Barrett Business Services, the Vancouver, Wash.-based supplier of staffing and outsourced human resources services, is under investigation by federal authorities in a case involving the company’s workers’ compensation reserves. In a filing with the U.S. Securities and Exchange Commission, Barrett said the SEC has launched an investigation of the company’s “accounting practices with regard to its workers’ compensation reserves.” The news pushed the company’s stock down $14.54, or 29 percent, to $35.01 Tuesday.
The public filing by the company stated “BBSI has been informed by staff at the San Francisco office of the Division of Enforcement of the Securities and Exchange Commission (“SEC”) that it has obtained a Formal Order of Investigation in connection with its review of the Company’s accounting practices with regard to its workers’ compensation reserves. The Company is cooperating fully with the SEC staff in providing the requested information.”
During the company’s first-quarter earnings conference call in April, Michael Elich, president and CEO of Barrett, said the company continued to maintain a “proactive, positive position” related to workers’ compensation expense The context of the company’s discussion of workers’ compensation costs was its announcement in the third quarter of last year of an $80 million increase in reserves for payments of drawn-out workers’ compensation claims.
In the aftermath of that announcement, the company was hit with a shareholder class-action lawsuit alleging Barrett, Elich and Chief Financial Officer Jim Miller violated federal securities laws. The suit arose after the company’s stock price plummeted on the heels of its announcement of increased workers’ compensation reserves. In a filing with the SEC, the company said it will defend itself against the litigation and that it believes “the claims are covered under our directors and officers’ liability insurance, and we have notified our insurance carriers of the claims.”
Barrett has clients with employees in 22 states and the District of Columbia through a network of 54 branch locations in California, Oregon, Washington, Idaho, Arizona, Nevada, Utah, Colorado, Maryland, Delaware and North Carolina.
Pursuant to SB 863 and Labor Code section 3701.9, effective January 1, 2015, the Company no longer maintains a certificate to self-insure in the state of California and now maintains individual policies with ACE Group (“ACE”) for all California-based clients. The arrangement, typically known as a fronted program, provides BBSI a licensed, admitted insurance carrier in California to issue policies on behalf of BBSI without the intention of transferring any of the workers’ compensation risk for the first $5.0 million per claim. The risk of loss up to the first $5.0 million per claim is retained by BBSI through an indemnity agreement. While this portion of the risk of loss remains with BBSI, ACE assumes credit risk should BBSI be unable to satisfy its indemnification obligations to ACE. ACE also bears the economic burden for all costs in excess of $5.0 million per claim. The agreement is effective through January 2016 with the potential for continued annual renewals. The Company makes monthly payments into a trust account established between the Company and ACE related to the new ACE fronted insurance program to be set aside for the payment of future claims. The balance in the trust account was $78.0 million and $50.1 million at March 31, 2015 and December 31, 2014, respectively. The trust account balance is included as a component of the current and long-term restricted marketable securities and workers’ compensation deposits in the accompanying consolidated balance sheet.
The company offers “professional employer organization” services. Under that system, Barrett becomes a co-employer of a client’s workforce, handling payroll, payroll taxes, workers’ compensation coverage and other administrative functions. Its staffing services include on-demand or short-term staffing, contract staffing, long-term on-site management, and direct placement. Barrett’s clients include electronics manufacturers, light-manufacturing industries, transportation enterprises, food processors and telecommunications firms.