty, retention and product differentiation goals from these programs.
In April 2020, we created our Recovery Credit program. Eligible clients received one-time reductions against fees for future services, accounted for as a discount, to be received over the following 12 months. As a result of the Recovery Credit, we reduced our total revenues by $128 million in 2020 and $17 million in 2021.
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If any of these programs, or any of our future client recovery programs, fails to generate the business impact for which they are designed, for any reason, our financial performance will be negatively affected, which could result in a material adverse effect on our business, financial condition and results of operations. For more details on our Recovery Credit program and 2021 Credit Program, refer to Note 1 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K.
Adverse changes in our insurance coverage, or in our relationships with key insurance carriers, could harm our business.
Our success depends in part on our ability to maintain competitive health and workers' compensation coverage options and insurance rates through well-known insurance carriers. If we are unable to maintain competitive insurance rates or obtain popular and desirable coverage plans through well-known insurance carriers, it could affect our ability to attract and retain clients, which could have a material adverse effect on our business. Where we sponsor insurance coverage and we are not responsible for any deductibles, our carriers set the fixed cost of the plan, which may lead to uncompetitive fees. Even where we sponsor insurance under which we are responsible for deductibles, we may not be able to control our costs in a way that would make our fees competitive.
In addition, broad adoption of our services in certain geographic regions or industries may make it more difficult for us to obtain competitive health and/or workers' compensation insurance rates due to concentration of clients within a particular region or industry. For example, we have significant concentrations of clients in California, New York, Florida, Texas and Georgia, which account for approximately 60% in aggregate of our paid WSEs for the year ended December 31, 2021. The loss of any one or more of our key insurance vendors in these areas, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, could have a material adverse effect on our financial condition and results of operations.
In order to attract and retain clients, we believe that we must compete in our industry effectively on the basis of the value proposition that we deliver to our clients, including customerclient experience and satisfaction, relevance and pricecost-effectiveness of our benefit plans, vertical market expertise, total price of service, brand awareness and reputation, ability to innovate and respond to customerclient needs rapidly, access to online and mobile solutions, and human resources subject matter expertise. The expectations of our clients and prospective clients in these areas change over time as a result of many factors outside of our control, such as competition, regulatory and technical changes, and changing trends in the demands employees place on SMB employers. IfRegulatory changes may also mandate that we are unablemake changes to satisfy the evolving product and service delivery expectations of our clients and WSEs, then we could experience lower client satisfaction, lower rates for on-boarding new clients and higher client attrition, which could have a material adverse effect on our business.
To satisfy the productclient expectations and service delivery expectations of our clients and regulators,regulatory requirements, we must also timely and effectively identify, develop, or license theappropriate technologies, we need, and implement those technologiesincorporate them into the solutions that we provide. New productsservices or upgrades may not be released according to schedule, or may contain defects when released. Difficulties with the performance of our new technologies, or our ability to satisfy changes in regulatory requirements, could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could materially harm our business. Even if we are capable of satisfying client expectations in these areas, we may not be able to do so on a cost-effective basis, which could have a material adverse effect on our financial condition and our results of operations. In addition, weWe could lose market share if our competitors develop superior products and services or satisfy client or regulatory demands before we are able to do so. If we are unable to satisfy the evolving product and service expectations and regulatory requirements, then we would experience lower client satisfaction, fewer new clients and higher client attrition, which could have a material adverse effect on our business.
We have acquired, and may in the future acquire, other businesses and technologies, which can divert management's attention and create integration risks and other risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to pursue future acquisitions. On December 23, 2021, we entered into a definitive agreement to acquire YourPeople, Inc. dba Zenefits. Acquisitions, including the potential acquisition of Zenefits, involve numerous other risks, some of which we have experienced in the past and which we may experience in the future, including:
•over-valuing and over-paying for businesses and technologies,
•increased operating costs and unanticipated costs to successfully integrate the clients, WSEs, operations, systems, technologies, services and personnel of the acquired business,
•establishing or maintaining required internal controls, procedures and policies for the acquired business,
•diversion of management’s attention from other business concerns,
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•litigation resulting from the activities of the acquired business,
•insufficient revenues, insurance or seller indemnification to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired businesses,
•entering markets in which we have no prior experience and may not succeed, and
•potential loss of key employees or key clients of the acquired business as a result of the acquisition or integration of the acquired business.
We have experienced increased operating costs to resolve the challenges of prior acquisitions. If we fail to appropriately integrate any acquired business, we may fail to achieve our growth, service enhancement or operational efficiency objectives, and our business, results of operations and financial condition could be harmed.
Our business and operations have undergone and will continue to undergo significant change as we seek to improve our operational effectiveness.effectiveness and the support, services and products that we provide to our clients. If our clients and prospects do not accept these changes, or if we are unable to effectively manage this change, our business and results of operations may suffer.
We have changed our operations and internalclient service processes in recent periods in order to improve our operational effectiveness, and to provide improved client support, services and services. Managing these changesproduct options, and we will continue to require further refinementdo so in the future. For example, in 2020, we adopted a new client service engagement support model, called Connect 360, that we believe will benefit our clients and WSEs by providing them with improved support.. Similarly, in 2021, we launched Financial Services Preferred, and a new product, called IOM, that offers clients the option to receive PEO services from TriNet while also obtaining client-sponsored health benefits from a third-party broker that partners with TriNet. We have adopted robust remote work policies and practices during the COVID-19 pandemic. These policies and practices may make it more difficult to manage and implement certain program, service and product initiatives for our clients and their WSEs. If our clients and prospects do not accept or value these support programs, services and products, and other similar changes we make in the future, we may lose clients, experience reduced onboarding rates, and see increased operational costs, any one of which could have a material adverse effect on our business, financial condition and results of operations.
In addition, managing these operational and process changes typically requires changes our internal operational, financial and management controls and reporting systems and procedures while we simultaneously seek to effectively recruit, integrate, train and motivate new corporate employees, retain our existing corporate employees, maintain the beneficial aspects of our corporate culture, effectively execute our business plan, satisfy the requirements of our existing clients, acquire new clients, and enhance the quality and scope of our services. These activities willalso require significant operating and capital expenditures and allocation of valuable management and employee resources, which we expect will continue to place significant demands on our management and on our operational and financial infrastructure.resources. If we fail to manage these operational and process changes effectively, our costs and expenses may increase more than we expect and our business, financial condition and results of operations may be harmed.
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If we are unable to attract, maintain and manage qualified personnel, including our sales force, our business may be harmed.
We have a material adverse effect on our financial condition and results of operations. For example, we havealso experienced elevated sales force attrition in the past and may experience it in the future, experience, elevated sales force attrition asfor a resultvariety of our changereasons, including due to changes in industry or client focus, compensation structure, changes, third-party competition for sales talent and other factors. Newly hired sales personnel are typically not productive for some period of time following their hiring, which results in increased near-term costs to us relative to their actual sales contributions during this period. If we are unable to effectively train and maintain an adequately seasoned sales force, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
Our industry is competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.
We face significant competition on a national and regional level from other PEOs, as well as other existing, and potential, companies and industries that service, or may in the future service, client HR needs. Refer to the heading “Competition”"Competition" under Part I, Item 1. Business, above for more details. Our competitors, regardless of industry, may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure.
Moreover, we may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations either by themselves or by using the services of our competitors. If we cannot compete effectively against other PEOs or against the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the advantages of our offerings, our market share and business may suffer, resulting in a material, adverse effect on our financial condition and results of operations.
Data Privacy and Security Risks
Cyber-attacks or other security-related incidents could result in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
We and our third-party service providers and subcontractors collect, store, use, retain, disclose, transfer and otherwise process a significant amount of confidential, sensitive and personal information from and about our actual and potential clients, WSEs and corporate employees, including bank account and social security numbers, tax information, certain medical information,PHI, certain health claim information, PHI, retirement account information, and payroll data. Maintaining the security of our infrastructure and the confidentiality of the confidential, sensitive and personalthis information ofis critically important to our clients, WSEs and corporate employees is critical as the clients, WSEs and corporate employees using our technology platform and services rely on our security infrastructure to protect their confidential, sensitive and personal information. In providing our services, we also rely on third-party service providers, such as insurance carriers and banks, who also have access to confidential, sensitive and personal information about our clients, WSEs and corporate employees. Some of those service providers in turn subcontract with other service providers.
Due to the size and complexity of our technology platform and services, the amount of confidential, sensitive and personal information that we store and the number of clients, WSEs, corporate employees and service providers with access to confidential, sensitive and personalthis information, we and our service providers are potentially vulnerable to a variety of intentional and inadvertent cyber-attacks and other security-related incidents and threats, which could result in a disclosure of information and a material adverse effect on our business. The occurrence of any actual or attempted cyber-attack or other security-related incident, the reporting of such an incident, whether accurate or not, or our failure to make adequate or timely disclosures to the public or law enforcement agencies following any such event, whether due to delayed discovery or a failure to follow existing protocols, could result in significant fines, penalties, orders, sanctions and proceedings or actions against us or our service providers by governmental bodies and other regulatory authorities, clients or third parties, which could in turn result in a material adverse effect on our financial condition and results of operations. Any such fines, penalties, order, sanctions, proceedings or actions, and any related indemnification obligation, could damage our reputation, force us to incur significant expenses in defense of these proceedings or to pay fines and penalties, distract our management, increase our costs of doing business or result in the imposition of financial liability.threats.
Any actual or attempted cyber-attack or other security-related incident could have a material adverse effect on our business, reputation, financial condition or results of operation. Any actual or attempted breach or disclosure of the timing, nature and scope of cyber-attacks and other security-related incidents, there can be no assurance that any security procedures and controls that we or our service providers have implemented will be sufficient to prevent such incidents from occurring. Furthermore, because the methods of attack and deception change frequently, are increasingly complex and sophisticated, and can originate from a wide variety of sources, including third parties such as service providers and even nation-state actors, it is possible that we may not be able to anticipate, detect, appropriately react and respond to, or implement effective preventative measures against, all cyber-attacks and other security-related incidents. As a result, disclosure of confidential, sensitive and personal information that we possess about our clients and WSE could occur due to the occurrence of such attacks of incidents, which could materially and adversely affecthave a material adverse effect on our business, reputation, financial condition or results of operations. Public perception of, or even inaccurate or unfounded rumors of, any such attacks, incidents, breaches or disclosures, could have a material adverse effect on our business, reputation, financial condition or results of operation.
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Any such attacks, incidents, breaches or disclosures could result in material financial liability by
•resulting in material fines, penalties, orders, sanctions and proceedings or actions against us or our service providers by regulatory authorities, clients and other third parties,
•requiring us to indemnify clients and other third parties,
•damaging our reputation,
•forcing us to incur significant expenses to defend our actions and practices,
•delaying product and service development plans,
•resulting in unrelated compliance breaches as a result of system failures or management distraction, and
•increasing our costs of doing business.
TriNet does not need to be the target of such attacks, incidents, breaches and disclosures for them to have a material adverse effect on our operations. For example, a cybersecurity attack on a key third-party software service provider could disrupt our services or compromise client data entrusted to that service provider. In December 2021, a third party reported a security vulnerability in a commonly used Java-based application that TriNet also uses called “Log4j”. After review, our security team determine that no security compromise had occurred within TriNet’s systems, but this is no guarantee that a vulnerability identified in any other third-party software would not result in a security compromise. Similarly, a security incident involving a client could result in access to TriNet’s systems. Any of these incidents, even if not initially directed at TriNet, could also have a material adverse effect on our business operations, result in liability, fines and penalties or other regulatory sanctions, a loss of confidence in our ability to provide our services, and/or harm our reputation and relationships with current or potential clients.
We, our clients and our service providers have been the victims of these types of threats, attacks and security breaches in the past. No security measures, procedures, technology or amount of preparation can provide guaranteed protection from these threats,past, and we, our clients and our service providers expect to be victims again in the future. Cyber-attacks have disrupted, or resulted in unauthorized access to, our networks, applications, bank accounts, and confidential, sensitive and personal information, or those of our clients or WSEs or service providers, in the past and successful attacks may occur again in the future. We, our service providers and our clients have experienced other security incidents in the past that led to disclosure of the confidential, sensitive or personal information we possess and we and they could experience such incidents in the future. In addition,As a result of these incidents, we have in the past been,reported, and mayexpect to report in the future, be, required to report data breaches to regulators, affected individuals, clients and other third parties. While we do not believe that any such past events resulted in material expenditures or a material loss of confidential, sensitive or personal information, we cannot guarantee that any future events will not have a material impact on our operations.
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Our efforts to protect against and to remediate cyber-attacks, other security-related incidents, and data breaches may not succeed and any such event, whether intentional or inadvertent and whether attributable to us or our service providers, could have a material adverse effect on our business, reputation and the price of our common stock.
We have implemented policy, procedural, technical, physical, and administrative controls with the aim of protecting our networks, applications, bank accounts, and the confidential, sensitive and personal information entrusted to us, including bank account and social security numbers, tax information, certain medical information, certain health claim information, PHI, retirement account information, and payroll data and other PHI, from cyber-attacks and other security-related incidents. While we, and our service providers, have security measures and programs in place to prevent, detect, and respond to cyber-attacks, security-related incidents, data breaches and other similar threats, these security measures and programs and our collective efforts may not always succeed. Despite our efforts and those of our service providers, we cannot fully eliminate the possibility of such cyber-attacks, security-related incidents and other threats, whether intentional or inadvertent and whether internal or external and we, our clients or our service providers may not discover a security incident for a significant period of time after the incident occurs.
In some cases, we perform risk assessments of our service providers or require them to undertake security measures through contract provisions. However, we do not control our service providers and our ability to monitor their data security is limited, so we cannot ensure the security measures they take will be sufficient to protect our confidential, sensitive and personal information. Due to applicable laws and regulations or contractual obligations, we may be held responsible for any cyber-attack or other security-related incident attributed to our service providers regarding the information we share with them and any contractual protections we may have from our service providers may not be sufficient to adequately protect us from any such liabilities and losses.
We have invested, and plan to continue investing, in resources to protect our information security ecosystem against cyber-attacks, other security-related incidents, and data breaches and to investigate and remediate any information security vulnerabilities. However, the security protections and strategies that we implement, and the investigation and remediation efforts we undertake, may not be successful. Any security breach, whether intentional or inadvertent, could result in the access, public disclosure, loss or theft of our clients', WSEs' and corporate employees’ confidential, sensitive and personal information, which could negatively affect our ability to attract new clients, cause existing clients to terminate their agreements with us, result in significant reputational damage and subject us to significant lawsuits, regulatory fines, or other actions or liabilities, any of which could materially and adversely affect our business and operating results.
We must comply with constantly evolving, data privacy and security laws and regulations, which may require substantial costs or changes to our business, and any actual or perceived compliance failure could result in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
We are subject to various federal, state and local laws, rules, and regulations, as well as contractual obligations, relating to the collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information. Existing laws and regulations are constantly evolving, and new laws and regulations that apply to our business are being introduced at every level of government inside and outside of the United States. For example, all 50 U.S. states, the District of Columbia, Guam, Puerto Rico, the Virgin Islands and Canada have enacted data breach notification laws that may require us to notify WSEs, clients, corporate employees, or other third parties and regulators in the event of unauthorized access to or disclosure of confidential, sensitive or personal information experienced by us or our service providers.
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In addition to breach notification laws, we have seen increased focus at every level of government inside and outside of the United States on regulating the collection, store,storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information. For example, in recent years, many states have proposed or enacted new laws or amended existing laws. Certain state laws, including the CCPA and CPRA, may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts, requiring attention to changing regulatory requirements. We believe that we currently comply with the requirements of the CCPA, but additional provisions of the CCPA became effective in 2021 and will become effective in 2021.2023. In 2021 the CCPA went into effect and imposed certain obligations on businesses, such as a requirement to respond to consumer data access requests. We evaluated our obligations under CCPA and ensured necessary compliance. The CPRA, which goes into effect in 2023, may impose additional obligations on us. While we are working to comply with these provisions, we cannot guarantee that we will not incur significant costs or that our efforts will be successful. As a sponsor of employee benefit plans with access to certain PHI, we are subject to regulation at the federal level, including under the HIPAA and the HITECH Act. HIPAA contains restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure of PHI and there are penalties and fines for HIPAA violations.
For details regarding these data privacy and security laws and regulations discussed above and that apply to our operations, refer to Part I, Item 1. Business, of this Form 10-K, under the heading Legal"The Laws and Regulatory:Regulations that affect Our Business: Data Privacy and Security Regulations.Regulations". Complying with these and any other data privacy and security laws, rules and regulations, and with any new laws or regulations or changes to existing laws, could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, divert resources from other initiatives and projects, and restrict the way products and services involving data are offered, all of which may have a material adverse effect on our business. For example, we have incurred and expect to continue to incur additional costs to comply with the CCPA and other similar regulations. Despite our efforts, in the future we may be unable to make required changes and modifications to our business practices in a commercially reasonable manner, or at all. Given the rapid development of cybersecurity and data privacy laws, we expect to encounter inconsistent interpretation and enforcement of these laws and regulations, as well as frequent changes to these laws and regulation.regulations. As a result, we may be required to incur significant, unexpected compliance costs and we may be exposed to significant penalties or liability for non-compliance, the possibility of fines, lawsuits (including class action privacy litigation), regulatory investigations, criminal or civil sanctions, audits, adverse media coverage, public censure, other claims, significant costs for remediation and damage to our reputation, all of which could have a material adverse effect on our business and operations. Any inability, or the perception of any inability, to adequately address data privacy or security-related concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and security, could result in additional cost and liability to us, damage our relationships with clients and have a material adverse effect on our business.
Legal and Compliance Risks
Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business.
The products and services we provide to our clients are subject to numerous complex federal, state and local laws and regulations, including those described in Part I, Item 1. Business, of this Form 10-K. These laws and regulations cover a diverse range of topics, including employer status, employee and independent contractor classifications, employee benefit,benefits, health and retirement plan laws,plans, workers' compensation, laws, employment and payroll tax, laws, worksite safety, laws, insurance and banking, laws, wage and hour, laws, anti-discrimination, laws, and many lawstopics specific to the industries of our clients. Many of these laws do not specifically address PEOs or co-employment relationships, and regulators are often unfamiliar with the PEO industry and co-employment relationships, which can lead to unpredictable application, interpretation and enforcement of these laws and regulations at the federal, state and local levels in relation to our business.
Any new laws, changes in existing laws, or any adverse application, interpretation or enforcement of new or existing laws, including those described in Part I, Item 1. Business, of this Form 10-K, whether they apply to employers generally or specifically to PEOs or to our co-employment relationships could:
•reduce or eliminate the value and benefits that customersclients realize by using our products and services,
•change or eliminate the types of products and services we provide,
•require us to make significant changes to how we do business and provide products and services,
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•require us to modify our current business practices or operations,
•affect the extent and type of employee benefits that employers and co-employers can or must provide employees,
•alter the amount, timing and type of taxes employers, co-employers, clients and employeesWSEs are required to pay and that we are able tomust manage for and collect from our clients,
•increase the cost and complexity of the licensing requirements for our business operations,
•create or increase our liability and responsibilities to our clients and WSEs, and/or
•mandate new compliance requirements, disclosures or services.
Any of thesethe above changes could have a material adverse effect on our business, financial condition and results of operations.
For example, we have seen a growing trend, particularly at the federal level, of using payroll tax credits, deferrals and other related payroll tax programs as a mechanism for incentivizing SMB development and/or economic recovery. These programs are popular because they allow SMBs, which often have income tax losses, to realize benefits via payroll tax reductions, rather than income tax reductions. However, these programs have generally not been designed with the PEO industry in mind and rely on calculations contained in client income tax returns (which PEOs do not process in their role as the co-employer) and/or other client data that cannot be verified by a PEO, even though the resulting tax benefits are processed through the PEO’s payroll tax returns. Because minimal guidance exists in the statutes that create these programs, they are subject to broad agency interpretation and confusion. In addition, the processes used to evaluate payroll tax filings are designed with individual taxpayers in mind, not PEOs that aggregate the filings of many clients, which can further increase agency confusion and make it difficult to predict agency interpretations.
Examples of these programs include the 2015 PATH Act, which allows SMBs to use research and development tax credits submitted on the SMB’s income tax return to reduce the SMB’s payroll taxes, and the CARES Act and FFCRA Act payroll tax credit and payroll tax deferral programs enacted in 2020 and 2021, which allow SMBs to defer certain payroll tax obligations to a later date or to receive payroll tax credits based on SMB employment practices that are beyond our control. The IRS has taken positions that we and other PEOs, rather than clients, are responsible for client errors and repaying rejected tax credit claims under these and similar programs. While our clients are contractually responsible for repaying us for any rejected credits under these programs, a contract does not guarantee our ability to recover rejected tax credits and any failure to recover rejected tax credits from our clients would increase our operating expenses, which could result in a material adverse effect on our financial condition and results of operations.
These developments, and any other new laws, changechanges in laws or adverse application or interpretation of laws, including payroll tax incentive programs, could reduce or eliminate the attractiveness of our productsservices and services,our ability to support programs that clients want, provide customersclients with new and attractive alternatives to our products and services, significantly increase our compliance costs and the cost to provide our products and services, or require us to make substantial changes to the way in which we operate, or require us to pay client liabilities with no guarantee of subsequent recovery from our clients, and any one of whichthese outcomes could result in a material adverse effect on our financial condition and results of operations.
Changing laws and regulations governing health insurance and other traditional employee benefits at the federal, state and local level could negatively affect our business.
Changes to and continued uncertainty regarding the implementation and future of health care reform in the United States, at the federal, state and local level, has the potential to substantially change the health insurance market for SMBs and how such employers provide health insurance to their employees, which could have a materially adverse effect on how we provide our sponsored health benefits to our WSEs, and our ability to attract and retain our clients. In addition, changes at the federal, state and local level to the laws and regulations regarding other traditional employee benefits, such as retirement and workers’ compensation benefits, also have the potential to substantially change the types of benefit programs that are available to SMBs and that we and other PEOs may be
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| RISK FACTORS | |||||
required to offer. Our ability to comply with, and adapt our productservice offerings to take advantage of, any such changes could require significant additional costs, prove cost prohibitive and/or otherwise divert management attention, or be prohibitive based on cost, technology or other factors, which could result in a material adverse effect on our business, financial condition and results of operations.
If we are not recognized as an employer of worksite employees under federal and state regulations, we and our clients could be adversely impacted.
In order to sponsor ourcertain employee benefit plan offerings for WSEs, we must qualify as an employer of WSEs for certain purposes under the Code and ERISA. In addition, our status as anthe employer for the purposes of ERISA is important for purposes of ERISA’s preemption of certain state laws. The definition of employer under various laws is not uniform, and under both the Code and ERISA the term is defined in part by complex multi-factordifferent facts and circumstances tests.
Generally, these tests are designed to evaluate whether an individual is an independent contractor or employee and they provide substantial weight to whether a purported employer has the right to direct and control the details of an individual's work. Some factors that the IRS hasmay be considered important in the past in evaluating this issueunder these tests have included the employer’s degree of behavioral control (for example the extent of instructions, training and evaluation of the work), financial control and the economic aspects of the work relationship, the type of relationship, as evidenced by the specific contract, if any, whether employee benefits are provided, whether the work is indefinite in duration or project-based, and whether it is a regular part of the employer’s business. However, a definitive judicial interpretation of “employer” in the context of PEOs has not been established. For
We believe that we qualify as the employer of WSEs for the purposes of Sections 3(5) and 3(40) of ERISA purposes, for example, courts have heldand that test factors relatingour health plans are single-employer plans that, as such, are entitled to ERISA’s preemption of the ability to controlapplication of state law. The DOL, however, has determined on a facts and supervise an individual are less important, while the DOL has issued guidancecircumstances basis that certain entities in the HR outsourcing industry do not qualify as common law employers. In addition, the DOL routinely audits employee benefit plan offerings of employers, for ERISA purposes. Although we believe that we qualify as an employerand these audits can take years to complete. In one routine audit of WSEs under ERISA andone of TriNet’s health plans, the DOL has not provided guidance otherwise,indicated that while it agrees that we are not able to predict the outcome of any regulatory challenge.
Similarly, to qualify for favorable tax treatment under the Code, certain employee benefit plans, such as 401(k) retirement plans and cafeteria plans must be established and maintained by an employer for the exclusive benefit of its employees. All of our 401(k) retirement plans are operated pursuant to guidance provided by the IRS and we have received favorable determination letters from the IRS confirming the qualified status of these plans. However, the IRS uses its own complex, multi-factor test to ascertain whether an employment relationship exists between a worker and a purported employer. Although we believe that we qualify as an employer of WSEs under the Code, we cannot assure you that the IRS will not challenge our position or continue to provide favorable determination letters. Moreover, the IRS' 401(k) guidance and qualification requirements are not applicable to the operation of our cafeteria plans.
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The definition of employers, employees and independent contractors is evolving. Changes to the laws and regulations that govern what it means to be an employer or an employee may require us to make significant changes in our operations and may negatively affect our business.
National views on employers, employees and independent contractors are changing at a rapid rate, as evidenced by recent federal and state rule changes. In September 2019, California passed AB5, a law that could potentially reclassify client independent contractors as employees. In November 2020, California voter passed Proposition 22, which supersedes AB5 for certain types of contractors. On August 20, 2021, a California state court found that portions of Proposition 22 were unconstitutional and similar changesfurther held that the entirety of Proposition 22 was unenforceable. Changes like these to the rules in rules definingany jurisdiction that define when a worker is an employee or independent contractor can increase or decrease the pool of WSEs that we are allowed tocan co-employ and include in our TriNet sponsored benefit plans, which may negatively impact client demand for the products and services we provide, require us to modify or change how we operate our business and have a material adverse effect on our business and results of operations.
In addition, in January 2020, the DOL issued a new rule broadening the definition of joint employer that has been used under the Fair Labor Standards Act (FLSA) for more than sixty years. In 2022, the National Labor Relations Board (NLRB) plans to create a new rule for determining whether two businesses are joint employers under the National Labor Relations Act (NLRA). Joint employment is not the same as co-employment, and we do not believe that we are a joint employer under the new DOL rule or any future NLRB rule, or that thisthese rule change impactschanges impact our status as a co-employer. However,While the DOL rule has been partially vacated by a district court decision, these changes could still potentially result in increased FLSA joint employment claims, which could divert management attention and cause us to incur additional and potentially material costs to defend.
The examples above highlight the impact to our business when regulations regarding the definitions or classification of employers, employees, independent contractors and other groups of workers change. Any such regulatory changes could affect the way in which we provide TriNet-sponsored benefits to our WSEs, the way in which we report and remit payroll taxes to tax authorities, and our legal liability for the actions and inactions of our clients. Any of such regulatory changes could also require us to change the manner in which we operate our business, or provide our products and services, and could have an adverse effect on our business and results of operations.
If we fail to qualify as a co-employer of WSEs under applicable federal and state licensing rules,do not comply with our regulatory license requirements, or if we are deemed to be operating in certainvarious non-PEO licensed industries without the required licenses, we and our clients could be adversely impacted.
In addition, state regulatory authorities generally impose licensing requirements on companies acting as insurance agents or third-party administrators, such as those that handle health or retirement plan funding and claim processing. Other state regulatory authorities impose licensing requirements on companies involved in the transmission of cash, such as banks, and other money transmitters. We do not believe that our current activities require any such licenses, but we and others in our industry have received inquiries from regulatory authorities in the past and could receive them in the future. If regulatory authorities in any state determine that we are acting as an insurance agent, third-party administrator, money transmitter, or as any other regulated industry other than a PEO, we may need to hire additional personnel to manage regulatory compliance and pay annual regulatory fees, which could have a material adverse effect on our financial condition and results of operations.
We are subject to legal and tax proceedings that may result in adverse outcomes.
We are subject to claims, suits,lawsuits, government investigations, and other legal and regulatory proceedings arising from the ordinary course of our business. Refer to Note 10 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for additional information about the legal proceedings we are currently involved in and future proceedings that we may face. Current and future legal proceedings may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.
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| RISK FACTORS | |||||
In addition, the tax authorities in the U.S. regularly examine our income and other tax returns. Refer to Note 13 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for additional details regarding our on-going tax examinations and disputes. The ultimate outcome of tax examinations and disputes cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of these or other examinations, we may be required to record charges to operations that could have a material impact on our results of operations, financial position or cash flows.
Financial and Stock Ownership Risks
Our results of operations and stock price may fluctuate as a result of numerous factors, many of which are outside of our control.
Our future operating results and stock price are subject to fluctuations and quarterly variations based upon a variety of factors, many of which are not within our control, including, without limitation:
•the volume and severity of health and workers' compensation insurance claims made by our WSEs, recorded as part of our insurance costs, and the timing of related claims information provided by our insurance carriers,
•the amount and timing of our insurance premiums and other insurance costs, operating expenses and capital expenditures,
•the number of our new clients and the number of WSEs employed by each new client,
•the retention or loss of existing clients, for any reason, including third-party acquisition,
•a reduction in the number of WSEs employed by existing clients,
•the timing of client payments and payment defaults by clients,
•the costs associated with our acquisitions of companies, assets and technologies,
•any payments or draw downs on our credit facility,
•any unanticipated expenses, such as litigation or other dispute-related settlement payments and compliance expenses arising from changes in regulations or regulatory enforcement,
•any expenses we incur for geographic and service expansion and product and service enhancements,
•any changes in laws or adverse interpretation or enforcement of laws, which may require us to change the manner in which we operate and/or increase our regulatory compliance costs,
•any changes in our effective tax rate,
•the issuance of common stock or debt to pay for future acquisitions, which could dilute our stockholders or subject us to significant debt service obligations,
•amortization expense, or the impairment of intangible assets and goodwill, associated with past or future acquisitions, and
•the impact of new accounting pronouncements.
In addition, the trading price of our common stock is subject to fluctuation in response to a variety of factors, including the factors above and below, many of which are not within our control, including, without limitation:
•the overall performance of the equity markets,
•any trading activity, or a market expectation regarding such activity, by our directors, executive officers and significant stockholders,
•the economy as a whole, and its impact on SMBs and our clients,
•the performance and market perception of companies that investors believe are similar to us, and
•any significant changes in the liquidity of our common stock.stock, and
•market acceptance of our performance across non-financial factors, including evolving environmental, social, and governance factors favored by investors and required by regulators.
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| RISK FACTORS | |||||
Many of the above factors are discussed in more detail elsewhere in this Risk Factors section and in Part II, Item 7. MD&A, of this Form 10-K. Many of these factors are outside our control, and the variability and unpredictability of these factors have in the past and could in the future cause us to fail to meet our expectations and the expectations of investors and any industry analysts who cover our shares, which could result in a decline in our share price and reduced liquidity in our shares. In addition, the occurrence of one or more of these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins, short-term liquidity, and our ability to retain or attract key personnel, and could cause other unanticipated issues, including a downgrade of our sharessecurities by or change in opinion of industry analysts and a related decline in our share price.
The terms of our credit facility may restrict our current and future operations, which would impair our ability to respond to changes in our business and to manage our business.
Our credit facility contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us subject to customary exceptions, including restricting our ability to:
•incur, assume or prepay debt or incur or assume liens,
•pay dividends or distributions or redeem or repurchase capital stock,
•make loans, investments or acquisitions,
•enter into sale-leaseback transactions,
•enter into new lines of business,
•complete a significant corporate transaction, such as a merger or sale of our company or its assets, and
•enter into agreements that prohibit the incurrence of liens or the payment by our subsidiaries of dividends and distributions.
Our failure to comply with these restrictions and the other terms and conditions under our credit facility could result in a default, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under our credit facility and acceleration of a substantial portion of our indebtedness then outstanding under our credit facility. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt, which could materially harm our business and force us to seek bankruptcy protection.
Atairos, our largest stockholder, may have significant influence over our Company, and the ownership of capital stock, and thus the voting control, of our Company remains concentrated in our executive officers, directors and their affiliates, which limits your ability to influence corporate matters.
On February 1, 2017, an entity affiliated with Atairos Group, Inc. (together with its affiliates, “Atairos”) became our largest stockholder when it acquired the shares of TriNet common stock previously held by General Atlantic. In connection with this transaction, we appointed Michael J. Angelakis, the Chairman and CEO of Atairos, to our board of directors and agreed to nominate Mr. Angelakis or another designee of Atairos reasonably acceptable to our Nominating and Corporate Governance Committee for election at future annual meetings until Atairos’ beneficial ownership falls below 15% of our common stock. As of January 31, 2020,2022, Atairos beneficially owned approximately 28%33% of our outstanding common stock, and all of our directors, executive officers and their affiliates, including Atairos, beneficially own, in the aggregate, approximately 37%38% of our outstanding common stock. As a result Atairos, particularly when acting with our executive officers, directors and their affiliates, is able to exert substantial influence on all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
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| PROPERTIES, LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES | ||||||||
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease space for 54our offices in various U.S. states, including the following:
| • Dublin, California | • Bradenton, Florida | ||||
| • Reno, Nevada | |||||
| • Indian Land, South Carolina | |||||
| • Austin, Texas | |||||
Item 3. Legal Proceedings
For the information required in this section, refer to Note 10 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock is traded on the New York Stock Exchange under the symbol “TNET”.
As of February 6, 2020,7, 2022, we had 3931 holders of record of our common stock per Computershare Trust Company N.A., our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in a trust by other entities.
For information regarding our equity-based incentive plans, please refer to Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Form 10-K.
Dividend Policy
We did not declare or pay cash dividends in 20192021 or 2018.2020. Payment of cash dividends if any, in the future, if ever, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions under our credit facility (refer to Note 9 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K), capital requirements, business prospects and other factors our board of directors may deem relevant.
Performance Graph
The graph on the following page compares the cumulative return on our common stock since December 31, 20142016 with the cumulative return on the S&P 500 Index and a Peer Group Index. The cumulative return is based on the assumption that $100 had been invested in TriNet Group, Inc. common stock, the Standard & Poor's 500 Stock Index (S&P 500) and common stock of members of a Peer Group Index, all on December 31, 20142016 and that all quarterly dividends were reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have had at each year end.
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COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group(1)
(1) The Peer Group Index used in the chart above consists of the following companies:
| Automatic Data Processing, Inc. | Insperity, Inc. | Paychex, Inc. | ||||||
| Barrett Business Services, Inc. | Intuit, Inc. | |||||||
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased (1) | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (in millions) (3) | ||||||||||
| October 1 - October 31, 2021 | 5,116 | $ | 98.36 | — | $ | 264 | ||||||||
| November 1 - November 30, 2021 | 45,279 | $ | 108.44 | — | $ | 264 | ||||||||
| December 1 - December 31, 2021 | 75,814 | $ | 95.15 | 6,202 | $ | 263 | ||||||||
| Total | 126,209 | 6,202 | ||||||||||||
(1) In May 2014, our board of directors in 2014 and has been subsequently amended. As of December 31, 2019, our board of directors hadapproved a stock repurchase program pursuant to which we are authorized us to repurchase up to an aggregate $615 million under this program of which approximately $236 million remained available as of December 31, 2019 for repurchases under all authorizations approved by the board of directors. We repurchased approximately $140 million of our common stock in 2019 using existing cash and cash equivalents through our Rule 10b5-1 plan. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. ThisFrom time to time, our board of directors authorizes increases to our stock repurchase program and approved an aggregate total of $951 million as of December 31, 2021. The total remaining authorization has no expiration. We plan to use current cash and cash generated from ongoing operating activities to fund this sharefor future stock repurchases under our stock repurchase program. We useprogram was $263 million as of December 31, 2021. Our board of directors subsequently approved an aggregate total of $300 million under this program to return value to our stockholders and to offset dilution fromin February 2022. As a result, the issuance oftotal remaining authorization for future stock repurchases under our equity-based incentive plans and employee purchase plan.stock repurchase program was $563 million, as of February 14, 2022. The program does not have an expiration date.
| Period | Total Number of Shares Purchased (1) | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (in millions) (2) | ||||||
| October 1- October 31, 2019 | 156,425 | $ | 55.89 | 156,285 | $ | 283 | ||||
| November 1 - November 30, 2019 | 554,910 | $ | 53.79 | 488,765 | $ | 257 | ||||
| December 1 - December 31, 2019 | 513,349 | $ | 55.55 | 382,671 | $ | 236 | ||||
| Total | 1,224,684 | 1,027,721 | ||||||||
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| STOCK ACTIVITIES | |||||
Our stock repurchases are subject to certain restrictions under the terms of our credit facility. For more information about our stock repurchases and the restrictions imposed by our credit facility, refer to Note 9 and Note 12 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
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| Year Ended December 31, | |||||||||||||||
| (in millions, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Income Statement Data: | |||||||||||||||
| Total revenues | $ | 3,856 | $ | 3,503 | $ | 3,275 | $ | 3,060 | $ | 2,659 | |||||
| Net income | 212 | 192 | 178 | 61 | 32 | ||||||||||
| Diluted net income per share of common stock | 2.99 | 2.65 | 2.49 | 0.85 | 0.44 | ||||||||||
Non-GAAP measures (1): | |||||||||||||||
Net Service Revenues | 929 | 893 | 809 | 646 | 547 | ||||||||||
Net Insurance Service Revenues | 399 | 406 | 351 | 199 | 146 | ||||||||||
| Adjusted EBITDA | 378 | 347 | 285 | 185 | 151 | ||||||||||
| Adjusted Net Income | 236 | 218 | 142 | 87 | 71 | ||||||||||
| Balance Sheet Data: | |||||||||||||||
| Working capital | 228 | 221 | 234 | 156 | 112 | ||||||||||
| Total assets | 2,748 | 2,435 | 2,593 | 2,095 | 2,092 | ||||||||||
| Long-term debt | 391 | 413 | 423 | 459 | 494 | ||||||||||
| Total stockholders’ equity | 475 | 375 | 206 | 35 | 8 | ||||||||||
| Cash Flow Data: | |||||||||||||||
| Net cash (used in) provided by operating activities | $ | 471 | $ | (104 | ) | $ | 606 | $ | 192 | $ | (281 | ) | |||
| Net cash (used in) investing activities | (188 | ) | (200 | ) | (24 | ) | (27 | ) | (38 | ) | |||||
| Net cash (used in) financing activities | (176 | ) | (85 | ) | (77 | ) | (104 | ) | (81 | ) | |||||
Non-GAAP measures (1): | |||||||||||||||
| Corporate operating cash flows | 233 | 234 | 299 | 189 | 169 | ||||||||||
• Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. • Provides a measure, among others, used in the determination of incentive compensation for management. • We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to Net Service Revenue. | ||
| Year Ended December 31, | |||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Total revenues | $ | 3,856 | $ | 3,503 | $ | 3,275 | $ | 3,060 | $ | 2,659 | |||||
| Less: Insurance costs | 2,927 | 2,610 | 2,466 | 2,414 | 2,112 | ||||||||||
| Net Service Revenues | $ | 929 | $ | 893 | $ | 809 | $ | 646 | $ | 547 | |||||
| Year Ended December 31, | |||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Insurance service revenues | $ | 3,326 | $ | 3,016 | $ | 2,817 | $ | 2,613 | $ | 2,258 | |||||
| Less: Insurance costs | 2,927 | 2,610 | 2,466 | 2,414 | 2,112 | ||||||||||
| Net Insurance Service Revenues | $ | 399 | $ | 406 | $ | 351 | $ | 199 | $ | 146 | |||||
| NIM | 12 | % | 13 | % | 12 | % | 8 | % | 6 | % | |||||
| Year Ended December 31, | |||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 212 | $ | 192 | $ | 178 | $ | 61 | $ | 32 | |||||
| Provision for income taxes | 58 | 49 | 22 | 43 | 28 | ||||||||||
| Stock based compensation | 41 | 44 | 32 | 26 | 18 | ||||||||||
| Interest expense and bank fees | 21 | 22 | 20 | 20 | 19 | ||||||||||
| Depreciation and amortization of intangible assets | 46 | 40 | 33 | 35 | 54 | ||||||||||
| Adjusted EBITDA | $ | 378 | $ | 347 | $ | 285 | $ | 185 | $ | 151 | |||||
| Adjusted EBITDA Margin | 41 | % | 39 | % | 35 | % | 29 | % | 28 | % | |||||
| Year Ended December 31, | |||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 212 | $ | 192 | $ | 178 | $ | 61 | $ | 32 | |||||
| Effective income tax rate adjustment | (11 | ) | (13 | ) | (59 | ) | (1 | ) | 3 | ||||||
| Stock based compensation | 41 | 44 | 32 | 26 | 18 | ||||||||||
| Amortization of intangible assets | 5 | 5 | 5 | 16 | 39 | ||||||||||
| Non-cash interest expense | 1 | 4 | 2 | 4 | 4 | ||||||||||
| Income tax impact of pre-tax adjustments | (12 | ) | (14 | ) | (16 | ) | (19 | ) | (25 | ) | |||||
| Adjusted Net Income | $ | 236 | $ | 218 | $ | 142 | $ | 87 | $ | 71 | |||||
| Year Ended December 31, | |||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Net cash (used in) provided by operating activities | $ | 471 | $ | (104 | ) | $ | 606 | $ | 192 | $ | (281 | ) | |||
| Change in WSE related other current assets | (15 | ) | 33 | 35 | (96 | ) | 188 | ||||||||
| Change in WSE related liabilities | (223 | ) | 305 | (342 | ) | 93 | 262 | ||||||||
| Corporate Operating Cash Flows | $ | 233 | $ | 234 | $ | 299 | $ | 189 | $ | 169 | |||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operational Highlights
Our consolidated results for 20192021 reflect our continued progress in attracting new customerscontinuing efforts to our industry-oriented (vertical) products, servingserve our existing customersclients throughout the COVID-19 pandemic and improvingto support the economic recovery of SMBs. We will continue to monitor and evaluate developments relating to the COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on our brand awareness through marketing.business and our clients' businesses.
•continued to grow total revenues as we are investingachieved the highest Total WSEs in our processeshistory,
•entered into a definitive agreement to ensureacquire Zenefits,
•established our 2021 Credit Program to benefit our eligible clients,
•hosted the 2nd annual TriNet PeopleForce conference, our showcase customer and prospect conference focused on business transformation, agility and innovation for small and medium-size businesses,
•introduced TriNet Financial Services Preferred, a stronger customer experience. We expect this investment will further enhancenew top-tier version of our value to our customers, support retention and provide further efficiency and scale for our operations. We started this work in 2018 and expect this to continueHR solution that addresses the critical HR needs of businesses in the near-term.financial services industry,
Performance Highlights
| $3.9B | $268M | $929M | |||||||||
| Total revenues | Operating income | Net Service Revenue * | |||||||||
| 10 | % | increase | 7 | % | increase | 4 | % | increase | |||
| $212M | $2.99 | $236M | |||||||||
| Net income | Diluted EPS | Adjusted Net income * | |||||||||
| 10 | % | increase | 13 | % | increase | 8 | % | increase | |||
| * | Non-GAAP measure | ||||||||||
Our results for WSEs and payroll and payroll tax payments in 20192021 when compared to 2020 are noted below:
| $4.5B | $455M | 86% | ||||||||||||||||||||||||
| Total revenues | Operating income | Insurance cost ratio | ||||||||||||||||||||||||
| 13 | % | increase | 24 | % | increase | 1 | % | increase | ||||||||||||||||||
| $338M | $5.07 | $376M | ||||||||||||||||||||||||
| Net income | Diluted EPS | Adjusted Net income * | ||||||||||||||||||||||||
| 24 | % | increase | 27 | % | increase | 24 | % | increase | ||||||||||||||||||
| 340,067 | 364,940 | ||||||||||||||||||||||||||||
| Average WSE | Total WSE | ||||||||||||||||||||||||||||
| 5 | % | increase | 10 | % | increase | ||||||||||||||||||||||||
| * | |||||||||||||||||||||||||||||
We continued to achieve year-over-year revenue growth, reflecting our higher Average WSEs, rate increases and the prior year were:
| 324,927 | 340,017 | $41.7B | ||||||||
| Average WSE | Total WSE | Payroll and payroll tax payments | ||||||||
| 2 | % | increase | 4% | increase | 11 | % | increase | |||
During 2019,2021, our averageAverage WSEs increased 5% and total WSEs grewincreased 10% compared to 2020, primarily as a result of new clients, continued hiring by clients in theour installed base and lower client attrition. In addition, ourbase.
Increased medical services utilization in 2021, combined with increased volume due to WSE growth, and increased participation in our health services resulted in a 10% increase in total revenues. We also experienced higher insurance costs duecompared to an increase2020.
The growth in medical cost trend, thattotal revenues, partially offset by increases in insurance costs and operating expenses, resulted in reduced NSR growth of 4%. Net income increased 10% and adjustedincreases in our net income increased 8%and Adjusted Net Income of 24%.
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Results of Operations
The following table summarizes our results of operations for the three years ended December 31, 2019, 20182021, 2020 and 2017.2019. For details of the critical accounting judgments and estimates that could affect the Results of Operations, see the Critical Accounting Judgments and Estimates section within MD&A.
| Year Ended December 31, | % Change | ||||||||||||||||
| (in millions, except operating metrics data) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||||
| Income Statement Data: | |||||||||||||||||
| Professional service revenues | $ | 639 | $ | 544 | $ | 530 | 17 | % | 3 | % | |||||||
| Insurance service revenues | 3,901 | 3,490 | 3,326 | 12 | 5 | ||||||||||||
| Total revenues | 4,540 | 4,034 | 3,856 | 13 | 5 | ||||||||||||
| Insurance costs | 3,339 | 2,979 | 2,927 | 12 | 2 | ||||||||||||
| Operating expenses | 746 | 687 | 661 | 9 | 4 | ||||||||||||
| Total costs and operating expenses | 4,085 | 3,666 | 3,588 | 11 | 2 | ||||||||||||
| Operating income | 455 | 368 | 268 | 24 | 37 | ||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest expense, bank fees and other | (20) | (21) | (21) | (5) | — | ||||||||||||
| Interest income | 6 | 10 | 23 | (40) | (57) | ||||||||||||
| Income before provision for income taxes | 441 | 357 | 270 | 24 | 32 | ||||||||||||
| Income taxes | 103 | 85 | 58 | 21 | 47 | ||||||||||||
| Net income | $ | 338 | $ | 272 | $ | 212 | 24 | % | 28 | % | |||||||
| Cash Flow Data: | |||||||||||||||||
| Net cash provided by operating activities | 218 | 546 | 471 | (60) | % | 16 | % | ||||||||||
| Net cash used in investing activities | (135) | (151) | (188) | (11) | (20) | ||||||||||||
| Net cash provided by (used in) financing activities | 12 | (208) | (176) | (106) | 18 | ||||||||||||
Non-GAAP measures (1): | |||||||||||||||||
| Adjusted EBITDA | 565 | 468 | 378 | 21 | 24 | % | |||||||||||
| Adjusted Net income | 376 | 303 | 236 | 24 | 28 | ||||||||||||
| Corporate Operating Cash Flow | 415 | 338 | 233 | 23 | 45 | ||||||||||||
| Operating Metrics: | |||||||||||||||||
| Insurance Cost Ratio | 86 | % | 85 | % | 88 | % | 1 | (3) | % | ||||||||
| Average WSEs | 340,067 | 323,672 | 324,927 | 5 | — | ||||||||||||
| Total WSEs | 364,940 | 331,908 | 340,017 | 10 | (2) | ||||||||||||
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP measures under the heading "Non-GAAP Financial Measures".
The following table summarizes our balance sheet data as of December 31, 2021, 2020 and 2019.
| Year Ended December 31, | % Change | ||||||||||||||||
| (in millions) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||||
| Balance Sheet Data: | |||||||||||||||||
| Cash and cash equivalents | $ | 612 | $ | 301 | $ | 213 | 103 | % | 41 | % | |||||||
| Working capital | 700 | 290 | 228 | 141 | % | 27 | % | ||||||||||
| Total assets | 3,309 | 3,043 | $ | 2,748 | 9 | % | 11 | % | |||||||||
| Debt | 495 | 369 | 391 | 34 | % | (6) | % | ||||||||||
| Total stockholders’ equity | 881 | 607 | 475 | 45 | % | 28 | % | ||||||||||
| Year Ended December 31, | % Change | ||||||||||||
| (in millions, except operating metrics data) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||
| Income Statement Data: | |||||||||||||
| Professional service revenues | $ | 530 | $ | 487 | $ | 458 | 9 | % | 6 | % | |||
| Insurance service revenues | 3,326 | 3,016 | 2,817 | 10 | 7 | ||||||||
| Total revenues | 3,856 | 3,503 | 3,275 | 10 | 7 | ||||||||
| Insurance costs | 2,927 | 2,610 | 2,466 | 12 | 6 | ||||||||
| Operating expenses | 661 | 642 | 592 | 3 | 8 | ||||||||
| Total costs and operating expenses | 3,588 | 3,252 | 3,058 | 10 | 6 | ||||||||
| Operating income | 268 | 251 | 217 | 7 | 15 | ||||||||
| Other income (expense): | |||||||||||||
| Interest expense, bank fees and other | (21 | ) | (22 | ) | (20 | ) | (5 | ) | 10 | ||||
| Interest income | 23 | 12 | 3 | 92 | 300 | ||||||||
| Income before provision for income taxes | 270 | 241 | 200 | 12 | 21 | ||||||||
| Income taxes | 58 | 49 | 22 | 18 | 128 | ||||||||
| Net income | $ | 212 | $ | 192 | $ | 178 | 10 | % | 8 | % | |||
Non-GAAP measures (1): | |||||||||||||
| Net Service Revenues | $ | 929 | $ | 893 | $ | 809 | 4 | % | 10 | % | |||
| Net Insurance Service Revenues | 399 | 406 | 351 | (2 | ) | 16 | |||||||
| Adjusted EBITDA | 378 | 347 | 285 | 9 | 22 | ||||||||
| Adjusted Net income | 236 | 218 | 142 | 8 | 53 | ||||||||
| Operating Metrics: | |||||||||||||
| Average WSEs | 324,927 | 317,104 | 324,679 | 2 | % | (2 | )% | ||||||
| Total WSEs | 340,017 | 325,616 | 325,370 | 4 | — | ||||||||
| Total WSEs payroll and payroll taxes processed (in millions) | $ | 41,682 | $ | 37,666 | $ | 37,115 | 11 | 1 | |||||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
A discussion regarding our financial condition and results of operations for 20182020 compared to 20172019 can be found under Part II, Item 7. Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2018,2020, filed with the SEC on February 14, 2019.16, 2021.
The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation from, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.
| Non-GAAP Measure | Definition | How We Use The Measure | ||||||
| Adjusted EBITDA | • Net income, excluding the effects of: - income tax provision, - interest expense, bank fees and other, - depreciation, - amortization of intangible assets, and - stock based compensation expense. | • Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization, and stock-based compensation recognized based on the estimated fair values. We believe these charges are either not directly resulting from our core operations or not indicative of our ongoing operations. • Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. • Provides a measure, among others, used in the determination of incentive compensation for management. • We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to total revenues. | ||||||
| Adjusted Net Income | • Net income, excluding the effects of: - effective income tax rate (1), - stock based compensation, - amortization of other intangible assets, net, - non-cash interest expense (2), and - the income tax effect (at our effective tax rate (1) of these pre-tax adjustments. | • Provides information to our stockholders and board of directors to understand how our management evaluates our business, to monitor and evaluate our operating results, and analyze profitability of our ongoing operations and trends on a consistent basis by excluding certain non-cash charges. | ||||||
| Corporate Operating Cash Flows | • Net cash provided by (used in) operating activities, excluding the effects of: - Assets associated with WSEs (accounts receivable, unbilled revenue, prepaid expenses and other current assets) and - Liabilities associated with WSEs (client deposits and other client liabilities, accrued wages, payroll tax liabilities and other payroll withholdings, accrued health benefit costs, accrued workers' compensation costs, insurance premiums and other payables, and other current liabilities). | • Provides information that our stockholders and management can use to evaluate our cash flows from operations independent of the current assets and liabilities associated with our WSEs. • Enhances comparisons to prior periods and, accordingly, used as a liquidity measure to manage liquidity between corporate and WSE related activities, and to help determine and plan our cash flow and capital strategies. | ||||||
(1) Non-GAAP effective tax rate is 25.5% for 2021, 2020 and 2019, which excludes the income tax impact from stock based compensation, changes in uncertain tax positions and nonrecurring benefits or expenses from federal legislative changes.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Net income to Adjusted EBITDA:
| Year Ended December 31, | |||||||||||||||||
| (in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Net income | $ | 338 | $ | 272 | $ | 212 | |||||||||||
| Provision for income taxes | 103 | 85 | 58 | ||||||||||||||
| Stock based compensation | 50 | 43 | 41 | ||||||||||||||
| Interest expense, bank fees and other | 20 | 21 | 21 | ||||||||||||||
Depreciation and amortization of intangible assets ¹ | 54 | 47 | 46 | ||||||||||||||
| Adjusted EBITDA | $ | 565 | $ | 468 | $ | 378 | |||||||||||
| Adjusted EBITDA Margin | 12.5 | % | 11.6 | % | 9.8 | % | |||||||||||
(1) Amount includes impairment of customer relationship intangibles and amortization of cloud computing arrangements included in operating expenses.
The table below presents a reconciliation of Net income to Adjusted Net Income:
| Year Ended December 31, | |||||||||||||||||
| (in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Net income | $ | 338 | $ | 272 | $ | 212 | |||||||||||
| Effective income tax rate adjustment | (10) | (6) | (11) | ||||||||||||||
| Stock based compensation | 50 | 43 | 41 | ||||||||||||||
Amortization of other intangible assets, net ¹ | 12 | 5 | 5 | ||||||||||||||
| Non-cash interest expense | 3 | 1 | 1 | ||||||||||||||
| Income tax impact of pre-tax adjustments | (17) | (12) | (12) | ||||||||||||||
| Adjusted Net Income | $ | 376 | $ | 303 | $ | 236 | |||||||||||
(1) Amount includes impairment of customer relationship intangibles.
The table below presents a reconciliation of net cash provided by operating activities to Corporate Operating Cash Flows:
| Year Ended December 31, | |||||||||||||||||
| (in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Net cash provided by operating activities | $ | 218 | $ | 546 | $ | 471 | |||||||||||
| Less: Change in WSE related other current assets | (51) | 10 | 15 | ||||||||||||||
| Less: Change in WSE related liabilities | (146) | 198 | 223 | ||||||||||||||
| Net cash (used in) provided by operating activities - WSE | $ | (197) | $ | 208 | $ | 238 | |||||||||||
| Net cash provided by operating activities - Corporate | $ | 415 | $ | 338 | $ | 233 | |||||||||||
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our business. Average WSEs increased 2%5% when comparing 2021 to 2020, primarily due to increased hiring by clients in 2019. Throughout 2019, we experienced reduced attrition resulting from our customer service initiatives, continuedinstalled base across most verticals in 2021, led by our Technology vertical. Most of the hiring in our installed based primarily in 2021 was from clients that benefited from our Professional ServicesRecovery Credit program that we launched in April 2020. Our Recovery Credit program was designed to assist in the economic recovery of SMBs and Technology verticals,to promote client loyalty and stronger new sales performance.incentivize client retention.
Total WSEs can be used to estimate our beginning WSEs for the next period and, as a result, can be used as an indicator of our potential future success in growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation derived from Average WSEs or Total WSEs due to pricing differences across our HR solutions and services and the degree to which clients and WSEs elect to participate in our solutions during future periods. In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies, productbenefit participation and productservice differentiation to expand our revenue opportunities. We report the impact of client and WSE participation differences as a change in mix.
Insurance Cost Ratio (ICR)
ICR is a performance measure calculated as the ratio of insurance costs to manage attrition.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
Under our risk-based health insurance policies, we assume the risk of variability in future health claims costs for our enrollees. This variability typically results from changing trends in the volume, severity and ultimate cost of medical and pharmaceutical claims, due to changes to the components of medical cost trend. These trends change, and other seasonal trends and variability may develop. As a result, it is difficult for us to predict our insurance costs with accuracy and a significant increase in these costs could have a material adverse effect on our business.
| (in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Insurance costs | $ | 3,339 | $ | 2,979 | $ | 2,927 | ||||||||||||||
| Insurance service revenues | 3,901 | 3,490 | 3,326 | |||||||||||||||||
| Insurance Cost Ratio | 86 | % | 85 | % | 88 | % | ||||||||||||||
ICR increased due to the increase in medical services utilization in 2021, combined with COVID-19 testing, treatment and vaccination costs, which together resulted in higher insurance costs. This was partially offset by the increase in insurance service revenues. While medical services utilization has increased in 2021, the ICR remains below pre-pandemic levels, as access to medical systems was constrained in regions where increases in hospitalizations arising from the COVID-19 Delta and Omicron variants reduced preventative and elective procedures.
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Total Revenues
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). PSR represents fees charged to clients for processing payroll-related transactions on behalf of our clients, access to our HR expertise, employment and benefit law compliance services, and other HR-related services. ISR consists of insurance-related billings and administrative fees collected from clients and withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers.
In April 2020, we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain eligible clients. Eligible clients received one-time reductions against fees for future services, accounted for as a discount, to be received over the following 12 months.
The reduction in total revenue under the Recovery Credit program was estimated each period based on the timing of when eligible clients received the Recovery Credit and the ultimate amount of the total Recovery Credit. As of June 30, 2021, we had fully recognized the maximum amount of $145 million for the Recovery Credit and no further reduction to revenue will be recognized.
In March 2021, we created our 2021 Credit program, which was designed to return up to $25 million to eligible customers based on the performance of our health insurance costs in 2021. We recognized a $25 million reduction to revenue for credits that will be paid to eligible clients under this program. These credits are recorded as a reduction to ISR and are payable within 12 months to eligible clients as of March 31, 2021.
In 2021, we recognized a reduction in revenue of $17 million for the Recovery Credit and $25 million for the 2021 Credit Program, compared to $128 million recognized in 2020 for the Recovery Credit.
Monthly total revenues per Average WSE is a measure we use to monitor the success of our product and service pricing strategies. This measure increased 8% during 20197% in 2021 compared to 2018.2020.
We also use the following measures to further analyze changes in total revenue:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the combined weighted average percentage changes in service fees for each vertical productservice and changes in service fees associated with each insurance service offering, and
•Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance service offerings.offerings, and
| PSR | |||||||||||||||||
| ISR - % represents proportion of insurance service revenues to total revenues | |||||||||||||||||
The volume increasegrowth in 2019total revenues was primarily driven by WSEhigher Average WSEs and growth especially in our Professional Services and Technology verticals. The changes in rate, and mix during 2019, were primarily drivencombined with the $111 million decrease in the Recovery Credit recognized in 2021. This was partially offset by increasesthe $25 million reduction in insurance service fees and increased health plan enrollment in our insurance service offerings.
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Operating Income
Our operating income consists of total revenues less insurance costs and OE. Our insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers. Our OE consists primarily of our corporate employees' compensation related expenses, which includes payroll, payroll taxes, SBC, bonuses, commissions and other payroll-and benefits-related costs.
The table below provides a view of the changes in components of operating income on a year-over-year basis.
| (in millions) | ||||||||
| $ | ||||||||
| + | Higher total revenues | |||||||
| Higher insurance costs primarily as a result of | ||||||||
| Higher OE primarily as a result of | ||||||||
| $ | ||||||||
Professional Service Revenues
Our clients are primarily billed either based on a fee per WSE per month per transaction or on a percentage of the WSEs’ payroll. For those clients that are billed on a percentage of WSEs' payroll, as our clients' payrolls increase, our fees also increase.
transaction. Our vertical approach provides us the flexibility to offer our clients in different industries with varied services at different prices, which we believe potentially reduces the value of solely using Average WSE and Total WSE counts as indicators of future potential revenue performance.
We also analyze changes in PSR with the following measures:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees for each vertical, and
•Mix - the change in composition of Average WSEs across our verticals.verticals, and
The growth in PSR was driven by higher Average WSEs, a growth in rate and a $12 million decrease in the Recovery Credit recognized. The growth in rate was weighted to our smaller clients, and included an increase in PSR during 2019 reflects the result of our vertical pricing strategy and ongoing change in the mix of our WSEs.fees for other services, including COBRA administration. We continued to experience WSE growth, especiallya favorable change in our vertical mix of WSEs, as SMBs in our Technology, Financial Services and Professional Services and Technology verticals whilereturned to hiring at a faster rate than our Main Street vertical continued to shrink, but at a reduced rate when compared to 2018.
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Insurance Service Revenues
ISR consists of insurance services-related billings and administrative fees collected from clients and withheld from WSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers.
We use the following measures to analyze changes in ISR:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees associated with each of our insurance service offerings,
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment), and
•Credit - the weighted average amounts recognized for the Recovery Credit and 2021 Credit programs.
The growth in ISR was primarily driven by higher Average WSEs, rate increases and the $99 million decrease in the Recovery Credit recognized, partially offset by the $25 million reduction in revenue recognized for the 2021 Credit Program.
Insurance Costs
Insurance costs include insurance premiums for coverage provided by insurance carriers, payments for claims costs and other risk management services, reimbursement of claims payments made by insurance carriers or third-party administrators below a predefined deductible limit, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
We use the following measures to analyze changes in insurance costs:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in cost trend associated with each of our insurance service offerings, and
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment).
During 2020, stay-at-home orders and social distancing practices due to the COVID-19 pandemic decreased medical services utilization, particularly in the second quarter, as enrollees deferred or cancelled elective procedures and reduced outpatient medical, dental and vision services. Medical services utilization increased in 2021 as enrollees returned to outpatient medical, dental and vision care and elective procedures. The higher utilization was partially offset by reductions in some regions for part of the year due to the surges of the COVID-19 Delta and Omicron variants. As a result, our medical services utilization in 2021 remained below pre-pandemic levels.
The growthincrease in ISR during 2019 primarily resulted from changesmedical services utilization in rate, due to higher insurance service fees per plan participant2021, combined with increased COVID-19 testing, treatment and changesvaccination costs, caused the increase in mix, due to higherrate. This was partially offset by larger positive claims development as our accrued health plan enrollment.
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Operating Expenses
OE includes cost of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), systems development and programming (SD&P), and depreciation and amortization expenses (D&A).
We manage our operating expenses and allocate resources across different business functions based on a percentage of NSR, which has decreased to 71% in 2019 from 72% in 2018.
| % represents portion of compensation related expense included in operating expenses | |||||||||||||||||||||||||||||
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We analyze and present our OE based upon the business functions COPS, S&M, G&A and SD&P and depreciation and amortization.D&A. The charts below provide a view of the expenses of the business functions. Dollars are presented in millions and percentages represent year-over-year change.
| (in millions) | ||||||||
| $ | ||||||||
| +2 | COPS was consistent with the prior year. | |||||||
| +16 | ||||||||
| +24 | G&A increased, driven primarily by increased payroll tax and related payroll tax assessments, compensation and technology services expenses to | |||||||
| + | ||||||||
| + | D&A increased, | |||||||
| $ | ||||||||
The primary drivers to the changes in our OE are presented below:
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Other Income (Expense)
Other income (expense) consists primarily of interest and dividend income from investments, and interest expense under our previous credit facility.facility and interest on our 3.50% Senior Notes due 2029 (our 2029 Notes) issued in February 2021.
Interest income increased to $23 million in 2019 decreased primarily due to a change in our investment strategy initiated in the second quarter of 2018 to improve ourlower average market interest income. Our investment strategy has improved our interest income, net income, Adjusted Net Income and Adjusted EBITDA, year-over-year. rates. Interest expense, bank fees and other, remained was consistent year-over-year.with the prior period.
Provision for Income Taxes
Our effective tax rate (ETR) was 21%23% and 20%24% for the years ended December 31, 20192021 and 2018,2020, respectively. The change in ETR was driven by a 3% increase primarily from one-time expensesattributable to benefits associated with SBC, partially offset by a 2% decreasefavorable adjustment of our previously disputed receivable from a one-time benefit associated with prior year tax expense and changes in the valuation allowance.IRS.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our principal source of liquidity for operations is derived from cash provided by operating activities. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, and capital expenditures. Our cash flow related to WSE payroll and benefits is generally matched by advance collection from our clients. To minimize the credit risk associated with remitting the payroll and associated taxes and benefits costs, we require clients to prefund the payroll and related payroll taxes and benefits costs.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements andcan meet our obligations to our clients, creditorspresent and debt holders.reasonably foreseeable operating cash needs and future commitments through existing liquid assets and continuing cash flows from corporate operating activities.
Included in our balance sheets are assets and liabilities resulting from transactions directly or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other benefit programs. Although we are not subject to regulatory restrictions that require us to do so, we distinguish and manage our corporate assets and liabilities separately from those current assets and liabilities held by us to satisfy our employer obligations associated with our WSEs as follows:
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total | (in millions) | Corporate | WSE | Total | Corporate | WSE | Total | |||||||||||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 213 | $ | — | $ | 213 | $ | 228 | $ | — | $ | 228 | Cash and cash equivalents | $ | 612 | $ | — | $ | 612 | $ | 301 | $ | — | $ | 301 | |||||||||||||
| Investments | 68 | — | 68 | 54 | — | 54 | Investments | 135 | — | 135 | 57 | — | 57 | |||||||||||||||||||||||||
| Restricted cash, cash equivalents and investments | 15 | 1,165 | 1,180 | 15 | 927 | 942 | Restricted cash, cash equivalents and investments | 19 | 1,176 | 1,195 | 15 | 1,373 | 1,388 | |||||||||||||||||||||||||
| Other current assets | 45 | 365 | 410 | 36 | 386 | 422 | Other current assets | 91 | 406 | 497 | 59 | 355 | 414 | |||||||||||||||||||||||||
| Total current assets | $ | 341 | $ | 1,530 | $ | 1,871 | $ | 333 | $ | 1,313 | $ | 1,646 | Total current assets | $ | 857 | $ | 1,582 | $ | 2,439 | $ | 432 | $ | 1,728 | $ | 2,160 | |||||||||||||
| Total current liabilities | $ | 113 | $ | 1,530 | $ | 1,643 | $ | 112 | $ | 1,313 | $ | 1,425 | Total current liabilities | 157 | 1,582 | $ | 1,739 | $ | 142 | $ | 1,728 | $ | 1,870 | |||||||||||||||
| Working capital | $ | 228 | $ | — | $ | 228 | $ | 221 | $ | — | $ | 221 | Working capital | $ | 700 | $ | — | $ | 700 | $ | 290 | $ | — | $ | 290 | |||||||||||||
Working capital for WSEs related activities
We designate funds to ensure that we have adequate current assets to satisfy our current obligations associated with WSEs.WSEs, the Recovery Credit liability and 2021 Credit Program liability. We expect the Recovery Credit and 2021 Credit Program aggregate liability of $48 million as of December 31, 2021 to be settled over the following 12 months. We manage our WSE payroll and benefits obligations through collections of payments from our clients which generally occursoccur two to three days in advance of client payroll dates. We regularly review our short-term obligations associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate funds required to fulfill these short-term obligations, which we refer to as PFC. PFC is included in current assets as restricted cash, cash equivalents and investments.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust our collateral balances when facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash equivalents and investments as current and noncurrent assets to match against the anticipated timing of paymentpayments to carriers.
The following table summarizes our workers' compensation obligations, gross of claims.collateral, as of December 31, 2021,
| Payments Due by Period | |||||||||||||||||
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
Workers' compensation obligations (1) | $ | 198 | $ | 57 | $ | 62 | $ | 26 | $ | 53 | |||||||
(1) Represents estimated payments that are expected to be made to carriers for various workers' compensation programs under the contractual obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with the workers' compensation insurance policy.
Working capital for corporate purposes
Corporate working capital as of December 31, 2021 increased $410 million from December 31, 2020, primarily driven by a $311 million increase in corporate unrestricted cash and cash equivalents and a $78 million increase in corporate investments.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
We use our available cash and cash equivalents to satisfy our operational and regulatory requirements and to fund capital expenditures. We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from corporate operating activities our borrowing capacity under our revolving credit facility and the potential issuance of debt or equity securities. We believe our existing corporate cash and cash equivalents and positive working capital will be sufficient to meet our working capital expenditure needs for at least the next twelve months.
| Payments Due by Period | |||||||||||||||||
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
Purchase obligations (1) | $ | 150 | $ | 87 | $ | 56 | $ | 7 | $ | — | |||||||
Cash Flows
The following table presents our cash flow activities for the stated periods:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| (in millions) | 2019 | 2018 | (in millions) | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total | |||||||||||||||||||||||||||
| Net cash provided by (used in): | Net cash provided by (used in): | |||||||||||||||||||||||||||||||||||||
| Operating activities | $ | 233 | $ | 238 | $ | 471 | $ | 234 | $ | (338 | ) | $ | (104 | ) | Operating activities | $ | 415 | $ | (197) | $ | 218 | $ | 338 | $ | 208 | $ | 546 | |||||||||||
| Investing activities | (191 | ) | 3 | (188 | ) | (200 | ) | — | (200 | ) | Investing activities | (119) | (16) | (135) | (69) | (82) | (151) | |||||||||||||||||||||
| Financing activities | (176 | ) | — | (176 | ) | (85 | ) | — | (85 | ) | Financing activities | 12 | — | 12 | (208) | — | (208) | |||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | (134 | ) | $ | 241 | $ | 107 | $ | (51 | ) | $ | (338 | ) | $ | (389 | ) | Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | 308 | $ | (213) | $ | 95 | $ | 61 | $ | 126 | $ | 187 | |||||||||
| Cash and cash equivalents, unrestricted and restricted: | Cash and cash equivalents, unrestricted and restricted: | |||||||||||||||||||||||||||||||||||||
| Beginning of period | $ | 425 | $ | 924 | $ | 1,349 | $ | 476 | $ | 1,262 | $ | 1,738 | Beginning of period | $ | 352 | $ | 1,291 | $ | 1,643 | $ | 291 | $ | 1,165 | $ | 1,456 | |||||||||||||
| End of period | $ | 291 | $ | 1,165 | $ | 1,456 | $ | 425 | $ | 924 | $ | 1,349 | End of period | $ | 660 | $ | 1,078 | $ | 1,738 | $ | 352 | $ | 1,291 | $ | 1,643 | |||||||||||||
| Net increase (decrease) in cash and cash equivalents: | Net increase (decrease) in cash and cash equivalents: | |||||||||||||||||||||||||||||||||||||
| Unrestricted | $ | (15 | ) | $ | — | $ | (15 | ) | $ | (108 | ) | $ | — | $ | (108 | ) | Unrestricted | $ | 311 | $ | — | $ | 311 | $ | 88 | $ | — | $ | 88 | |||||||||
| Restricted | (119 | ) | 241 | 122 | 57 | (338 | ) | (281 | ) | Restricted | (3) | (213) | (216) | (27) | 126 | 99 | ||||||||||||||||||||||
Operating Activities
Components of net cash (used in) provided by operating activities are as follows:
| Year Ended December 31, | ||||||||
| (in millions) | 2021 | 2020 | ||||||
| Net cash provided by operating activities | $ | 218 | $ | 546 | ||||
| Net cash provided by operating activities - Corporate | $ | 415 | $ | 338 | ||||
| Net cash provided by (used in) operating activities - WSE | $ | (197) | $ | 208 | ||||
| Year Ended December 31, | ||||||
| (in millions) | 2019 | 2018 | ||||
| Net income | $ | 212 | $ | 192 | ||
| Depreciation and amortization | 57 | 46 | ||||
| Noncash lease expense | 16 | — | ||||
| Stock based compensation expense | 41 | 44 | ||||
| Payment of interest | (19 | ) | (17 | ) | ||
| Income tax payments, net | (62 | ) | (49 | ) | ||
| Changes in deferred taxes | (7 | ) | 1 | |||
| Changes in other operating assets | (36 | ) | (44 | ) | ||
| Changes in other operating liabilities | 31 | 61 | ||||
| Net cash provided by operating activities - Corporate | $ | 233 | $ | 234 | ||
| Collateral (paid to) refunded from insurance carriers, net | 6 | 26 | ||||
| Changes in other operating assets | 15 | (27 | ) | |||
| Changes in other operating liabilities | 217 | (337 | ) | |||
| Net cash (used in) provided by operating activities - WSE | $ | 238 | $ | (338 | ) | |
| Net cash (used in) provided by operating activities | $ | 471 | $ | (104 | ) | |
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Investing Activities
Cash used in investing activities for the periods presented below primarily consisted of purchases of investments and capital expenditures, partially offset by proceeds from the sale and maturity of investments.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||
| (in millions) | 2019 | 2018 | (in millions) | 2021 | 2020 | |||||||||
| Investments: | Investments: | |||||||||||||
| Purchases of investments | $ | (302 | ) | $ | (258 | ) | Purchases of investments | $ | (444) | $ | (327) | |||
| Proceeds from sale and maturity of investments | 159 | 101 | Proceeds from sale and maturity of investments | 349 | 224 | |||||||||
| Other | Other | — | (12) | |||||||||||
| Cash used in investments | $ | (143 | ) | $ | (157 | ) | Cash used in investments | $ | (95) | $ | (115) | |||
| Capital expenditures: | Capital expenditures: | |||||||||||||
| Software and hardware | $ | (34 | ) | $ | (30 | ) | Software and hardware | $ | (33) | $ | (33) | |||
| Office furniture, equipment and leasehold improvements | (11 | ) | (13 | ) | Office furniture, equipment and leasehold improvements | (7) | (3) | |||||||
| Cash used in capital expenditures | $ | (45 | ) | $ | (43 | ) | Cash used in capital expenditures | $ | (40) | $ | (36) | |||
| Cash used in investing activities | $ | (188 | ) | $ | (200 | ) | Cash used in investing activities | $ | (135) | $ | (151) | |||
Investments
We invest a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our balance sheets as investments. As of December 31, 2019, we had approximately $193 million in investments.
We also invest funds held as collateral to satisfy our long-term obligation towards workers' compensation liabilities. These investments are classified on our balance sheets as restricted cash, cash equivalents and investments. We review the amount and the anticipated holding period of these investments regularly in conjunction with our estimated long-term workers' compensation liabilities and anticipated claims payment trend. At December 31, 2021, our investments had a weighted average duration of less than two years and an average S&P credit rating of AA.
As of December 31, 2019,2021, we held approximately $1.8$2.3 billion in restricted and unrestricted cash, cash equivalents and investments, of which $213$612 million is unrestricted.was unrestricted cash and cash equivalents and $303 million was unrestricted investments. Refer to Note 2 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K for a summary of these funds.
In December 2021, we entered into a definitive agreement to acquire Zenefits. The total purchase price of $220 million, subject to customary closing adjustments, will be settled by the issuance of up to $20 million of TriNet stock to eligible selling shareholders, with the remainder paid in cash from corporate working capital. The acquisition is subject to customary closing conditions and regulatory approval and is expected to close in the first quarter of 2022.
Capital Expenditures
During 2019,2021, we continued to make investments in software and hardware and we enhanced our existing productsservice offerings and technology platform. We also incurred expenses related to the build out of our corporate headquarters and our technology and client service centers. We expect capital investments in our software and hardware to continue in the future.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |||||
Financing Activities
Net cash used inprovided by (used in) financing activities in the years ended December 31, 20192021 and 20182020 consisted of our debt and equity-related activities.
| Year Ended December 31, | ||||||||
| (in millions) | 2021 | 2020 | ||||||
| Financing activities | ||||||||
| Repurchase of common stock, net of issuance | $ | (109) | $ | (186) | ||||
| Proceeds from issuance of 2029 Notes | 500 | — | ||||||
| Repayment of borrowings | (370) | (22) | ||||||
| Payment of debt issuance costs | (7) | — | ||||||
| Payment of long-term financing fees | (2) | — | ||||||
| Draw down from revolving credit facility | — | 234 | ||||||
| Repayment of borrowings under revolving credit facility | — | (234) | ||||||
| Cash provided by (used in) financing activities | $ | 12 | $ | (208) | ||||
| Year Ended December 31, | ||||||
| (in millions) | 2019 | 2018 | ||||
| Financing activities | ||||||
| Repurchase of common stock, net of issuance | $ | (154 | ) | $ | (69 | ) |
| Repayment of borrowings | (22 | ) | (22 | ) | ||
| Net proceeds from issuance of debt | — | 6 | ||||
| Cash used in financing activities | $ | (176 | ) | $ | (85 | ) |
In February 2020,2022, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014. We use this program to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee purchase plan.
| Payments Due by Period | |||||||||||||||
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||
Debt obligations (1) | $ | 392 | $ | 22 | $ | 44 | $ | 326 | $ | — | |||||
Workers' compensation obligations (2) | 217 | 66 | 49 | 34 | 68 | ||||||||||
Operating lease obligations (3) | 74 | 19 | 21 | 15 | 19 | ||||||||||
Purchase obligations (4) | 60 | 34 | 22 | 4 | — | ||||||||||
Uncertain tax positions (5) | 7 | 1 | 6 | — | — | ||||||||||
| Total | $ | 750 | $ | 142 | $ | 142 | $ | 379 | $ | 87 | |||||
Capital Resources
As of December 31, 2021, $500 million aggregate principal of our 2029 Notes was outstanding. The Indenture governing the 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant subsidiary guarantees of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions.
Our 2021 Credit Agreement includes a $500 million revolving credit facility. The 2021 Credit Agreement includes negative covenants that limit our ability to incur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, we have entered into indemnification agreementsthe 2021 Credit Agreement also contains other customary affirmative and negative covenants and customary events of default. The 2021 Credit Agreement also contains a financial covenant that requires the Company to maintain certain maximum total net leverage ratios.
We were in compliance with all financial covenants under our officers and directors, which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us. Such indemnification obligations are not included in the table above.2021 Credit Agreement at December 31, 2021.
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Critical Accounting Judgments and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected. For additional information about our accounting policies, refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
The following items require significant estimation or judgment:
Insurance Costs
We purchase fully insured workers' compensation and health benefits coverage for our employees and WSEs. As part of these insurance policies, we bear claims costs up to a defined deductible amount and as a result, we establish accrued insurance costs including both known claims filed and estimates for incurred but not reported claims.
We use external actuaries to evaluate, review and recommend estimates of our accrued workers' compensation and health insurance costs. The accrued costs studies performed by these qualified external actuaries analyze historical claims data to develop a range of our potential ultimate costs using loss development, expected loss ratio and frequency/severity methods in accordance with Actuarial Standards of Practice. These methods are applied to classes of the claims data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by class and the accrued costs selection overall include:
•the selection of method used and the relative weights given to selecting the method used for each policy year,
•the underlying assumptions of LDF used in these models,
•the effect of any changes to the insurers' claims handling and payment processes,
•evaluation of medical and indemnity cost trends, costs from changes in the risk exposure being evaluated and any applicable changes in legal, regulatory or judicial environment.
We review and evaluate these judgments and the associated recommendations in concluding the adequacy of accrued costs. Our quarterly reserving process involves the collaboration of our qualified external actuaries and our actuarial and finance departments to approve a single point best estimate. In selecting this best estimate, management considers the actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to: the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, and the extent of our historical loss data versus industry information. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
These accrued costs may vary in subsequent quarters from the amount estimated. Certain assumptions used in estimating these accrued costs are highly judgmental. Our accrued costs, results of operations and financial condition can be materially impacted if actual experience differs from the assumptions used in establishing these accrued costs.
Accrued Workers' Compensation Costs
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to $1 million per claim occurrence (Deductible Layer). As workers' compensation costs for a particular period are not known for many years after the losses have occurred, these costs represent our best estimate of unpaid claim losses and loss adjustment expenses within the deductible layer in accordance with our insurance policies. We use external actuaries to evaluate, review and recommend accrued workers' compensation costs on a quarterly basis. The data is segmented by class and state and analyzed by policy year, and states where we have small exposure are aggregated into a single grouping.
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We use a combination of loss development, expected loss ratio and frequency/severity methods which include the following inputs, assumptions and analytical techniques:
•Historical volume and severity of workers' compensation cost experience, exposure data and industry loss experience related to TriNet’s insurance policies,
•inputs of WSEs’ job responsibilities and location,
•estimates of future cost trends,
•expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of rate changes and other quantifiable factors, and
•LDFs to project the reported losses for each accident year to an ultimate basis.
Final cost settlements may vary materially from the present estimates, particularly when payments do not occur until well into the future. In our experience, plan years related to workers' compensation programs may take 10 years or more to be fully settled.
We believe that our estimate of accrued workers' compensation costs is most sensitive to LDFs given the long reporting and paid development patterns for our workers' compensation loss costs. Our methods of estimating accrued workers' compensation costs rely on these LDFs and an estimate of future cost trend.
The following table illustrates the sensitivity of changes in the LDFs on our year end estimate of insurance costs (in millions of dollars):
| Change in loss development factor | Change in insurance costs | Change in loss development factor | Change in insurance costs | |||
| -5.0% | ($33) | -5.0% | ($33) | |||
| -2.5% | ($18) | -2.5% | ($19) | |||
| +2.5% | $19 | +2.5% | $20 | |||
| +5.0% | $38 | +5.0% | $40 | |||
Accrued Health Insurance Costs
We sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, vision and life insurance as an employer plan sponsor under section 3(5) of the ERISA. Approximately 83%84% of our group health insurance costs relate to risk-based plans in which we agree to reimburse our carriers for any claims paid within an agreed-upon per-person deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum limits vary by carrier and year.
Costs covered by these insurance plans generally develop on average within three to six months so insurance costs and accrued health insurance costs include estimates of reported losses and claims incurred but not yet paid (IBNP). Data is grouped and analyzed by insurance carrier.
To estimate accrued health benefits costs we use a number of inputs, assumptions and analytical techniques:
•historical loss claims payment patterns and medical cost trend rates related to TriNet’s insurance policies,
•current period claims costs and claims reporting patterns (completion factors), and
•plan enrollment.
Medical cost trend rates are a significant factor we use in developing our accrued health insurance costs. Medical cost trends are developed through an analysis of claims incurred in prior months, provider pricing and indicators of health care utilization, including pharmacy utilization trends, and outpatient and inpatient utilization. Many factors may cause medical cost trend to vary from our estimates.
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The following table illustrates the sensitivity of changes in the medical cost trend on our year end estimate of insurance costs (in millions of dollars):
| Change in medical cost trend | Change in insurance costs | Change in medical cost trend | Change in insurance costs | |||
| +3.0% | $18 | +3.0% | $21 | |||
| +2.0% | $12 | +2.0% | $14 | |||
| +1.0% | $6 | +1.0% | $7 | |||
| -1.0% | $(6) | -1.0% | $(7) | |||
| -2.0% | $(12) | -2.0% | $(14) | |||
| -3.0% | $(18) | -3.0% | $(21) | |||
Completion factors are an actuarial estimate based on historical experience and analysis of current trends, of paid costs to carriers as a percentage of the expected ultimate costs to carriers. Many factors may cause actual claims submissions rates from our carriers to vary from our estimated completion factors, including carrier claims processing patterns, the mix of providers and the mix of electronic versus manual claims submitted to our carriers.
The following table illustrates the sensitivity of changes in completion factors on our year end estimate of insurance costs (in millions of dollars):
| Change in completion factors | Change in insurance costs | Change in completion factors | Change in insurance costs | |||
| -0.75% | $14 | -0.75% | $16 | |||
| -0.50% | $9 | -0.50% | $11 | |||
| -0.25% | $5 | -0.25% | $5 | |||
| +0.25% | $(5) | +0.25% | $(5) | |||
| +0.50% | $(9) | +0.50% | $(11) | |||
| +0.75% | $(14) | +0.75% | $(16) | |||
Recent Accounting Pronouncements
Refer to Note 1 in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K for additional information related to recent accounting pronouncements.
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| QUANTITATIVE AND QUALITATIVE DISCLOSURES | |||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio and outstanding floating rate debt.portfolio. Changes in U.S. interest rates affect the interest earned on the Company’sCompany's cash, cash equivalents and investments and the fair value of the investments, as well as interest costs associated with our debt.
Our cash equivalents consist primarily of money market mutual funds, which are not significantly exposed to interest rate risk. Our AFS marketable securitiesinvestments are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates. We attempt to limit our exposure to interest rate risk and credit risk by investing our investment portfolio in instruments that meet the minimum credit quality, liquidity, diversification and other requirements of our investment policy. Our AFS marketable securitiesinvestments consist of liquid, investment-grade securities. The average effective duration of our AFS marketable securities was 1.49 years at December 31, 2019. The risk of rate changes on investment balances was not significantmaterial at December 31, 2019.
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