BARRETT BUSINESS SERVICES INC - Annual Report: 2015 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

Commission File Number 0-21886

BARRETT BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)

(360) 828-0700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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  x

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  x

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  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ¨    No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as indicated by Exchange Act Rule 12b-2).

Large accelerated filer  ¨                 Accelerated filer  x                 Non-accelerated filer  ¨                 Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

State the aggregate market value of the common equity held by non-affiliates of the registrant: $252,856,535 at June 30, 2015

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

DOCUMENTS INCORPORATED BY REFERENCE

None.

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BARRETT BUSINESS SERVICES, INC.

2015 ANNUAL REPORT ON FORM 10-K

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EXPLANATORY NOTE

In this Annual Report on Form 10-K, referred to as this Form 10-K, Barrett Business Services, Inc. (“BBSI,” the “Company,” “our” or “we”), is restating its consolidated financial statements, selected financial data, and certain financial data in management’s discussion and analysis and other information for the following periods: (i) the fiscal years ended December 31, 2014, 2013, 2012 and 2011, including related quarterly periods in 2014 and 2013; and (ii) the quarterly periods ended March 31 and June 30, 2015 (the “Restatement”). This report covers the fiscal years ended December 31, 2015, 2014 (as restated) and 2013 (as restated) and includes unaudited condensed consolidated financial statements and supplemental information as applicable for quarterly periods ended March 31, 2015 (restated), June 30, 2015 (restated), September 30, 2015, December 31, 2015, March 31, 2014 (restated), June 30, 2014 (restated), September 30, 2014 (restated), December 31, 2014 (restated), March 31, 2013 (restated), June 30, 2013 (restated), September 30, 2013 (restated) and December 31, 2013 (restated). With respect to periods prior to the year ended December 31, 2013, the cumulative effect of the issues described below is reflected as an adjustment to the opening retained earnings balance for the year ended December 31, 2013 with the exception of the 5 year selected consolidated financial data. The cumulative effect of the issues described below is reflected as an adjustment to the opening retained earnings balance for the year ended December 31, 2011 in the 5 year selected consolidated financial data.

The Company has not amended and does not intend to amend any of its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the Restatement. For this reason, the consolidated financial statements previously included in periodic reports filed by BBSI for fiscal years and quarters beginning January 1, 2011 and ending on or before June 30, 2015, any related financial information contained in such previously filed reports and any related reports of the Company’s independent registered public accounting firm, Moss Adams LLP, should not be relied upon.

Background of Restatement of Previously Issued Financial Statements

On March 3, 2016, the Audit Committee was informed by the Company’s then Chief Financial Officer (“CFO”) that he had made unsupported journal entries in the Company’s financial records during each calendar quarter of 2013. The Audit Committee formally engaged an independent public accounting firm to conduct an independent forensic accounting investigation of the Company’s financial records for the five years ended December 31, 2015, as well as the first quarter of 2016, to evaluate the unsupported journal entries identified by our former CFO. The independent public accounting firm also performed other procedures within the scope of their engagement. On April 19, 2016, the Audit Committee received the final report of the investigation, which confirmed that the journal entries identified by our former CFO, as well as additional entries that he did not bring to our attention, were not made in accordance with generally accepted accounting principles in the United States (“GAAP”).

The adjustments described below have been identified (i) in connection with the review of unsupported journal entries as described under 1 below; and (ii) over the course of the Company’s periodic financial reporting process and audit procedures as described under 2 and 3 below.

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Prior Period Adjustments

1. Unsupported Non-GAAP Journal Entries

Based on information provided by the Company’s former CFO and additional analysis by and under the direction of the Company, the Company determined in April 2016 that the unsupported non-GAAP journal entries identified in the investigation described above had resulted primarily in the overstatement of payroll and payroll related expenses while understating workers’ compensation expense during the years ended December 31, 2014, 2013 and 2012, along with the first two quarters of the year ended December 31, 2015.

2. Workers’ Compensation

The Company also concluded, following extensive analysis, that its interpretation and analysis of certain of the actuarial reports received from its independent actuaries and actuarial consultant had been in error. In March 2016, after further interpretation of actuarial data available in July 2014, management concluded that the large workers’ compensation charge taken in the third quarter of 2014 should have been recorded in the second quarter of 2014.

The Company separately discovered errors resulting from the omission of medical cost containment (“MCC”) expense information from Company generated data utilized by its independent actuaries from 2011 to 2015. These errors resulted in the understatement of workers’ compensation claims liabilities and the related workers’ compensation expense.

In addition, the Company discovered that in the third quarter of 2014 it had inadvertently omitted a workers’ compensation reserve that had been previously established to cover unallocated loss adjustment expenses.

3. Payroll Taxes

In March 2016, as a result of subsequent analysis done in conjunction with the investigation, the Company discovered errors in its calculation of accrued payroll taxes liabilities and the related payroll tax expense. These errors resulted in both understatements and overstatements of accrued payroll taxes liabilities and the related payroll taxes and benefits expense from 2011 to 2015.

See “Note 2. Restatement of Previously Issued Financial Statements” and “Note 14. Quarterly Financial Information (Unaudited)” to the consolidated financial statements incorporated into Item 8 of Part II, “Financial Statements and Supplementary Data.” See also Part I-Item 1A-“Risk Factors” and Item 6-“Selected Consolidated Financial Data,” Item 7-“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 9A-“Controls and Procedures” in Part II of this Form 10-K for additional information.

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PART I

General

Company Background.  Barrett Business Services, Inc. (“BBSI,” the “Company,” “our” or “we”), is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively. We believe this platform, delivered through a decentralized organizational structure, differentiates BBSI from our competitors. BBSI was incorporated in Maryland in 1965.

Certain statements below contain forward-looking information that is subject to risks and uncertainties. See “Forward-Looking Information” in Item 7 of Part II of this report and “Risk Factors” in Item 1A of Part I of this report.

Business Strategy.  Our strategy is to align local operations teams with the mission of small and mid-sized business owners, driving value to their business. To do so, BBSI:

Business Organization.  We operate a decentralized delivery model using operationally-focused business teams, typically located within 50 miles of our client companies. These teams are led by senior level business generalists and comprised of senior level professionals with expertise in human resources, organizational development, risk mitigation and workplace safety and various types of administration, including payroll. These teams are responsible for growth of their operations, and for providing strategic leadership, guidance and expert consultation to our client companies. The decentralized structure fosters autonomous decision-making in which business teams deliver plans that closely align with the objectives of each business owner client. This structure also provides a means of incubating talent to support increased growth and capacity. We support clients with employees located in 22 states and the District of Columbia through a network of 55 branch locations in California, Oregon, Washington, Arizona, Colorado, Idaho, Nevada, Utah, Delaware, Maryland, North Carolina and Virginia. We also have several smaller recruiting locations in our general market areas, which are under the direction of a branch office.

BBSI believes that making significant investments in the best talent available allows us to leverage the value of this investment many times over. We motivate our management employees through a compensation package that includes a competitive base salary and the opportunity for profit sharing. At the branch level, profit sharing is in direct correlation to client performance, reinforcing a culture focused on achievement of client goals.

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Services Overview.  BBSI’s core purpose is to advocate for business owners, particularly in the small and mid-sized business segment. Our evolution from an entrepreneurially run company to a professionally managed organization has helped to form our view that all businesses experience inflection points at key stages of growth. The insights gained through our own growth, along with the trends we see in working with more than 4,000 companies each day, define our approach to guiding business owners through the challenges associated with being an employer. BBSI’s business teams align with each business owner client through a structured three-tiered progression. In doing so, business teams focus on the objectives of each business owner and deliver planning, guidance and resources in support of those objectives.

Tier 1: Tactical Alignment

The first stage focuses on the mutual setting of expectations and is essential to a successful client relationship. It begins with a process of assessment and discovery in which the business owner’s business objectives, attitudes, and culture are aligned with BBSI’s processes, controls and culture. This stage includes an implementation process, which addresses the administrative components of employment.

Tier 2: Dynamic Relationship

The second stage of the relationship emphasizes organizational development as a means of achieving each client’s business objectives. There is a focus on process improvement, development of best practices, supervisor training and leadership development.

Tier 3: Strategic Counsel

With an emphasis on advocacy on behalf of the business owner, the third stage of the relationship is more strategic and forward-looking with a goal of cultivating an environment in which all efforts are directed by the mission and long-term objectives of the business owner.

In addition to serving as a resource and guide, BBSI has the ability to provide workers’ compensation coverage as a means of meeting statutory requirements and protecting our clients from employment-related injury claims. Through our internal claims managers and our third-party administrators, we provide claims management services for our clients. We work aggressively to manage and reduce job injury claims, identify fraudulent claims and structure optimal work programs, including modified duty.

Categories of Services

We report financial results in two categories of services: Professional Employer Services (PEO) and Staffing. During 2015, we supported in excess of 4,100 PEO clients and approximately 151,000 employees. This compares to more than 3,600 PEO clients and approximately 129,000 employees during 2014. See Item 7 of this Report for information regarding the percentages of total net revenues provided by our PEO and staffing services for each of the last three fiscal years.

PEO.  We enter into a client services agreement to establish a co-employment relationship with each client company, assuming responsibility for payroll, payroll taxes, workers’ compensation coverage and certain other administrative functions for the client’s existing workforce. The client maintains physical care, custody and control of their workforce, including the authority to hire and terminate employees.

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Staffing and Recruiting.  Our staffing services include on-demand or short-term staffing assignments, contract staffing, long-term or indefinite-term on-site management, and direct placement. Our recruiting experts maintain a deep network of professionals from which we source candidates. Through an assessment process, we gain an understanding of the short-and long-term needs of our clients, allowing us to identify and source the right talent for each position. We then conduct a rigorous screening process to help ensure a successful hire.

Clients and Client Contracts

Our business is typically characterized by long-term relationships that result in recurring revenue. The terms and conditions applicable to our client relationships are set forth in a client services agreement, which typically provides for an initial term of one year with renewal for additional one-year periods but generally permits cancellation by either party upon 30 days’ written notice. In addition, we may terminate the agreement at any time for specified breach of contract, including nonpayment or failure to follow our workplace safety recommendations. Our annual client retention rate is in excess of 90%.

The client services agreement also provides for indemnification by the client against losses arising out of any default by the client under the agreement, including failure to comply with any employment-related, health and safety, or immigration laws or regulations. Our client service agreement requires clients in a co-employment arrangement to maintain comprehensive liability coverage in the amount of $1.0 million for acts of their employees. It is nevertheless possible that claims not satisfied through indemnification or insurance may be asserted against us, which could adversely affect our results of operations.

We have client services agreements with a diverse array of customers, including electronics manufacturers, various light-manufacturing industries, agriculture-based companies, transportation and shipping enterprises, food processors, telecommunications companies, public utilities, general contractors in various construction-related fields, and professional services firms. None of our clients individually represented more than 1% of our total revenues in 2015.

Market Opportunity

As a company that aligns with the mission of business owners by providing resources and guidance to small and mid-size businesses, BBSI believes its growth is driven by the desire of business owners to focus on mission-critical functions, reduce complexity associated with the employment function, mitigate costs and maximize the investment in human capital. Our integrated management platform has enabled us to capitalize on these needs within the small to mid-size business sector.

The small and mid-sized business segment is particularly attractive because:

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Competition

The business environment in which we operate is characterized by intense competition and fragmentation. BBSI is not aware of reliable statistics regarding the number of its competitors, but certain large, well-known companies typically compete with us in the same markets and also have greater financial and marketing resources than we do, including Automatic Data Processing, Inc., ManpowerGroup, Inc., Kelly Services, Inc., Insperity, Inc., TriNet Group, Inc., CDI Corp, Robert Half International Inc. and Paychex, Inc. We face additional competition from regional providers and we may in the future also face competition from new entrants to the field, including other staffing services companies, payroll processing companies and insurance companies. The principal competitive factors in the business environment in which we operate are price and level of service.

We believe that our growth is attributable to our ability to provide small and mid-sized companies with the resources and knowledge base of a large employer delivered through a local operations team. Our level of integration with each client business provides us an additional competitive advantage.

Growth Strategy

We believe our clients are our best advocates and powerful drivers of referral-based growth. In each market, operations teams provide expertise, consultation and support to our clients, driving growth and supporting retention. We anticipate that by adding business teams to existing branches, we can achieve incremental growth in those markets, driven by our reputation and by client referrals. While in most markets, business development efforts are led by area managers, in some markets our sales efforts are further supported by Business Development Managers.

Our business growth has three primary sources: referrals from existing clients, direct business-to-business sales efforts by our area managers and an extensive referral network. Partners in our referral network include insurance brokers, financial advisors, attorneys, CPA’s, and other business professionals who can facilitate an introduction to prospective clients. These referral partners facilitate introductions to business owners on our behalf, typically in exchange for a fee equal to a small percentage of payroll.

We see two key drivers to our growth:

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Workers’ Compensation

Through our client services agreement, we have the ability to provide workers’ compensation coverage to our clients. We provide this coverage through a variety of methods, all of which are subject to rigorous underwriting to assess financial stability, risk factors and cultural alignment related to safety and the client’s desire to improve their operations. In providing this coverage, we are responsible for complying with applicable statutory requirements for workers’ compensation coverage.

Risk mitigation is also an important contributor to our principal goal of helping business owners operate their business more efficiently. It is in the mutual interests of the client and BBSI to commit to workplace safety and risk mitigation.

Elements of Workers’ Compensation System.  State law (and for certain types of employees, federal law) generally mandates that an employer reimburse its employees for the costs of medical care and other specified benefits for injuries or illnesses, including catastrophic injuries and fatalities, incurred in the course and scope of employment. Most states require employers to maintain workers’ compensation insurance or otherwise demonstrate financial responsibility to meet workers’ compensation obligations to employees. The benefits payable for various categories of claims are determined by state regulation and vary with the severity and nature of the injury or illness and other specified factors. In return for this guaranteed protection, workers’ compensation is an exclusive remedy and employees are generally precluded from seeking other damages from their employer for workplace injuries. In many states, employers who meet certain financial and other requirements are permitted to self-insure.

Insurance Coverage for Workers’ Compensation.  We currently maintain self-insured employer status for workers’ compensation in Oregon, Delaware, Maryland and Colorado, as well as in Washington for our staffing and management employees. Regulations governing self-insured employers in each jurisdiction typically require the employer to maintain surety bonds, surety deposits of government securities, letters of credit or other financial instruments to cover workers’ claims in the event the employer is unable to pay for such claims. BBSI was self-insured as to worker’s compensation claims in California from 1995 until December 31, 2014. Effective January 1, 2015, the Company ceased maintaining a certificate to self-insure in the state of California, and it now maintains individual policies with ACE Group (“ACE”) for all clients in California, along with clients in Delaware, Virginia, Pennsylvania and the District of Columbia. See “Regulatory Changes in California” below for further discussion of recent developments in California.

To manage our financial exposure to catastrophic injuries and fatalities, we maintain excess workers’ compensation insurance coverage. Our wholly owned, fully licensed captive insurance company incorporated in Arizona, Associated Insurance Company for Excess (“AICE”), provides excess workers’ compensation coverage up to $5.0 million per occurrence, except in Maryland and Colorado, where our retention per occurrence is $1.0 million and

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$2.0 million, respectively. AICE maintains excess workers’ compensation insurance coverage with ACE between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with ACE is between $1.0 million and $25.0 million per occurrence, and in Colorado, where the coverage with ACE is between $2.0 million and statutory limits per occurrence.

Overall, this approach results in a per occurrence retention on a consolidated basis of $5.0 million. In light of the higher per occurrence retention, we may incur higher workers’ compensation costs and a corresponding negative effect on our operating results.

AICE provides us with access to an alternative mechanism for excess insurance coverage, as well as certain income tax benefits arising from the ability to accelerate the tax deduction of certain accruals for workers’ compensation claims.

Additionally, Ecole Insurance Company, a wholly owned, fully licensed insurance company (“Ecole”), provides workers’ compensation coverage to our employees working in Arizona, Nevada and Utah. We maintain additional reinsurance coverage for Ecole with ACE between $5.0 million and statutory limits per occurrence.

Claims Management.  As a result of our status as a self-insured employer in many states and other arrangements, our workers’ compensation expense is tied directly to the incidence and severity of workplace injuries to our employees. We seek to contain our workers’ compensation costs through an aggressive approach to claims management. We use managed-care systems to reduce medical costs and keep time-loss costs to a minimum by assigning injured workers, whenever possible, to short-term assignments which accommodate the workers’ physical limitations. We believe that these assignments minimize both time actually lost from work and covered time-loss costs. We employ internal, professionally licensed claims adjusters and engage third-party claims administrators (“TPAs”) to provide the principal claims management expertise. Typical claims management procedures include performing thorough and prompt on-site investigations of claims filed by employees, working with physicians to encourage efficient medical management of cases, denying questionable claims and attempting to negotiate early settlements to eliminate future adverse development of claims costs. We also maintain a corporate-wide pre-employment drug screening program and a mandatory post-injury drug test. We believe our claims management program has resulted in a reduction in the frequency of fraudulent claims and in accidents in which the use of illegal drugs appears to have been a contributing factor.

Components of Our Workers’ Compensation Costs.  The costs associated with our workers’ compensation program include case reserves for reported claims, an additional expense provision for potential future increases in the cost to finally resolve open injury claims (known as “adverse loss development”) and claims incurred in prior periods but not reported (together with adverse loss development, “IBNR”), fees payable to our TPAs, additional claims administration expenses, administrative fees payable to state workers’ compensation regulatory agencies, legal fees, MCC fees, business referral fees, premiums for excess workers’ compensation insurance, and costs associated with forming and operating our wholly owned, fully licensed captive insurance company for excess coverage, AICE. The state assessments are typically based on payroll amounts and, to a limited extent, the amount of permanent disability awards during the previous year. Excess insurance premiums are also based in part on the size and risk profile of our payroll and loss experience.

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Regulatory Changes in California.  Effective January 1, 2015, we ceased maintaining a certificate to self-insure in the state of California as required under California Senate Bill 863 (“SB 863”), which was signed into law in September 2012. Under SB 863, the California Director of Self-Insurance was required not to issue certificates of consent to self-insure after January 1, 2013, to any employer engaged in the activities of a professional employer organization, a leasing employer, a temporary services employer or any employer the Director determines to be in the business of providing employees to other employers. Additionally, the Director was required to revoke any previously issued certificate of consent to self-insure in favor of any employer engaged in these types of activities not later than January 1, 2015.

To address the Company’s anticipated surrender of its certificate to self-insure, in February 2014 BBSI entered into an arrangement typically known as a fronted insurance program with ACE. Under this arrangement, ACE provides workers’ compensation insurance to our clients, but BBSI retains the risk of loss up to the first $5.0 million per claim through an indemnity agreement with ACE. Nonetheless, ACE remains responsible for any claims BBSI is unable to satisfy. In addition, ACE continues to be BBSI’s carrier for costs in excess of $5.0 million per claim. We transitioned all California-based clients and their employees to ACE policies prior to December 31, 2014 in compliance with SB 863. During 2015, we incurred increased costs associated with the fronted insurance program, as 2015 represented the first full year of complete coverage.

Workers’ Compensation Claims Experience and Reserves

We recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by accruing liabilities and establishing a reserve which represents our estimates of future amounts necessary to pay claims and related expenses with respect to work place injuries that have occurred. When a claim involving a probable loss is reported, our internal claims management personnel or our TPA establishes a case reserve for the estimated amount of ultimate loss. The estimate reflects a judgment based on established case reserving practices and the experience and knowledge of our claims management staff and the TPA regarding the nature and expected amount of the claim, as well as the estimated expenses of settling the claim, including legal and other fees and expenses of claims administration. The adequacy of such case reserves in part depends on the professional judgment of both our claims management staff and our TPA to properly and comprehensively evaluate the economic consequences of each claim. Our reserves include an additional component for IBNR (which includes) estimates for both future adverse loss development in excess of initial case reserves on open claims and incurred but not reported claims based on actuarial estimates provided by the Company’s independent actuary. Our reserves also include future MCC fees. Our reserves do not include an estimated provision for the incidence of unknown or unreported catastrophic claims.

As part of the case reserving process, historical data is reviewed and consideration is given to the anticipated effect of various factors, including known and anticipated legal developments, inflation and economic conditions. Reserve amounts are based on management’s estimates, and as other data becomes available, these estimates are revised, which may result in increases or decreases in existing case reserves. Management’s internal accrual process for workers’ compensation expense is based upon the immediate recognition of an expense and the related liability at the time a claim occurs; the value ascribed to the expense and liability is based upon our internal claims management and the TPAs’ estimate

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of ultimate claim cost coupled with a provision for estimated future development based upon an actuarial review performed by our independent actuary. We believe our total accrued workers’ compensation claims liabilities at December 31, 2015 are adequate. It is possible, however, that our actual future workers’ compensation obligations may exceed the amount of our accrued liabilities, with a corresponding negative effect on future earnings, due to such factors as unanticipated adverse loss development of known claims and, to a much lesser extent, of claims incurred but not reported.

We maintain clear guidelines for our area managers and risk management consultants, directly tying their continued employment to their diligence in understanding and addressing the risks of accident or injury associated with the industries in which client companies operate and in monitoring clients’ compliance with workplace safety requirements.

Employees and Employee Benefits

At December 31, 2015, we had approximately 103,250 total employees, including approximately 8,930 staffing services employees, approximately 93,750 employees under our client service agreements, 584 managerial, sales and administrative employees, and 4 executive officers. The number of employees at any given time may vary significantly due to business conditions at customer or client companies. We believe our employee relations are good.

We offer various qualified employee benefit plans to our employees, including those employees for whom we are the administrative employer in a co-employment arrangement who so elect. Employees covered under a PEO arrangement may participate in our 401(k) plan at the sole discretion of the PEO client. All qualified staffing and management employee benefit plans include our 401(k) plan to which employees may enroll upon reaching 21 years of age and completing 1,000 hours of service in a 12 consecutive month period. We make matching contributions to the 401(k) plan under a safe harbor provision, which are immediately 100% vested. We match 100% of contributions by management and staffing employees up to 3% of each participating employee’s annual compensation and 50% of the employee’s contributions up to an additional 2% of annual compensation. We may also make discretionary contributions to the 401(k) plan, which vest over six years and are subject to certain legal limits, at the sole discretion of our Board of Directors.

We also offer a cafeteria plan under Section 125 of the Internal Revenue Code; and group health, life insurance and disability insurance plans to qualified staffing and management employees. Generally, qualified employee benefit plans are subject to provisions of both the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (“ERISA”). In order to qualify for favorable tax treatment under the Internal Revenue Code, qualified plans must be established and maintained by an employer for the exclusive benefit of its employees.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) were signed into U.S. law. The Acts represent comprehensive U.S. healthcare reform legislation that, in addition to other provisions, subjects us to potential penalties unless we offer to our employees minimum essential healthcare coverage that is affordable. Because our PEO clients are considered to be the sole employer in the application of any rule or law included within the scope of the Acts, we do not offer health care coverage to the employees of our PEO clients. However, in order to

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comply with the employer mandate provision of the Acts, we have begun offering health care coverage to all eligible staffing employees and management employees eligible for coverage under the Acts. Designating employees as eligible is complex, and is subject to challenge by employees and the Internal Revenue Service. While we believe we have properly identified employees, a later determination that we failed to offer the required health coverage to eligible employees could result in penalties that may materially harm our business.

Regulatory and Legislative Issues

We are subject to the laws and regulations of the jurisdictions within which we operate, including those governing self-insured employers under the workers’ compensation systems in Oregon, Maryland, Delaware and Colorado, as well as in Washington for staffing and management employees. As a result of legislation in California related to our self-insurance program, we transitioned out of self-insurance in California into an insured program with ACE during 2014. We are also subject to laws and regulations governing our two wholly owned, fully licensed insurance companies in Arizona. While the specific laws and regulations vary among these jurisdictions, they typically require some form of licensing and often have statutory requirements for workplace safety and notice of change in obligation of workers’ compensation coverage in the event of contract termination. Although compliance with these requirements imposes some additional financial risk, particularly with respect to those clients who breach their payment obligation to us, such compliance has not had a material adverse effect on our business to date.

Our operations are affected by numerous federal and state laws relating to labor, tax and employment matters. Through our client services agreement, we assume certain obligations and responsibilities as the administrative employer under federal and state laws. Since many of these federal and state laws were enacted prior to the development of nontraditional employment relationships, such as professional employer, temporary employment, and outsourcing arrangements, many of these laws do not specifically address the obligations and responsibilities of nontraditional employers. In addition, the definition of “employer” under these laws is not uniform.

As an employer, we are subject to all federal statutes and regulations governing our employer-employee relationships. Subject to the discussion of risk factors below, we believe that our operations are in compliance in all material respects with applicable federal statutes and regulations.

Additional Information

Our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K and amendments to these reports, are accessible free of charge at our website at http://www.barrettbusiness.com as soon as reasonably practicable after filing with the SEC. By making this reference to our website, we do not intend to incorporate into this report any information contained in the website. The website should not be considered part of this report.

The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers with publicly traded securities, including the Company.

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In addition to other information contained in this report, the following risk factors should be considered carefully in evaluating our business.

Risks Related to our Consolidated Financial Statements and Internal Controls

The Restatement of our previously issued consolidated financial statements has been time-consuming and expensive and may expose us to additional risks that could materially and adversely affect our financial position, results of operations and cash flows.

We have incurred significant expenses, including audit, legal, consulting and other professional fees in connection with the Restatement of our previously issued financial statements described in “Note 2. Restatement of Previously Issued Financial Statements” to the consolidated financial statements incorporated into Item 8 of Part II of this report. Our management’s attention has been, and may further be, diverted from the operation of our business in connection with the Restatement.

We cannot predict what losses we may incur in litigation matters, regulatory enforcement actions and contingencies related to our obligations under the federal and state securities laws, in connection with the Restatement of previously issued financial statements or in other legal proceedings.

As described in more detail in “Item 3. Legal Proceedings” and in “Note 13. Litigation” to the consolidated financial statements incorporated into Item 8 of Part II of this report, a lawsuit purporting to be a class action on behalf of all of BBSI’s stockholders was filed in the United States District Court for the Western District of Washington against BBSI and BBSI’s Chief Executive Officer and former Chief Financial Officer. The complaint alleges violations of the federal securities laws based on claims arising from declines in the market price for our common stock following announcement of a charge for increased workers’ compensation reserves expense in October 2014 and the events reported in March 2016 that resulted in the Restatement of our previously issued financial statements as discussed in “Note 2. Restatement of Previously Issued Financial Statements” to the consolidated financial statements incorporated into Item 8 of Part II of this report.

As also discussed in Item 3 and Note 13, a shareholder derivative lawsuit was filed in June 2015 against BBSI and certain of its officers and directors in the Circuit Court for Baltimore City, Maryland. The complaint alleges breaches of fiduciary duty, unjust enrichment and other violations of law and seeks recovery of various damages, including costs and expenses incurred in connection with the announcements of the workers’ compensation reserve charge in October 2014, as well as the proceeds of sales of stock by certain of BBSI’s officers and directors during 2013 and 2014.

In addition, BBSI received a subpoena from the San Francisco office of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) in April 2016 in connection with the SEC’s inquiry into reported errors in our financial statements. The Company previously received a subpoena from the SEC in May 2015 in connection with the SEC’s investigation of the Company’s accounting policies with regard to its workers’

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compensation reserves. The Company is cooperating with the SEC investigation. See Item 3 and Note 13 for additional information. Potential civil or criminal proceedings arising out of the SEC investigation could result in the imposition of substantial fines and other penalties on the Company, including those related to failure to keep accurate books and records.

The legal proceedings described above, if decided adversely to us or to our directors or officers, could result in significant monetary damages or penalties or reputational harm, and also have involved and likely will continue to involve significant defense and other costs. We have entered into indemnification agreements with each of our directors and certain of our officers, and our corporate charter requires us to indemnify each of our officers and directors against all liabilities, losses, judgments, penalties, fines, settlements and reasonable expenses arising out of their actions in such capacities to the fullest extent permitted by Maryland law. Although we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations, our insurance coverage may not cover all claims that have been or may be brought against us, or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, including pursuant to our indemnification obligations, which could adversely affect our business, prospects, results of operations and financial condition. Management is unable to estimate the probability, or the potential range, of loss arising from the legal actions described above. The Company has not reserved any amount in respect of these matters in its consolidated financial statements. These lawsuits and regulatory proceedings may also continue to divert the efforts and attention of the Company’s management from business operations.

There are various other claims, lawsuits and pending actions against us from time to time. While we cannot predict what losses we may incur from these other legal proceedings or contingencies, it is our opinion that the ultimate resolution of these other matters will not have a material adverse effect on our consolidated financial position. However, the resolution of certain of these matters could be material to our operating results for any particular period, depending on the level of income for such period. We can make no assurances that we will ultimately be successful in our defense of any of these other matters.

We face risks to our reputation and investor confidence arising from material weaknesses in our internal control environment over financial reporting.

In connection with the matters described above and in “Note 2. Restatement of Previously Issued Financial Statements” to the audited consolidated financial statements incorporated into Item 8 of Part II of this report, management has identified material weaknesses in internal control over financial reporting. Management has concluded that our internal control over financial reporting was not effective as of December 31, 2015. Our chief executive officer and chief financial officer have also concluded that our disclosure controls and procedures were not effective as of December 31, 2015. Although management has formulated and is implementing a plan to remediate these material weaknesses, we expect implementation to be time consuming and expensive, and the remedial actions we take may prove to be ineffective or inadequate. As a result, the Company may continue to be exposed to risk of misstatements in its financial statements. In such circumstances, investors and other users of BBSI’s financial statements may lose confidence in the reliability of our financial information, and BBSI could be in breach of certain representations and covenants in its credit agreement with its primary bank (the “Credit Agreement”) or be obligated to incur additional costs to improve our internal controls. Any failure or inability to remediate the

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material weaknesses in a timely and effective manner could also adversely affect our reputation and business prospects. See “Item 9A. Controls and Procedures” in Part II of this report for a more detailed description of the material weaknesses identified by management and plans to remediate these material weaknesses.

We have not filed our Form 10-Q for the quarter ended March 31, 2016 on a timely basis, resulting in additional violations of NASDAQ listing requirements and covenants in our Credit Agreement.

We have not yet filed our Form 10-Q for the quarter ended March 31, 2016. The resources necessary to complete the Restatements included in this Annual Report on Form 10-K were the same resources that are required to complete our Form 10-Q, as to which the deadline for filing with the SEC was May 10, 2016. Because the filing is late, investors still do not have access to the most current financial information about the Company, resulting in an additional violation of our listing requirements. NASDAQ has notified us of its determination to delist our Common Stock under its listing rules. However, we have requested a stay of the determination until a hearing can be held and a decision is issued by a NASDAQ hearing panel. If our request for stay is not granted, trading in our Common Stock on NASDAQ will cease.

The Company is currently in default under the terms of our Credit Agreement as a result of, among other things, the delayed filing with the SEC. We have entered into a forbearance agreement with respect to the Credit Agreement with our primary bank in connection with our failure to timely file reports with the SEC. The forbearance agreement established a time period during which our lender has voluntarily agreed not to cause the payment obligations under the Credit Agreement to be immediately due and payable, to invoke default interest rates, or to exercise any of the bank’s other rights, powers and remedies. The forbearance period was set to end on June 1, 2016 for our 2015 Form 10-K and will end on June 30, 2016, for filing our Form 10-Q for the quarter ended March 31, 2016. We cannot assure you that we will be able to obtain an extension of the forbearance period or additional waiver agreements if they become necessary. We also cannot assure you that, upon any acceleration arising from a default, we will have sufficient funds to repay all of the outstanding amounts under our Credit Agreement. Any acceleration of our outstanding debt could have a material adverse effect on our liquidity and financial condition.

Risks Relating to Our Business and Industry

Our workers’ compensation claims reserves may be inadequate to cover our ultimate liability for workers’ compensation costs.

We maintain reserves (recorded as accrued liabilities on our balance sheet) to cover our estimated liabilities for workers’ compensation claims, whether arising in connection with our fronted insurance arrangement with ACE in California, Delaware, Virginia, Pennsylvania and the District of Columbia, our self-insured status in Oregon, Delaware, Maryland and Colorado, or the business of our insurance subsidiary Ecole in Arizona, Utah and Nevada. The Company maintains excess workers’ compensation insurance coverage with ACE through our AICE subsidiary, but it remains responsible for costs below amounts of its excess coverage in each state. The determination of our reserves is based upon estimates arising out of evaluation of a number of factors, including current and historical claims activity, claims

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payment patterns, medical cost trends, and additional adverse loss development of existing claims. Our reserves include an additional component for both estimated future adverse loss development in excess of initial case reserves on open claims and for incurred but not reported claims that is based on actuarial estimates provided by the Company’s independent actuary. Our reserves also include an estimate of future legal and MCC fees but do not include an estimated provision for the incidence of unknown catastrophic claims. Reserves may be affected by both internal and external events, including changes in claims handling practices, modifications in reserve estimation procedures, changes in individuals involved in the reserve estimation process, trends in the litigation and settlement of pending claims and legislative changes. Reserves are adjusted from time to time to reflect new claims, claim development, or systemic changes, and such adjustments are reflected in the financial results for the periods in which the reserves are changed. As a result of the various estimates involved and other factors, our workers’ compensation reserves do not represent an exact calculation of liability. Moreover, because of the uncertainties that surround estimating workers’ compensation loss reserves, our reserves may prove to be inadequate. If our reserves are insufficient to cover our actual losses, we will be required to increase our reserves and incur charges to our earnings that could be material to our results of operations and financial condition. See “Item 1. Business—Workers’ Compensation” and “Note 6, Workers’ Compensation Claims” to the consolidated financial statements incorporated into Item 8 of Part II of this report for additional information.

Our consolidated retention for workers’ compensation claims is $5.0 million per occurrence under our insurance arrangement with ACE in the majority of states in which we operate.

We maintain our self-insured consolidated retention at $5.0 million per occurrence, except in Colorado and Maryland where our retention is at $2.0 million and $1.0 million per occurrence, respectively, due to regulatory requirements. The Company maintains its excess workers’ compensation insurance coverage with ACE through our AICE subsidiary. Additionally, Ecole’s retention is at $5.0 million per occurrence for coverage in Arizona, Nevada and Utah. Thus, the Company has financial risk for most workers’ compensation claims under $5.0 million on a per occurrence basis. This level of per occurrence retention may result in higher workers’ compensation costs to us with a corresponding negative effect on our operating results and financial condition.

Adverse developments in the market for excess workers’ compensation insurance could lead to increases in our costs.

To manage our financial exposure in the event of catastrophic injuries or fatalities, we maintain excess workers’ compensation insurance. Changes in the market for excess workers’ compensation insurance may lead to limited availability of such coverage, additional increases in our insurance costs or further increases in the amount for which we have financial risk, any of which may have a material adverse effect on our results of operations and financial condition.

Our ability to continue our business operations under our present service model is dependent on maintaining workers’ compensation insurance coverage.

Our arrangement with ACE to provide workers’ compensation coverage to BBSI’s PEO clients in California, Delaware, Virginia, Pennsylvania and the District of Columbia,

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extends through February 1, 2017, with the possibility of additional annual renewals. If ACE is unwilling or unable to renew our arrangement in the future, we would need to seek alternative coverage. If replacement coverage were unavailable or available only on significantly less favorable terms, our business and results of operations would be materially adversely affected.

Failure to manage the severity and frequency of workplace injuries will increase our workers’ compensation expenses.

Significant increases in the relative frequency or severity of workplace injuries due to failures to accurately assess potential risks or assure implementation of effective safety measures by our clients may result in increased workers’ compensation claims expenses, with a corresponding negative effect on our results of operations and financial condition.

We may be unable to draw on our revolving credit facility in the future.

As discussed in more detail in Note 7 to the consolidated financial statements incorporated into Item 8 of Part II of this report, our Credit Agreement with our principal bank, Wells Fargo Bank, National Association (the “Bank”), which expires October 1, 2017, provides for a revolving credit facility with a borrowing capacity of up to $14.0 million at December 31, 2015, to be used to finance working capital. There was no outstanding balance at that date. The Credit Agreement also provides a term loan which had an outstanding principal balance of $15.0 million at December 31, 2015 and matures December 31, 2016, a standby letter of credit agreement providing for a total of approximately $88.3 million in cash-secured letters of credit and a mortgage loan with a balance of approximately $4.8 million secured by our company office building in Vancouver, Washington.

If our business does not perform as expected, including if we generate less revenue than anticipated from our operations or encounter significant unexpected costs, we may fail to comply with the financial covenants under our credit facilities. If we do not comply with our financial covenants and we do not obtain a waiver or amendment from the Bank, the Bank may elect to cause all amounts owed to become immediately due and payable. In that event, we would seek to establish a replacement credit facility with one or more other lenders, including lenders with which we have an existing relationship, potentially on less desirable terms. There can be no guarantee that replacement financing would be available at commercially reasonable terms, if at all.

The Company is currently in default under the terms of the credit Agreement based upon the Company’s failure to comply with covenants regarding accuracy and timeliness of financial information. We have entered into a forbearance agreement with the Bank in connection with the current default. The forbearance agreement establishes a time period during which our lender has voluntarily agreed not to cause the payment obligations under the Agreement to be immediately due and payable, to invoke default interest rates or to exercise any of the Bank’s other rights, powers and remedies. The Bank has agreed to forbear from immediate enforcement of its rights and remedies based upon the defaults through June 1, 2016. BBSI must deliver its 2015 Form 10-K by June 1, 2016 as part of this agreement. In addition, the Bank has agreed to forbear from immediate enforcement of its rights and remedies based upon the defaults through June 30, 2016 with respect to BBSI’s late filing of its Form 10-Q for the quarter ended March 31, 2016.

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At June 30 and September 30, 2014, the Company was also in violation of the following covenants with its Bank:

In addition, at December 31, 2014 and June 30, 2015, the Company was in violation of its ratio of restricted and unrestricted cash and marketable securities to workers’ compensation and safety liabilities of at least 1.0:1.0. The Company was also in violation of the fixed charge coverage ratio of 1.50:1.0 at December 31, 2015. On May 24, 2016, the Company reached an agreement with the Bank pursuant to which the Bank has agreed to waive these covenant violations upon filing of the 2015 10-K. In addition, the Bank amended the Agreement to include delisting of the Company’s common stock by NASDAQ as an event of default.

The realization of any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations, and working capital.

Our business is subject to risks associated with geographic market concentration.

Our California operations accounted for approximately 78% of our total net revenues in 2015. As a result of the current importance of our California operations and anticipated continued growth from these operations, our profitability over the next several years is expected to be largely dependent on economic and regulatory conditions in California. If California experiences an economic downturn, or if the regulatory environment changes in a way that adversely affects our ability to do business or limits our competitive advantages, our profitability and growth prospects may be materially adversely affected.

In order to continue to grow revenues at or near current rates, we are dependent on retaining current clients and attracting new clients.

The Company has experienced significant growth in recent years. Revenues increased 16.4% in 2015 and 18.5% in 2014. There can be no assurance that we will continue to grow revenues at or near current rates of growth. Maintaining rates of growth at these levels becomes increasingly difficult as the size of the Company increases. Efforts to achieve business growth intensifies pressure on retaining current clients and attracting increasing numbers of new clients.

Economic conditions, particularly in California, may impact our ability to attract new clients and cause our existing clients to reduce staffing levels or cease operations.

Weak economic conditions typically have a negative impact on small-and mid-sized businesses, which make up the majority of our clients. In turn, these businesses could cut costs, including trimming employees from their payrolls, or closing locations or ceasing operations altogether. If weak economic conditions were to develop, these forces may result

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in decreased revenues due both to the downsizing of our current clients and increased difficulties in attracting new clients in a poor economic environment. In addition, weak economic conditions may also result in additional bad debt expense to the extent that existing clients cease operations.

Our business is subject to risks associated with healthcare reforms.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”) were signed into U.S. law. The Acts represent comprehensive U.S. healthcare reform legislation that, in addition to other provisions, subjects us to potential penalties unless we offer our employees minimum essential healthcare coverage that is affordable. In order to comply with the employer mandate provision of the Acts, we have begun offering health care coverage to all temporary and permanent employees eligible for coverage under the Acts. Designating employees as eligible is complex, and is subject to challenge by employees and the Internal Revenue Service. While we believe we have properly identified eligible employees, a later determination that we failed to offer the required health coverage to eligible employees could result in penalties that may materially harm our business. We cannot be certain that compliant insurance coverage will remain available to us on reasonable terms, and we could face additional risks arising from future changes to the Acts or changed interpretations of our obligations under the Acts. There can be no assurance that we will be able to recover all related costs through increased pricing to our customers or that such costs will be recovered in the period in which costs are incurred, and the net financial impact on our results of operations could be significant.

If we are unable to maintain our brand image and corporate reputation, our business may suffer.

Our success depends in part on our ability to maintain our reputation for providing excellent service to our customers. Service quality issues, actual or perceived, even when false or unfounded, could tarnish the image of our brand and may cause customers to use other companies. Also, adverse publicity surrounding labor relations, data breaches, SEC investigations, securities class actions, possible delisting of our common stock by NASDAQ and the like, could negatively affect our overall reputation. Damage to our reputation could reduce demand for our services and thus have an adverse effect on our business, financial condition and results of operations.

Our staffing business is vulnerable to economic fluctuations.

Demand for our staffing services is sensitive to changes in the level of economic activity in the regions in which we do business. As economic activity slows down, companies often reduce their use of temporary employees before undertaking layoffs of permanent staff, resulting in decreased demand for staffing services. During strong economic periods, on the other hand, we often experience shortages of qualified employees to meet customer needs.

Because we assume the obligation to make wage, tax and regulatory payments in respect of some employees, we are exposed to client credit risks.

We generally assume responsibility for and manage the risks associated with our clients’ employee payroll obligations, including liability for payment of salaries and wages

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(including payroll taxes), as well as group health and retirement benefits. These obligations are fixed whether or not the client makes payments to us as required by our services agreement, which exposes us to credit risks. We attempt to mitigate this risk by invoicing our clients at the end of their specific payroll processing cycle. We also carefully monitor the timeliness of our clients’ payments and impose strict credit standards on our customers. If we fail to successfully manage our credit risk, our results of operations and financial condition could be materially and adversely affected.

Increases in unemployment claims could raise our state and federal unemployment tax rates which we may not be able to pass on to our customers.

During weak economic conditions in our markets, the level of unemployment claims tends to rise as a result of employee layoffs at our clients and lack of work in our temporary staffing pool. The rise in unemployment claims often results in higher state and federal unemployment tax rates which in most instances cannot be concurrently passed on to our customers either due to existing client services agreements or competitive pricing pressures. Increases in our state and federal unemployment tax rates could have a material adverse effect on our results of operations, particularly in the early part of the calendar year when payroll tax rates are at or near their maximum.

If we are determined not to be an “employer” under certain laws and regulations, our clients may stop using our services, and we may be subject to additional liabilities.

We are the administrative employer in our co-employment relationships under the various laws and regulations of the Internal Revenue Service and the U.S. Department of Labor. If we are determined not to be the administrative employer under such laws and regulations and are therefore unable to assume our clients’ obligations for employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes. Some clients or prospective clients may view such potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new relationship with us. Any determination that we are not the administrative employer for purposes of ERISA could also adversely affect our cafeteria benefits plan operated under Section 125 of the Internal Revenue Code and result in liabilities to us under the plan.

We may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations.

We either co-employ employees in connection with our client services agreements or place our employees in our customers’ workplace in connection with our staffing business. As such, we are subject to a number of risks inherent to our status as the administrative employer, including without limitation:

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If we experience significant incidents involving any of the above-described risk areas we could face substantial out-of-pocket losses, fines or negative publicity. In addition, such claims may give rise to litigation, which may be time consuming, distracting and costly, and could have a material adverse effect on our business. With respect to claims involving our co-employer relationships, although our client services agreement provides that the client will indemnify us for any liability attributable to the conduct of the client or its employees, we may not be able to enforce such contractual indemnification, or the client may not have sufficient assets to satisfy its obligations to us. An increase in employment-related claims against us may have a material adverse effect on our results of operations.

We are dependent upon technology services. If we experience damage, service interruptions or failures in our computer and telecommunications systems, or if we are unable to remediate the material weakness in our information systems control environment our client relationships and our ability to attract new clients may be adversely affected.

We rely extensively on our computer systems to manage our branch network, perform employment-related services, accounting and reporting, and summarize and analyze our financial results. Our systems are subject to damage or interruption from telecommunications failures, power-related outages, computer viruses and malicious attacks, security breaches and catastrophic events. If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, experience loss of critical data and interruptions or delays in our ability to manage our operations, and encounter a loss of client confidence. In addition, our clients’ businesses may be adversely affected by any system or equipment failure or breach we experience. In addition, we are currently working to remediate a material weakness in our information and technology systems control environment. See Item 9A “Controls and Procedures” in part II of this report for a more detailed description of the material weakness involving information and technology systems. As a result, our relationships with our clients may be impaired, we may lose clients, our ability to attract new clients may be adversely affected and we could be exposed to contractual liability. We may invest in upgrades or replacements to our existing systems or additional security measures, each of which can involve substantial costs and risks relating to installation and implementation.

If our efforts to protect the security of personal information about our employees and clients are unsuccessful, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer.

The nature of our business involves the receipt, storage, and transmission of personal and proprietary information about thousands of employees and clients. If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our employees and clients could lose confidence in our

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ability to protect their personal and proprietary information, which could cause them to terminate their relationships with us. Any loss of confidence arising from a significant data security breach could hurt our reputation, further damaging our business.

We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.

Corporate human resource operations are subject to a broad range of complex and evolving laws and regulations, including those applicable to payroll practices, benefits administration, employment practices and privacy. Because our clients have employees in many states throughout the United States, we must perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or interpret and may change from time to time. Violation of such laws and regulations could subject us to fines and penalties, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be adversely affected.

Changes in government regulations may result in restrictions or prohibitions applicable to the provision of employment services or the imposition of additional licensing, regulatory or tax requirements.

Our business is heavily regulated in most jurisdictions in which we operate. We cannot provide assurance that the states in which we conduct or seek to conduct business will not:

Any changes in applicable laws and regulations may make it more difficult or expensive for us to do business, inhibit expansion of our business, or result in additional expenses that limit our profitability or decrease our ability to attract and retain clients.

The tax status of our insurance subsidiaries could be challenged resulting in an acceleration of income tax payments.

In conjunction with our workers’ compensation program, we operate two wholly owned insurance subsidiaries, AICE and Ecole. We treat the two subsidiaries as insurance companies for federal income tax purposes with respect to our consolidated federal income tax return. If the Internal Revenue Service (“IRS”) were to determine that the subsidiaries do not qualify as insurance companies, in which insurance reserves are currently deductible, we could be required to make accelerated income tax payments to the IRS that we otherwise would have deferred until future periods.

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We may find it difficult to expand our business into additional states due to varying state regulatory requirements.

Future growth in our operations depends, in part, on our ability to offer our services to prospective clients in new states, which may subject us to different regulatory requirements and standards. In order to operate effectively in a new state, we must obtain all necessary regulatory approvals, adapt our procedures to that state’s regulatory requirements and modify our service offerings to adapt to local market conditions. In the event that we expand into additional states, we may not be able to duplicate in other markets the financial performance experienced in our current markets.

We face competition from a number of other companies.

We face competition from various companies that may provide all or some of the services we offer. Our competitors include companies that are engaged in staffing services such as Robert Half International Inc., Kelly Services, Inc. CDI Corp., and ManpowerGroup Inc.; companies that are focused on co-employment, such as Insperity, Inc., and TriNet Group, Inc.; and companies that primarily provide payroll processing services, such as Automatic Data Processing, Inc. and Paychex, Inc. We also face competition from information technology outsourcing firms and broad-based outsourcing and consulting firms that perform individual projects.

Several of our existing or potential competitors have substantially greater financial, technical and marketing resources than we do, which may enable them to:

In order to compete effectively in our markets, we must target our potential clients carefully, continue to improve our efficiencies and the scope and quality of our services, and rely on our service quality, innovation, education and program clarity. If our competitive advantages are not compelling or sustainable, then we are unlikely to increase or sustain profits and our stock price could decline.

We are dependent upon certain key personnel and recruitment and retention of key employees may be difficult and expensive.

We believe that the successful operation of our business is dependent upon our retention of the services of key personnel, including our Chief Executive Officer, other executive officers and area managers. We may not be able to retain all of our executives,

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senior managers and key personnel in light of competition for their services. If we lose the services of one of our executive officers or a significant number of our senior managers, our results of operations likely would be adversely affected.

We do not have an expansive in-house sales staff and therefore rely extensively on referral partners.

We maintain a minimal internal professional sales force, and we rely heavily on referral partners to provide referrals to new business. In connection with these arrangements, we pay a fee to referral partners for new clients. These referral firms and individuals do not have an exclusive relationship with us. If we are unable to maintain these relationships or if they increase their fees or lose confidence in our services, we could face declines in our business and additional costs and uncertainties as we attempt to hire and train an internal sales force.

We depend on attracting and retaining qualified employees; during periods of economic growth, our costs to do so increase and attracting and retaining people becomes more difficult.

Our teams of client-facing professionals are the foundation of our value proposition. Our ability to attract and retain qualified personnel could be impaired by rapid improvement in economic conditions resulting in lower unemployment and increases in compensation. During periods of economic growth, we face increased competition for retaining and recruiting qualified personnel, which in turn leads to greater advertising and recruiting costs and increased salary expenses. If we cannot attract and retain qualified employees, the quality of our services may deteriorate and our reputation and results of operations could be adversely affected.

Our service agreements may be terminated on short notice, leaving us vulnerable to loss of a significant amount of customers in a short period of time, if business or regulatory conditions change or events occur that negatively affect our reputation.

Our client services agreements are generally terminable on 30 days’ notice by either us or our client. As a result, our clients may terminate their agreement with us at any time, making us particularly vulnerable to changing business or regulatory conditions or changes affecting our reputation or the reputation of our industry.

Our industry has at times received negative publicity that, if it were to become more prevalent, could cause our business to decline.

In the staffing and co-employment industries in which we compete, companies periodically have been tarnished by negative publicity or scandals from poor business judgment or even outright fraud. If we or our industry face negative publicity, customers’ confidence in the use of temporary personnel or co-employed workers may deteriorate, and they may be unwilling to enter into or continue our staffing or co-employment relationships. If a negative perception were to prevail, it would be more difficult for us to attract and retain customers.

Changes in federal and state unemployment tax laws and regulations could adversely affect our business.

In past years, there has been significant negative publicity relating to the use of staffing or PEO companies to shield employers from poor unemployment history and high unemployment

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taxes. New legislation enacted at the state or federal level to try to counter this perceived problem could have a material adverse effect on our business by limiting our ability to market our services or making our services less attractive to our customers and potential customers.

Risks Related to Ownership of our Common Stock

Our failure to timely file periodic reports with the SEC may result in the delisting of our Common Stock.

As a result of the Restatement and other events described in the Explanatory Note on the first page of this report, we were unable to file this report, as well as our quarterly reports for the quarter ended September 30, 2015, with the SEC on a timely basis. By letter dated November 12, 2015, The Nasdaq Stock Market (“NASDAQ”) notified us that we were not in compliance with its continued listing requirement regarding the timely filing of periodic reports with the SEC. We filed a compliance plan under NASDAQ’s listing rules and were granted an exception to become compliant with the periodic reporting requirement by no later than May 9, 2016. Due to our failure to file this report by that date, we received written notification from NASDAQ of its determination to delist the Company’s Common Stock on May 10, 2016. We also have not filed our quarterly report on Form 10-Q for the quarter ended March 31, 2016 (the “2016 first quarter 10-Q”), with the SEC, which was due on May 10, 2016. We received a second letter from NASDAQ on May 12, 2016, that identified our failure to timely file the 2016 first quarter 10-Q as additional grounds for delisting. We have submitted to NASDAQ our request for a hearing, which will stay the suspension and delisting action until June 1, 2016, with the possibility of a further extension until a hearing can be held and a decision is issued by a NASDAQ hearing panel. If we are unable to file the 2016 first quarter 10-Q by the time of the NASDAQ hearing or otherwise fail to maintain compliance with NASDAQ’s listing standards, our Common Stock may be delisted by NASDAQ. Delisting likely would have a significant negative effect on the trading price and liquidity of our Common Stock.

Our failure to timely file periodic reports with the SEC will also make it more difficult for us to raise capital.

Because we have not filed certain periodic reports with the SEC on a timely basis, we will not be eligible to use a registration statement on Form S-3 to conduct public offerings of our securities until we have timely filed all of our required periodic reports with the SEC for a full year. Our inability to use Form S-3 during this time period may have a negative effect on our ability to access the public capital markets in a timely fashion. If we wish to pursue a public offering during this time period, we would be required to file a long-form registration statement on Form S-1 and have it reviewed and declared effective by the SEC. These additional requirements may limit or block our ability to access the public markets to raise debt or equity capital, which may prevent us from pursuing transactions or implementing business strategies that are capital intensive.

Our stock price may be volatile or may decline, resulting in substantial losses for our stockholders.

The market price of our Common Stock has been, and may continue to be, volatile for the foreseeable future. Important factors that may cause our trading price to decline include the

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factors listed below and other factors that may have a material adverse effect on our business or financial results, including those described above in this “Risk Factors” section:

Maryland law and our Charter and bylaws contain provisions that could make the takeover of the Company more difficult.

Certain provisions of Maryland law and our Charter and bylaws could have the effect of delaying or preventing a third party from acquiring the Company, even if a change in control would be beneficial to our stockholders. These provisions of our Charter and bylaws:

In addition, the Company is subject to the Maryland control share act (the “Control Share Act”). Under the Control Share Act, a person (an “Acquiring Person”) who acquires voting stock in a transaction (a “Control Share Acquisition”) which results in its holding voting power within specified ranges cannot vote the shares it acquires in the Control Share Acquisition unless voting rights are accorded to such control shares by the holders of two-thirds of the outstanding voting shares, excluding the Acquiring Person and the Company’s officers and directors who are also employees of the Company.

The Company is also subject to the provisions of Maryland law limiting the ability of certain Maryland corporations to engage in specified business combinations (the “Business Combination Act”). Subject to certain exceptions, the Business Combination Act prohibits a Maryland corporation from engaging in a business combination with a stockholder who, with its affiliates, owns 10% or more of the corporation’s voting stock. These provisions will not apply to business combinations that are approved by the Board of Directors before the stockholder became an interested stockholder.

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None.

We operate through 55 branch offices. The following table shows the number of locations in each state in which we operate. We also lease office space in other locations in our market areas which we use to recruit and place employees.

We lease office space for our branch offices. At December 31, 2015, our leases had expiration dates ranging from less than one year to six years, with total minimum payments through 2021 of approximately $12.0 million. Our corporate headquarters occupies approximately 50 percent of the 65,300 square foot building we own in Vancouver, Washington.

On November 6, 2014, plaintiffs in Michael Arciaga, et al. v. Barrett Business Services, Inc., et al., filed an action in the United States District Court for the Western District of Washington against BBSI, Michael L. Elich, BBSI’s Chief Executive Officer, and James D. Miller, BBSI’s then Chief Financial Officer. The action purported to be a class action brought on behalf of all Company shareholders alleging violations of the federal securities laws. The claims arose from the decline in the market price for BBSI Common Stock following announcement of a charge for increased workers compensation reserves expense. The lawsuit sought compensatory damages (in an amount to be determined at trial), plus interest, and costs and expenses (including attorney fees and expert fees).

On November 13, 2014, a second purported shareholder class action was filed in the United States District Court for the Western District of Washington, entitled Christopher P. Carnes, et al. v. Barrett Business Services, Inc., et al. The Carnes complaint named the same defendants as the Arciaga case and asserted similar claims for relief.

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Similarly, on November 17, 2014, a third purported shareholder class action was filed in the United States District Court for the Western District of Washington, entitled Shiva Stein, et al. v. Barrett Business Services, Inc., et al. The Stein complaint named the same defendants as the Arciaga and Carnes cases and asserted similar claims for relief.

On February 25, 2015, the court ordered consolidation of the three cases, and any new or other cases involving the same subject matter, into a single action for pretrial purposes. The consolidated cases were recaptioned as In re Barrett Business Services Securities Litigation. The court also appointed the Painters & Allied Trades District Council No. 35 Pension and Annuity Funds as the lead plaintiff. Discovery has not been undertaken as it is automatically stayed under the federal Private Securities Litigation Reform Act.

On April 29, 2015, the plaintiffs in the class action filed a consolidated amended complaint, naming BBSI, Elich and Miller as defendants. On June 12, 2015, defendants filed a motion to dismiss the consolidated amended complaint.

On November 23, 2015, before the court had ruled on the motion to dismiss, plaintiffs filed a first amended consolidated complaint, naming the same defendants. The first amended consolidated complaint included new allegations relating to disclosures in BBSI’s Current Report on Form 8-K filed on November 9, 2015.

On February 16, 2016, BBSI filed a motion to dismiss the first amended consolidated complaint. That same day, Messrs. Elich and Miller, through separate counsel, also filed motions to dismiss the first amended consolidated complaint, adopting BBSI’s motion in its entirety.

On March 21, 2016, before the court had ruled on the motion to dismiss the first amended consolidated complaint, plaintiffs filed a second amended consolidated complaint, naming the same defendants. The second amended consolidated complaint dropped certain allegations from the first amended complaint and added new allegations relating to disclosures in BBSI’s Current Report on Form 8-K filed on March 9, 2016. Among other disclosures, BBSI reported that (1) previously issued financial statements could not be relied on, (2) Mr. Miller had reported making unsupported journal entries, (3) Mr. Miller’s employment had been terminated, and (4) BBSI was in the process of engaging a Big Four accounting firm to conduct an independent forensic accounting investigation. In a Current Report on Form 8-K filed on April 19, 2016, BBSI reported the results of the investigation, as well as the discovery of certain errors in BBSI’s previously filed financial statements. See Note 2 to BBSI’s consolidated financial statements incorporated into Item 8 of Part II of this report, as well as Part II, Item 9A “Controls and Procedures” of this report, for additional information.

BBSI responded to the second amended consolidated complaint by filing a motion to dismiss on May 23, 2016. Messrs. Elich and Miller joined in that motion. Under the current briefing schedule ordered by the court, plaintiffs’ opposition to the motion to dismiss is due June 27, 2016, and any reply is due July 25, 2016.

BBSI received a subpoena from the San Francisco office of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) in May 2015 in

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connection with the SEC’s investigation of the Company’s accounting practices with regard to its workers’ compensation reserves. In April 2016, the SEC issued a second subpoena to BBSI for documents relating to the disclosures made by the Company following Mr. Miller’s termination. BBSI is cooperating fully with the SEC staff in its investigation.

On June 17, 2015, Daniel Salinas (“Salinas”) filed a shareholder derivative lawsuit against BBSI and certain of its officers and directors in the Circuit Court for Baltimore City, Maryland. The complaint alleges breaches of fiduciary duty, unjust enrichment and other violations of law and seeks recovery of various damages, including the costs and expenses incurred in connection with the Company’s reserve strengthening process, reserve study and consultants, the cost of stock repurchases by BBSI in October 2014, compensation paid to the Company’s officers, and costs of negotiating the Company’s credit facility with its principal lender, as well as the proceeds of sales of stock by certain of BBSI’s officers and directors during 2013 and 2014. On September 28, 2015, the Company and the individual defendants filed motions to dismiss the derivative suit and a motion to stay pending resolution of In re Barrett Business Services Securities Litigation. On December 4, 2015, Salinas filed an opposition to each motion. On January 27, 2016, the defendants filed a reply to the opposition brief. On February 11, 2016, Judge Michel Pierson heard oral argument on the motions. A decision has not yet been issued.

Management is unable to estimate the probability, or the potential range, of loss arising from the legal actions described above.

BBSI is subject to other legal proceedings and claims, which arise in the ordinary course of our business. In the opinion of management, the amount of ultimate liability with respect to other currently pending or threatened actions is not expected to materially affect the Company’s consolidated financial position or results of operations.

Not Applicable

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PART II

Our common stock (the “Common Stock”) trades on the Global Select Market segment of The Nasdaq Stock Market under the symbol “BBSI.” At May 1, 2016, there were 23 stockholders of record and approximately 1,550 beneficial owners of the Common Stock.

The following table presents the high and low sales prices of the Common Stock and cash dividends paid for each quarterly period during the last two fiscal years, as reported by The Nasdaq Stock Market. The Company’s debt covenants to its primary bank permit continuation of quarterly cash dividends up to $0.22 per share so long as there is no default by the Company and payment would not cause a default. Any future determination as to the payment of dividends will be made at the discretion of the Board and will depend upon the Company’s operating results, financial condition, capital requirements, general business conditions and such other factors as the Board deems relevant.

The Company maintains a Board-approved stock repurchase program which originally authorized up to 3.0 million shares of the Company’s Common Stock to be repurchased from time to time in open market purchases. The repurchase program allowed for the repurchase of approximately 1.1 million shares as of December 31, 2015. The Company’s credit agreement with its primary bank currently prohibits the repurchase of our Common Stock.

The following table summarizes information related to stock repurchases during the quarter ended December 31, 2015.

The following graph shows the cumulative total return at the dates indicated for the period from December 31, 2010 until December 31, 2015, for our Common Stock, The

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Nasdaq Composite Index, and a group of the Company’s current peers in the staffing industry (the “2015 Peer Group”). The 2015 Peer Group is comprised of the five companies included in the peer group used to prepare the performance graph included in the Company’s Form 10-K for the year ended December 31, 2015.

The stock performance graph has been prepared assuming that $100 was invested on December 31, 2010, in our Common Stock, The Nasdaq Composite Index, and the 2015 Peer Group, and that dividends are reinvested. In accordance with the SEC’s disclosure rules, the stockholder return for each company in the 2015 Peer Group indices has been weighted on the basis of market capitalization as of the beginning of each annual period shown. The stock price performance reflected in the graph may not be indicative of future price performance.

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The following selected consolidated financial data should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes incorporated into Item 8 of Part II, “Financial Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results.

The consolidated statements of operations data for each of the years ended December 31, 2015, 2014 (as restated) and 2013 (as restated) and the consolidated balance sheet data as of December 31, 2015 and 2014 (as restated) are derived from our audited consolidated financial statements included in Part II-Item 8-“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The selected unaudited consolidated financial data as of and for the years ended December 31, 2012 and 2011 were derived from our books and records and have been restated to correct our accounting primarily for worker’s compensation expense, revenue, payroll taxes and benefit expense, SG&A expense and the related balance sheet categories. For a more comprehensive discussion of the events leading to the restatement of our previously issued financial statements as described above and the resulting Prior Period Adjustments, see “Explanatory Note” immediately preceding Item 1 of this Annual Report and “Note 2. Restatement of Previously Issued Financial Statements” to the Company’s consolidated financial statements incorporated into Item 8 of Part II, “Financial Statements and Supplementary Data.”

The Company has not amended and does not intend to amend any of its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the Prior Period Adjustments. For this reason, the consolidated financial statements previously disclosed in periodic reports filed by BBSI for fiscal years and quarters beginning January 1, 2011 and ending June 30, 2015, any related financial information contained in such previously filed reports and any related reports of the Company’s independent registered public accounting firm, Moss Adams LLP, should not be relied upon.

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The net loss in 2014 is primarily due to expense associated with an increase in the Company’s reserve for workers’ compensation claims liabilities of approximately $104.2 million. See “Note 6. Workers’ Compensation Claims” in the Company’s consolidated financial statements incorporated into Item 8 of Part II of this report.

Effective March 28, 2012, the Company repurchased 2,485,929 shares of the BBSI common stock held by the Estate of William W. Sherertz and 500,000 common shares held by Nancy Sherertz at a price of $20 per share, representing a total consideration of $59.7 million.

During the first quarter of 2011, William W. Sherertz, the Company’s President and Chief Executive Officer, died. The Company carried a $10 million key man life insurance policy on Mr. Sherertz and received the proceeds during the first quarter of 2011.

Overview

The Company is a leading provider of business management solutions for small and mid-sized companies. The Company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry. This platform, through the effective leveraging of human capital, helps our business owner clients run their businesses more effectively.

We report revenues in our financial results in two categories of services: Professional Employer Services (“PEO”) and Staffing.

With our PEO clients we enter into a co-employment arrangement in which we become the administrative employer and the client maintains physical care, custody and control of their workforce.

We generate staffing services revenues primarily from short-term staffing, contract staffing, on-site management and direct placement services. We recognize revenues from our staffing services for all amounts invoiced, including direct payroll, employer payroll-related taxes, workers’ compensation coverage and a service fee (equivalent to a mark-up percentage).

Through centralized operations at our headquarters in Vancouver, Washington, we prepare invoices weekly for our staffing customers and following the end of each payroll processing cycle for PEO clients under a client services agreement. We invoice our customers and clients as each payroll is processed. Payment terms for staffing customers are generally 30 days, while PEO clients’ invoices are generally due on the invoice date.

Our business is concentrated in California, and we expect to continue to derive a majority of our revenues from this market in the future. Revenues generated in our California offices accounted for 78% of our total net revenues in 2015, 77% in 2014 and 74% in 2013. Consequently, any weakness in economic conditions or changes in the regulatory or insurance environment in California could have a material adverse effect on our financial results.

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Our cost of revenues for staffing services is comprised of direct payroll costs, employer payroll-related taxes, employee benefits, and workers’ compensation. Our cost of revenues for PEO services includes only employer payroll-related taxes and workers’ compensation. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and employee benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers’ compensation costs consist primarily of the costs associated with our workers’ compensation program, including claims reserves, claims administration fees, legal fees, MCC expense, state administrative agency fees, third party broker commission, risk manager payroll and excess insurance premiums for catastrophic injuries. We maintain separate workers’ compensation insurance policies for employees working in states where the Company is not self-insured.

The largest portion of workers’ compensation expense is the cost of workplace injury claims. When an injury occurs and is reported to us, our respective independent third-party administrator for workers’ compensation claims (“TPA”) or our internal claims management personnel analyzes the details of the injury and develops a case reserve, which becomes the estimate of the cost of the claim based on similar injuries and their professional judgment. We then record an expense and a corresponding liability based on our estimate of the ultimate claim cost. As cash payments are made by our TPA against specific case reserves, the accrued liability is reduced by the corresponding payment amount. The TPA and our in-house claims administrators also review existing injury claims on an on-going basis and adjust the case reserves as new or additional information for each claim becomes available. Our reserve includes a provision both for future anticipated increases in costs (“adverse loss development”) of the claims for open claims and for claims incurred but not reported related to prior and current periods (together, “IBNR”). This provision for IBNR is based on an actuarial estimate provided by our independent actuary. We believe our operational policies and internal claims reporting system help to limit the amount of incurred but unreported claims.

Beginning in the first quarter of 2015, we began offering healthcare coverage to eligible staffing employees in compliance with the employer mandate provision of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Acts”). The Acts represent comprehensive U.S. healthcare reform legislation. In addition to other provisions, the Acts subject us to potential penalties unless we offer to our employees minimum essential healthcare coverage that is affordable. While it is still early in the adoption phase of the Acts’ employer mandate provision, initial price increases included in our contracts with clients appear to be sufficient to cover implementation and operating costs of offering healthcare coverage to staffing employees, but there can be no assurance that will continue to be the case.

Selling, general and administrative expenses represent both branch office and corporate-level operating expenses. Branch operating expenses consist primarily of branch office staff payroll and personnel related costs, advertising, rent, office supplies, professional and legal fees and branch incentive compensation. Corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs, professional and legal fees, travel, occupancy costs, information systems costs, and executive and corporate staff incentive compensation.

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Depreciation and amortization represent depreciation of property and equipment and amortization of intangible assets consisting of the amortization of software costs, covenants not to compete, and if material, customer related intangibles. Property and equipment are depreciated using the straight-line method over their estimated useful lives, which range from one to 39 years. Intangible assets are amortized using the straight-line method over their estimated useful lives, which generally range from two to 15 years.

Critical Accounting Policies

We have identified the following policies as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 1 in the Notes to the consolidated financial statements incorporated into Item 8 of Part II of this Report. The preparation of this Annual Report on Form 10-K requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition.  We recognize PEO service and staffing service revenue as services are rendered by our workforce. PEO services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Our client services agreements have a minimum term of one year, are renewable on an annual basis and typically require 30 days’ written notice to cancel or terminate the contract by either party. In addition, our client services agreements provide for immediate termination upon any default of the client regardless of when notice is given.

We report PEO revenues on a net basis because we are not the primary obligor for the services provided by our clients to their customers pursuant to our client services agreements. We reduce these service fee revenues by the amounts invoiced to our clients for direct payroll expenses such as salaries, wages, health insurance, employee out-of-pocket expenses incurred incidental to employment and safety incentives. Safety incentives represent cash incentives paid to certain client companies for maintaining safe-work practices and minimizing workplace injuries. The safety incentive is based on a percentage of annual payroll and is paid annually to clients who meet predetermined workers’ compensation claims cost objectives.

Workers’ Compensation Reserves.  We are self-insured for workers’ compensation coverage in a majority of our employee work sites in Oregon, Maryland, Delaware and Colorado and for staffing services and management employees only in Washington. We were self-insured in California through December 31, 2014. We now maintain individual policies for all California-based clients, along with clients in Delaware, Virginia, Pennsylvania and the District of Columbia, through our fronted insurance arrangement with ACE. Our employees working in Arizona, Utah and Nevada are eligible for coverage through Ecole, our wholly owned insurance company.

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The estimated liability for unsettled workers’ compensation claims represents our best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. Our estimate is based on an evaluation of information provided by our internal claims adjusters and TPA, coupled with management’s use of an independent actuary to provide an actuarial estimate of future IBNR costs. These elements serve as the basis for our overall estimate for workers’ compensation claims liabilities, which include more specifically the following components: case reserve estimates for reported losses, plus additional amounts for estimated future adverse cost development of IBNR, legal costs and MCC expenses, as well as estimates for unallocated loss adjustment expenses. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.

IBNR is based on an estimate of future claim payments beyond those considered in the specific case reserve estimates and claims arising from injuries that occurred during a particular time period on or prior to the balance sheet date. Therefore, IBNR is the compilation of the estimated ultimate losses for each accident year less amounts that have been paid and specific case reserves. IBNR reserves, unlike specific case reserves, do not apply to a specific claim but rather apply to the entire body of claims arising from a specific time period. IBNR primarily covers costs relating to:

Our workers’ compensation claims liabilities do not represent an exact calculation of liability, but instead represent management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The process of estimating unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, modifications in reserve estimation procedures, changes in individuals involved in the reserve estimation process, inflation, trends in the litigation and settlement of pending claims, and legislative changes.

Our estimates are based on informed judgment, derived from individual experiences and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss reserves.

A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the

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extent possible through an analysis of internal company data and, if available and when appropriate, external data. Actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.

We believe that the amounts recorded for our estimated liabilities for workers’ compensation claims, which are based on informed judgement, analysis of data, actuarial estimates, and analysis of other trends associated with the Company’s historical universe of claims data, are reasonable. Nevertheless, adjustments to such estimates will be required in future periods if the development of claim costs varies materially from our estimates and such future adjustments may be material to our results of operations.

Safety Incentives Liability.  Our accrued safety incentives represent cash incentives paid to certain PEO clients under our client services agreement for maintaining safe-work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third party administrator and the expected payout as determined by historical incentive payment trends. The safety incentive expense is netted against PEO services revenue in our consolidated statements of operations.

Allowance for Doubtful Accounts.  We make estimates of the collectability of accounts receivables. Management analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in the customers’ payment tendencies when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

Goodwill.  We assess the recoverability of goodwill annually for potential impairment for the Company’s one reporting unit. Management uses the traditional two step approach to determine if the fair value of the reporting unit’s goodwill does not exceed its carrying value, thus resulting in impairment. Management defines the fair value of the reporting unit as the market value of common shares outstanding as of the reporting period end date. Management defines the reporting unit’s carrying value as the value of its net assets. Management’s current assessment of the carrying value of goodwill indicates there was no impairment as of December 31, 2015.

Investments in Marketable Securities.  We consider available evidence in evaluating potential impairment of our investments, including the duration and extent to which fair value is less than cost and our ability and intent to hold the investment. Investments in securities classified as trading are reported at fair value, with unrealized gains or losses reported in other income in our consolidated statements of operations. Investments in securities classified as held-to-maturity are reported at amortized cost. The Company did not have investments in securities classified as trading or held-to-maturity as of December 31, 2015. Investments in securities classified as available-for-sale are reported at fair value, with unrealized gains or losses reported net of tax in accumulated other comprehensive income

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(loss) in stockholders’ equity. In the event a loss on our available-for-sale investments is determined to be other-than-temporary, the loss will be recognized in our statement of operations. The Company held investments in equity securities classified as available-for-sale as of December 31, 2015. For discussion of fair value measurement of these investments, refer to Note 4 in the Notes to the consolidated financial statements incorporated into Item 8 of Part II of this Report.

Income Taxes.  Our income taxes are accounted for using an asset and liability approach. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The impact of uncertain tax positions would be recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax positions would withstand challenge, if any, from taxing authorities. At December 31, 2015, we had deferred income tax assets of $24.4 million and deferred income tax liabilities of $16.7 million for net deferred income tax assets of $7.7 million. We assess our ability to realize deferred income tax assets, as significant changes in circumstances may require adjustments. The amount of the deferred income tax assets actually realized could vary, if there are differences in the timing or amount of future reversals of existing deferred income tax assets or changes in the actual amounts of future taxable income as compared to operating forecasts. If our operating forecast is determined to no longer be reliable due to uncertain market conditions, our long-term forecast may require reassessment. As a result, in the future, a valuation allowance may be required to be established for all or a portion of the deferred income tax assets. Such a valuation allowance could have a significant effect on our results of operations and financial condition.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements and their potential effect on the Company’s results of operations and financial condition, refer to Note 1 in the Notes to the Consolidated Financial Statements incorporated into Item 8 of Part II of this Report.

Forward-Looking Information

Statements in this Item or in Items 1, 1A, 3 and 9A of this Report include forward-looking statements which are not historical in nature. These forward-looking statements include, among others, discussion of economic conditions in our market areas and their effect on revenue levels, the effect of changes in our mix of services on gross margin, the need to continue to retain customers following price increases, the adequacy of our workers’ compensation reserves, the effect of changes in estimates of our future claims liabilities on our workers’ compensation reserves, the effect of changes in our reserving practices and claims management process on our actuarial estimates and workers’ compensation reserves, our ability to generate sufficient taxable income in the future to utilize our deferred tax assets, the effect of our formation and operation of two wholly owned fully licensed insurance subsidiaries, the effects of becoming self-insured for certain business risks, the risks of operation and cost of our fronted insurance program with ACE, our ability to pass on increased costs relating to the mandate to provide health insurance coverage to our clients,

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the effects of material weaknesses in our internal control environment, the cost of providing healthcare coverage to staffing employees, the financial viability of our excess insurance carriers, the effectiveness of our management information systems, payment of future dividends, our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements, compliance with the continued listing requirements of The Nasdaq Stock Market (“NASDAQ”), current and future shareholder litigation, the ongoing investigation by the Securities and Exchange Commission (the “SEC”), the effect of changes in the interest rate environment on the value of our investment securities and long-term debt, the adequacy of our allowance for doubtful accounts, and the potential for and effect of acquisitions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All of our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include our ability to retain current clients and attract new clients, difficulties associated with integrating clients into our operations, economic trends in our service areas, the potential for material deviations from expected future workers’ compensation claims experience, the effect of changes in the workers’ compensation regulatory environment in one or more of our primary markets, collectability of accounts receivable, the carrying values of deferred income tax assets and goodwill, which may be affected by our future operating results, the cost of defending against or settling shareholder litigation, the expenses associated with cooperating in the SEC investigation and the potential imposition of fines, penalties and other remedies by the SEC, the costs of remediating material weaknesses in our internal control environment, including the recruitment of a new Chief Financial Officer and additional members of the Board of Directors with experience in the oversight of financial reporting by public companies, the effect on our stock price if our Common Stock is delisted by NASDAQ, the impact of the Patient Protection and Affordable Care Act and escalating medical costs on our business, the effect of conditions in the global capital markets on our investment portfolio, and the availability of capital, borrowing capacity on our revolving credit facility, or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insured employer for workers’ compensation coverage or our fronted insurance program. Additional risk factors affecting our business are discussed in Item 1A of Part I in this report. We disclaim any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Results of Operations

The following table sets forth the percentages of total revenues represented by selected items in the Company’s Consolidated Statements of Operations for the years ended December 31, 2015, 2014 (as restated) and 2013 (as restated), incorporated into Item 8 of Part II

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of this report. References to the Notes to Financial Statements appearing below are to the notes to the Company’s consolidated financial statements incorporated into Item 8 of this Report.

We report professional employer service revenues on a net basis because we are not the primary obligor for the services provided by our co-employed clients to their customers pursuant to our client service agreements. We present for comparison purposes the gross revenues and cost of revenues information for the years ended December 31, 2015, 2014 and 2013 in the table below. Although not in accordance with “GAAP”, management believes this information is more informative as to the level of our business activity and more illustrative of how we manage our operations, including the preparation of our internal operating forecasts, because it presents our professional employer services on a basis comparable to our staffing services.

The presentation of revenues on a net basis and the relative contributions of staffing and professional employer services revenues can create volatility in our gross margin percentage. The general impact of fluctuations in our revenue mix is described below.

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A reconciliation of non-GAAP gross revenues to net revenues is as follows for the years ended December 31, 2015, 2014, and 2013 (in thousands):

The amount of the reclassification is comprised of direct payroll costs and safety incentives attributable to our professional employer services client companies.

Years Ended December 31, 2015 and 2014

Net income for 2015 amounted to $25.5 million compared to a net loss of $25.5 million for 2014. Net income in 2015 was primarily driven by a 16.4% increase in revenues and a 12.3% increase in gross margin percentage. The increase in gross margin in 2015 is primarily due to the large decrease in workers’ compensation expense from 2014 to 2015. Diluted earnings per share for 2015 was $3.47 compared to a diluted loss per share of $3.57 for 2014.

Revenues for 2015 totaled $740.8 million, an increase of approximately $104.5 million or 16.4% over 2014, which reflects primarily an increase in the Company’s professional employer service fee revenue of $101.8 million or 21.6%. Staffing services revenue increased $2.7 million or 1.6%.

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Approximately 78% and 77%, respectively, of our total net revenues during 2015 and 2014 was attributable to our California operations.

Our growth in professional employer service revenues was attributable to both new and existing customers. Due to continued strength in our referral channels, business from new customers during 2015 nearly doubled business lost from former customers. Professional employer service revenue from continuing customers grew 10.2% on a year-over-year basis, primarily resulting from increases in employee headcount and hours worked. The increase in staffing services revenue was due primarily to an increase in revenue from continuing customers, coupled with a slight increase in net staffing business of new customers over lost customers.

During 2015, the Company served approximately 4,195 PEO clients, compared to approximately 3,665 PEO clients during 2014. During 2015, the Company served approximately 1,770 staffing services customers, compared to 1,825 during 2014.

Gross margin for 2015 totaled approximately $129.5 million or 17.5% of revenue compared to $33.4 million or 5.2% of revenue for 2014. The 12.3% increase in gross margin percentage was primarily due to decreases in workers’ compensation expense and direct payroll costs, partially offset by a slight increase in payroll taxes and benefits.

Workers’ compensation expense, in terms of dollars and as a percentage of revenues, decreased from $213.5 million or 33.5% in 2014 to $171.1 million or 23.1% in 2015. The increase was primarily driven by the Company’s large worker’s compensation expense change of $84.7 million taken in the second quarter of 2014 (as restated).

In 2014 after extensive analysis, management concluded that a significant increase of workers’ compensation liability was needed, primarily to reflect the potential adverse development of prior period claims. Management’s primary considerations in determining to record a large increase in the Company’s estimate of workers’ compensation liability in 2014 included the large increase in the Company’s business in recent years, the potential for large future adverse development of open claims, and the increasing complexity and uncertainty surrounding healthcare costs. In 2015 as the actuarial data began to stabilize we did not see the significant adverse development on prior years’ claims as seen in 2014.

The Company recorded $255.7 million and $225.3 million at December 31, 2015 and 2014, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. The estimated liabilities for unsettled workers’ compensation claims represent management’s best estimate based upon an actuarial valuation provided by a third party actuary at December 31, 2015 and 2014. Included in the estimate for workers’ compensation claims liabilities are case reserve estimates for reported losses, plus additional amounts for estimated future adverse cost development of IBNR claims, legal costs, MCC expenses, and unallocated loss adjustment expenses, including future administrative fees to be paid to third party service providers. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.

Management believes it has improved the Company’s procedures in many areas of its workers’ compensation program over the past three years. See Note 6 to the consolidated financial statements incorporated into Item 8 of Part II of this Report. We believe these efforts have improved management’s ability to estimate workers’ compensation expense.

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Direct payroll costs as a percentage of revenues decreased to 17.3% for 2015 from 19.9% for 2014, primarily due to the increase in our mix of professional employer services in the Company’s customer base compared to 2014.

Payroll taxes and benefits as a percentage of revenues for 2015 was 42.1% compared to 41.4% for 2014. The percentage rate increase was primarily due to the effect of growth in professional employer services, where payroll taxes and benefits are presented at gross cost, whereas the related direct payroll costs are netted against professional employer services revenue. The effect of the growth in professional employer services on payroll taxes and benefits was partially offset by a decline in the overall state unemployment tax rates where the Company does business.

Selling, general and administrative (“SG&A”) expenses consist of compensation and other expenses relating to the operation of our headquarters and our branch offices and the marketing of our services. SG&A expenses for 2015 amounted to approximately $90.2 million, an increase of $16.1 million or 21.8% over 2014. The increase was primarily attributable to an increase in management payroll, incentive bonus pay to field personnel, legal fees, and other variable expense components within SG&A to support our business growth. SG&A expenses as a percentage of revenues increased from 11.6% in 2014 to 12.2% in 2015.

Other expense for 2015 totaled approximately $1.3 million as compared to other income of $522,000 for 2014 due to an increase in interest expense of $1.8 million resulting from the Company’s $40.0 million term loan entered into on December 29, 2014.

Our effective income tax rate for 2015 was 27.5%, compared to (40.1)% for 2014. Our income tax rate typically differs from the federal statutory tax rate of 35% primarily due to federal and state tax credits. See Note 10 to the consolidated financial statements incorporated into Item 8 of Part II of this Report for additional information regarding income taxes.

Years Ended December 31, 2014 and 2013

Net loss for 2014 (as restated) was $25.5 million compared to net income of $15.7 million for 2013. The net loss in 2014 was primarily due to the large increase in workers’ compensation expense. Diluted loss per share for 2014 was $3.57 compared to a diluted earnings per share of $2.12 for 2013.

Revenues for 2014 of $636.4 million reflect an increase in the Company’s professional employer service fee revenue of $77.4 million or 19.7%, coupled with an increase in staffing services revenue of $22.0 million or 15.3%.

Approximately 77% and 74%, respectively, of our total net revenues during 2014 and 2013 was attributable to our California operations.

Our growth in professional employer service revenues was attributable to both new and existing customers. Due to continued strength in our referral channels, business from new customers during 2014 nearly doubled business lost from former customers during that year. Professional employer service revenue from continuing customers grew 8.9% on a year-over-year basis, primarily resulting from increases in employee headcount and hours worked.

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The increase in staffing services revenue was due primarily to growth in new customers as well as the addition of new business, partially offset by lost business from former customers.

During 2014 the Company served approximately 3,665 PEO clients, compared to approximately 3,200 PEO clients during 2013. During 2014 the Company served approximately 1,825 staffing services customers, compared to 1,870 during 2013.

Gross margin for 2014 totaled approximately $33.4 million or 5.2% of revenue compared to $82.5 million or 15.4% of revenue for 2013. The 10.2% decline in gross margin percentage was primarily due to a large increase in workers’ compensation expense, partially offset by an increase in revenues of 18.5% and decreases in payroll taxes and benefits and direct payroll costs.

Workers’ compensation expense, in terms of dollars and as a percentage of revenues, increased from $123.4 million or 22.9% in 2013 to $213.5 million or 33.5% in 2014. The increase was primarily driven by the Company’s large workers’ compensation expense charge of $84.7 million taken in the second quarter of 2014 (as restated).

We took a number of steps in 2013 and 2014 to improve our workers’ compensation claims administration practices.

Beginning in late 2013, as part of our efforts to improve our claims handling practices, the Company initiated a specific case reserve study on its open workers’ compensation claims with injury dates in 2012 and earlier. The specific case reserve study resulted in moving dollars from the general IBNR reserve for unreported claims and future loss development of known claims into specific case reserves for individual claims. This process was intended to provide management with a more accurate estimate of the ultimate total cost of each claim at a detailed level. Management believes that this change in process provides better information to our claims management personnel to evaluate and close historical and future claims at lower ultimate total costs than our historical practices.

Additionally, in mid-2013, the Company initiated a change to its individual claim handling practices by recording specific case reserves on new claims at amounts that include all of the anticipated future costs and working to close claims more quickly with the goal of reducing the ultimate total cost of the claims. Previously, the Company had litigated claims more often, but determined that this practice often resulted in a higher total cost to resolve claims.

While management believes that the changes in the claims handling process are having the intended result of lowering the ultimate total cost per claim, we became aware, during the second quarter of 2014, that these combined initiatives were causing a disruption of the historical incurred and paid trends within our claims data from an actuarial perspective.

In 2014 after extensive analysis, management concluded that a significant increase of workers’ compensation liability was needed, primarily to reflect the potential adverse development of prior period claims. Management’s primary considerations in determining to record a large increase in the Company’s estimate of workers’ compensation liability in 2014 included the large increase in the Company’s business in recent years, the potential for large

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future adverse development of open claims, and the increasing complexity and uncertainty surrounding healthcare costs.

The Company had $225.3 million and $121.1 million at December 31, 2014 and 2013, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. The estimated liability for unsettled workers’ compensation claims represents management’s best estimate based upon an actuarial valuation provided by a third party actuary at December 31, 2014 and 2013.

Direct payroll costs as a percentage of revenues decreased to 19.9% for 2014 from 20.3% for 2013, primarily due to the increase in our mix of professional employer services in the Company’s customer base compared to 2013.

Payroll taxes and benefits as a percentage of revenues for 2014 was 41.4% compared to 41.4% for 2013. The constant percentage of revenues was due to a slight decline in the overall state unemployment tax rates where the Company does business offset by a rise in the overall average wage rate. The percentage rate decreased due to a decline in the overall state unemployment tax rates where the Company does business and to a small rise in the overall average wage rates which allowed the tax ceilings to be reached sooner in 2014 as compared to 2013.

SG&A expenses for 2014 were approximately $74.1 million, an increase of $14.6 million or 24.6% over 2013. The increase was primarily attributable to an increase in management payroll, information technology (“IT”) expenses, and other variable expense components within SG&A to support our business growth. The increased IT expenses relate to projects designed to enhance access and delivery of information to the field as well as to improve efficiencies over time. SG&A expenses as a percentage of revenues increased from 11.1% in 2013 to 11.6% in 2014.

Other income for 2014 was $522,000 compared to $292,000 for 2013. Other income for 2014 was primarily attributable to investment income earned on the Company’s cash and marketable securities.

Our effective income tax rate for 2014 was (40.1) % reflecting our loss from operations, as compared to 26.5% for 2013. Our income tax rate typically differs from the federal statutory tax rate of 35% primarily due to federal employment tax credits and state tax expense, net of federal benefit.

Fluctuations in Quarterly Operating Results

We have historically experienced significant fluctuations in our quarterly operating results, including losses in the first quarter of each year, and expect such fluctuations to continue in the future. Our operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers’ compensation, demand for our services and competition. Payroll taxes, as a component of cost of revenues, generally decline throughout a calendar year as the applicable statutory wage bases for federal and state unemployment taxes and Social Security taxes are exceeded on a per employee basis. Our revenue levels may be higher in the third quarter due to the effect of increased business activity of our customers’ businesses in the agriculture,

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food processing and forest products-related industries. In addition, revenues in the fourth quarter may be reduced by many customers’ practice of operating on holiday-shortened schedules. Workers’ compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. In addition, adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company’s estimated workers’ compensation expense.

Liquidity and Capital Resources

The Company’s cash position of $25.2 million at December 31, 2015 increased $13.7 million compared to December 31, 2014. The increase in cash at December 31, 2015, as compared to December 31, 2014, was primarily due to net income of $25.5 million, proceeds from sales and maturities of securities of $291.7 million and an increase in workers’ compensation claims liabilities of $30.4 million, partially offset by purchases of securities of $344.3 million and payments of long-term debt of $25.2 million.

Net cash provided by operating activities for 2015 amounted to $100.6 million, compared to $69.6 million for 2014. For 2015, cash flow was primarily provided by net income of $25.5 million, an increase in workers’ compensation claims liabilities of $30.4 million and safety incentive liability of $7.0 million, and a decrease in trade accounts receivable of $12.1 million and income taxes receivable of $10.5 million.

Net cash used in investing activities totaled $55.6 million for 2015, compared to $182.5 million for 2014. For 2015 cash used in investing activities consisted primarily of purchases of restricted marketable securities of $211.7 million, restricted certificates of deposit of $124.3 million and marketable securities of $8.2 million, partially offset by proceeds from sales and maturities of restricted certificates of deposit of $228.7 million, marketable securities of $53.0 million and restricted marketable securities of $10.0 million. The Company presently has no material long-term capital commitments.

To monitor our overall investment risk and to assess the fair values of assets within our investment portfolio, we review our investment portfolio on a quarterly basis for significant unrealized gains or losses. We define significant to be in excess of 5% of cost basis. When we identify significant unrealized gains or losses, we inquire as to the reasons with our investment advisors.

Net cash used in financing activities for 2015 was $31.4 million compared to net cash provided by financing activities of $30.9 million for 2014. For 2015 cash was primarily used for payments on long-term debt of $25.2 million and dividends of $6.3 million. Borrowings on the Company’s credit line equaled repayments in 2015.

The states of California, Oregon, Maryland, Washington, Delaware and Colorado require us to maintain specified investment balances or other financial instruments totaling $156.8 million at December 31, 2015 to cover potential workers’ compensation claims losses related to the Company’s current and former status as a self-insured employer. In partial satisfaction of these requirements, at December 31, 2015, we have provided surety bonds and standby letters of credit totaling $152.0 million, including a California requirement of $147.2 million. The Company satisfied the California requirement through the posting of third

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party issued surety bonds, backed by a total of $88.3 million in letters of credit. In conjunction with these letters of credit, the Company posted $92.4 million in restricted money market funds and restricted certificates of deposit as collateral.

As part of the ACE fronted insurance program, the Company makes monthly payments into a trust account (“the ACE trust account”) to be used for the payment of future claims. The balance in the ACE trust account was $166.6 million and $50.1 million at December 31, 2015 and December 31, 2014, respectively. The ACE trust account balance is made up of money market funds, included as a component of the current and long-term restricted marketable securities and workers’ compensation deposits in the Company’s consolidated balance sheets.

Management expects total amounts of the certificates of deposit and the letters of credit to decrease over time as a result of a declining self-insured liability in California. The Company’s self-insurance status in California ended on December 31, 2014. Consequently, management expects the Company’s working capital position to improve in future quarters as the related collateral requirements ease with the decline in the self-insured liability in California.

As disclosed in Note 7 to the audited consolidated financial statements incorporated into Item 8 of Part II of this Report, the Company maintains a credit agreement (the “Credit Agreement”) with its principal bank, Wells Fargo Bank, National Association (the “Bank”). The Agreement includes a $40.0 million term loan maturing December 31, 2016, as well as a $14.0 million revolving credit line, with a $5.0 million sublimit for unsecured standby letters of credit. The outstanding balance on the term loan was $15.0 million at December 31, 2015 and $40.0 million at December 31, 2014. The Company had no outstanding borrowings on its revolving credit line at December 31, 2015 and 2014. The Credit Agreement also includes $88.3 million in cash-secured letters of credit to satisfy collateral requirements associated with security deposit requirements for workers’ compensation purposes in the state of California, as discussed above. In conjunction with the letters of credit, the Company posted $92.4 million in restricted money market funds and restricted certificates of deposit with the bank as collateral.

As of December 31, 2015 the term loan with the Bank required principal payments of $5.0 million on June 30, 2016, September 30, 2016 and December 31, 2016. The term loan bears interest at the one month LIBOR plus 4.0%.

Advances under the revolving credit facility bear interest, as selected by the Company, of either (a) a daily floating rate of one month LIBOR plus 2% or (b) a fixed rate of LIBOR plus 2.0%. The Credit Agreement also provides for an unused commitment fee of 0.35% per year on the average daily unused amount of the revolving credit facility, and a fee of 1.75% of the face amount of each letter of credit and 0.95% on secured letters of credit.

Additionally, the Company maintains a mortgage loan with the Bank with a current balance of approximately $4.8 million secured by the Company’s corporate office building in Vancouver, Washington. This loan requires payment of monthly installments of $18,375, bearing interest at the one month LIBOR plus 2.25%, with the unpaid principal balance due November 1, 2017. This mortgage loan is included in the current portion of long-term debt due to the forbearance agreement with the Bank.

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The credit facility is collateralized by the Company’s accounts receivable and other rights to receive payment, general intangibles, inventory and equipment.

The Credit Agreement requires the satisfaction of certain financial covenants as follows:

The Credit Agreement includes certain additional covenants as follows:

The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, the Bank may declare any outstanding obligations under the Credit Agreement to be immediately due and payable.

The Company is currently in default under the terms of the Agreement based upon the Company’s failure to comply with covenants regarding accuracy and timeliness of financial information. We have entered into a forbearance agreement with the Bank in connection with the current default. The forbearance agreement establishes a time period during which our lender has voluntarily agreed not to cause the payment obligations under the Agreement to be immediately due and payable, to invoke default interest rates or to exercise any of the Bank’s other rights, powers and remedies. The Bank has agreed to forbear from immediate enforcement of its rights and remedies based upon the defaults through June 1, 2016. BBSI must deliver its 2015 Form 10-K by June 1, 2016 as part of this agreement. In addition, the Bank has agreed to forbear from immediate enforcement of its rights and remedies based upon the defaults through June 30, 2016 with respect to BBSI’s late filing of its Form 10-Q for the quarter ended March 31, 2016.

At June 30 and September 30, 2014, the Company was also in violation of the following covenants with its Bank:

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In addition, at December 31, 2014 and June 30, 2015, the Company was in violation of its ratio of restricted and unrestricted cash and marketable securities to workers’ compensation and safety liabilities of at least 1.0:1.0. The Company was also in violation of the fixed charge coverage ratio of 1.50:1.0 at December 31, 2015. On May 24, 2016, the Company reached an agreement with the Bank pursuant to which the Bank has agreed to waive these covenant violations upon filing of the 2015 10-K.

As part of its negotiations with the Bank on the forbearance and waivers discussed above, the Company accelerated to May 24, 2016 the payment of $2.5 million of the $5 million originally due December 31, 2016 on its term loan. The Company also agreed to pay the remaining $2.5 million balance on the December 31, 2016 payment upon the earlier of December 31, 2016 or the receipt of federal unemployment tax refunds. In addition, the Bank amended the Agreement to include delisting of the Company’s common stock by NASDAQ as an event of default.

The Company is self-insured for certain business insurance risks such as general liability, errors and omissions and umbrella coverage. Management may explore in the future whether to pursue other vehicles to provide coverage including coverages provided by the Company’s captive insurance companies.

Management expects that the funds anticipated to be generated from operations, current liquid assets, and availability under the Company’s revolving credit facility will be sufficient in the aggregate to fund the Company’s working capital needs for the next twelve months.

Contractual Obligations

The Company’s contractual obligations as of December 31, 2015, including commitments for future payments under non-cancelable lease arrangements, current and long-term workers’ compensation liabilities for catastrophic injuries, long-term debt, and other long-term liabilities, are summarized below: