Our business is subject to a wide range of complex U.S. and foreign laws and regulations, including, but not limited to, the laws and regulations described in the “Industry Regulation” section in Part I, Item 1 of this Annual Report on Form 10-K. Failure to comply with laws and regulations applicable to our operations or client solutions and services could cause us to incur substantial costs or could result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, the imposition of consent orders or civil and criminal penalties, including fines, and lawsuits, including class actions, that could damage our reputation and have a materially adverse effect on our results of operations or financial condition.
In addition, changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, may decrease our revenues and earnings and may require us to change the manner in which we conduct some aspects of our business. For example, a change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities would adversely impact average client balances and, thereby, adversely impact interest income from investing client funds before such funds are remitted to the applicable tax authorities. Changes in U.S. or foreign tax laws, regulations or rulings or the interpretation thereof could adversely affect our effective tax rate and our net income. In addition, changes in federal, state or local tax laws and regulations allowing for tax credits (including the non-renewal of such laws) could adversely impact our Tax Credit Services business, which helps clients in the United States realize tax credit opportunities in connection with the hiring of new employees and certain other activities. Changes in laws or regulations have caused, and could in the future cause, us to modify our client funds investment strategy, which may reduce the interest income earned on such funds. Changes in laws, or interpretations thereof, that govern the co-employment arrangement between a professional employer organization and its worksite employees may require us to change the manner in which we conduct some aspects of our PEO business. In addition, changes in the manner in which health and welfare plans sponsored by PEOs or the TotalSource Health and Welfare Plan, in particular, are regulated could adversely impact the demand for our PEO offering.
Because our PEO is a co-employer with our PEO clients and a Certified PEO by the Internal Revenue Service, we may be subject to certain obligations, responsibilities and liabilities of an employer with respect to Worksite Employees (“WSE”), including with respect to their wages and the payment thereof, tax credits for employers, the payment of certain taxes with respect to WSE wages and employee benefits provided to the WSEs. Even though PEO clients are contractually responsible for the timely remittance of such costs, it is possible that our clients will not remit such payments despite their contractual obligations. The risk of failing to receive such payments from PEO clients is magnified during significant financial or other disruptions or catastrophic events, such as the failure of a bank with whom a significant number of PEO clients may bank at the time, or more widespread stress or failure within the U.S. banking system. Any such event could prevent or materially delay the recovery of any payments not timely remitted and could have an adverse impact on our financial results and liquidity.
For our PEO to sponsor many of its employee benefit plan offerings, it must qualify as the employer of the WSEs under certain provisions of the Internal Revenue Code and ERISA. Additionally, our PEO’s status as an employer for purposes of ERISA is important because ERISA preempts certain state laws that could limit our PEO’s ability to offer certain benefit plan offerings as we do today. The definition of employer under the Internal Revenue Code and ERISA is not uniform and there is no definitive judicial or legislative interpretation of employer in the context of PEOs. Because many of our PEO employee benefit plan offerings are subject to ERISA, our PEO must administer and operate these plans in accordance with ERISA requirements. We believe that our PEO benefit plans satisfy all applicable ERISA requirements, but if it were determined that the PEO benefit
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plans fail to satisfy any such requirements, our PEO would likely be required to modify its current business model, and the PEO could be subject to material fines or penalties. Any such event could have an adverse impact on our financial results and liquidity.
In addition, our payroll and tax processing services involve the collection and disbursement of a significant amount of funds to a large number of federal, state and local tax authorities. Our failure to properly or timely remit taxes on behalf of our clients could result in fines, penalties and interest for which we could be responsible, and could materially adversely affect our reputation, results of operations or financial condition.
Our Wisely® offerings and potentially other future offerings in the payments and/or consumer space may subject us to additional laws and regulations, some of which may not be uniform and may require us to modify or restrict our offerings and decrease our potential revenue and earnings.