Standards & Procedures for ESAC Accreditation and Client Assurance Program Participation

8/7/2019 Standards & Procedures for ESAC Accreditation and Client Assurance Program Participation

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Employer Services Assurance Corporation

Standards and Procedures forESAC Accreditation and ClientAssurance Program Participation(Effective October 2010)

Three Financial Centre, Suite 401

900 S. Shackleford RoadLittle Rock, Arkansas 72211-3849

Phone: (501) 219-2045 Fax: (501) 219-2603E-mail: [email protected] Website: www.ESACorp.org


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Table of Contents

GENERAL INFORMATIONStatement of Purpose and Operation .................................................................................3Eligibility..............................................................................................................................4Confidentiality Provisions....................................................................................................4Definitions ...........................................................................................................................5

STANDARDS

Ethical Conduct...................................................................................................................8Financial Responsibility ......................................................................................................9Operational Requirements................................................................................................12

APPLICATION AND PARTICIPATION PROCEDURES

Initial Application...............................................................................................................17Accreditation and Participation Maintenance....................................................................19Renewal Application .........................................................................................................22

OTHER INFORMATION

Authority of ESAC.............................................................................................................23Limitation of Liability of ESAC and Standard of Review ...................................................23Prohibitions & Requirements ............................................................................................24Grounds for Disciplinary Action ........................................................................................24Rights of Applicants and ESAC Members ........................................................................25Procedures for Handling Alleged Violations, Defaults & Claims.......................................25

Compliance Committee .............................................................................................26

Reporting of an Allegation of a Default or Failure to Comply.....................................26Procedure for Handling an Allegation of a Default or Failure to Comply ...................26Standards for Hearings..............................................................................................28Penalties ....................................................................................................................29Appeals Procedure ....................................................................................................30

Fees..................................................................................................................................31Accreditation Fee.......................................................................................................31Reinstatement Fee ....................................................................................................31Changes and Additions..............................................................................................31Delinquent Reporting Penalties .................................................................................32Acquisitions and Mergers ..........................................................................................32Denial of Application and Treatment of Pending Applications...................................33

EXHIBITS

Exhibit A: PEO Participation AgreementExhibit B: Ethical Conduct Guidelines Example FormExhibit C: Financial Guaranty FormExhibit D: Notice and Certification of Correction of the Failure to Meet a StandardExhibit E: Tax & Benefits Payment Verification Agreed-Upon Procedures


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Standards & Procedures Manual (Effective as of October 2010) 3

GENERAL INFORMATION

Statement of Purpose and Operation

The Employer Services Assurance Corporation (ESAC) was established to operate as an independent, non-profitorganization in 1994 by the National Association of Professional Employer Organizations for the purpose of providingservices to the Professional Employer Organization (PEO) industry that could not be provided by an industry tradeassociation.

ESACs purpose is to build trust and provide assurance to PEO clients, worksite employees, insurers, taxingauthorities, regulators, and the general public by providing the following services to the PEO industry:

1) Administer a comprehensive accreditation process for PEOs to voluntarily demonstrate, in an independentlyverifiable manner, their compliance with important ethical, financial and operational standards;

2) Monitor ongoing compliance with those standards by ESAC-accredited PEOs on a quarterly basis, unless monthlymonitoring is required as determined by a Compliance Committee of Independent Directors;

3) Provide a financial assurance program with surety bonds held by the Employer Services Trust to back the

performance of each accredited PEO;

4) Work with accredited PEOs and other industry organizations to protect public interests and promote continuedindustry growth, including providing assistance to accredited PEOs to help ensure their financial stability andsuccess; and

5) Certify and provide efficient electronic reporting of accredited PEO compliance with registration and licensingrequirements of government regulatory agencies.

PEO participation in ESAC programs is totally voluntary. Membership in any industry trade association is not aprerequisite for participation.

ESAC is managed by its officers and staff under the supervision of the Board of Directors. The number of directors isestablished by the Board of Directors and includes independent directors, including distinguished former regulators,professional advisory directors, and experienced PEO industry executives representing various sizes of PEOs and

various geographical regions. Only independent directors have access to confidential information and vote on mattersinvolving the accreditation or compliance of individual PEOs. Officers and directors are nominated by a nominatingcommittee appointed by the chairman and are elected by the vote of a majority of participating PEOs.

Ad hoc industry committees, ESAC staff, and professional advisors to the Board develop ESAC programs, standardsand procedures. Participation requirements are based on studies of past industry failures and defaults, considerationof current industry best practices, consideration of the demonstrated strengths and weaknesses of various state PEOlicensing and registration laws and applicable state and federal regulations, and the requirements of surety bond andinsurance carriers backing ESAC programs. Participation requirements and program administrative procedures areoffered for the broadest possible industry review, including all participating PEOs, ESAC surety and insurance carriers,Industry trade associations, nationally recognized industry attorneys, and industry-related national regulatoryorganizations. Program features and requirements are approved by the Board of Directors by majority vote afterconsidering all review comments and recommendations.

ESAC programs are administered in the most objective and professional manner possible by outsourcing keyevaluation functions to independent service providers with nationally-recognized expertise in the areas of backgroundinvestigations, monitoring of critical business functions, PEO employment and service practices, finance andaccounting, and applicable state and federal regulations.

Annual fees paid by participating PEOs provide funding for ESAC programs. The accreditation fee schedule isestablished by majority vote of the Board of Directors as necessary to cover administrative and program costs. TheBoard diligently seeks to manage the affairs of ESAC in the most cost-effective manner possible consistent withaccomplishing its mission and its nonprofit status.


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4 Standards & Procedures Manual (Effective as of October

Any ESAC-accredited PEO and Controlling Person, as a condition of eligibility for continued accreditation, agrees to bebound by the terms and conditions set forth in these Standards. Any applicant for accreditation or as a ControllingPerson, as a condition of consideration of such application, agrees to be bound by the terms and conditions set forth inthese Standards.

Eligibility

Any Professional Employer Organization (PEO) or group of Affiliated Professional Employer Organizations (PEOGroup) is eligible to apply for accreditation and participation in the Client Assurance Program.

IMPORTANT NOTE: A PEO may be eligible for accreditation even though it enters into a service arrangement thatdoes not conform to the requirements of this section if the non-conformance of the arrangement is due to arequirement of state law, regulation or administrative rule applicable to PEOs operating in that state.

Confidentiality Provisions

The fundamental credibility of ESAC and of the entire accreditation and financial assurance process rests fully on thetrust by applicants and ESAC-accredited PEOs that all information provided to ESAC shall be used appropriately andheld in strict confidence. The following principles of conduct will be adhered to by ESAC staff, officers, Board ofDirectors, service providers, and trusted advisors to the Board:

1) The portion of Board meetings, where matters related to specific applicants or ESAC-accredited PEOs arescheduled for discussion, are closed to all persons except authorized representatives of the applicant or accreditedPEO in question and Board members, Board advisors and ESAC staff.

2) Every applicant or ESAC-accredited PEO must be provided with 10 business days prior written notice, whenevermatters specifically pertaining to them are included in the discussion agenda of any Board meeting, except in thecase of an urgent situation involving an alleged default of employer responsibilities by an ESAC-accredited PEO inwhich case notice provided to the PEO may be less than 10 business days.

3) Any applicant or ESAC-accredited PEO has the right to petition the recusal of any Board member it reasonablybelieves possesses a bias against it, has a conflict of interest, or is otherwise unable to cast an objective decisionon the matter at hand. Such petition must be received by ESAC in writing at least 3 business days prior to suchBoard action and must include the reason why recusal is requested. A copy of the petition shall be provided to theBoard member in question, and he or she shall be required to respond in writing. The Board will evaluate such

petition and the Board members response, and will vote whether to require the recusal of the member asrequested by the petitioner. The affected Board member shall not vote on the petition for his or her recusal. TheBoard shall be liberal in approving such requests for recusal based on receipt of factual justification.

4) ESAC shall hold all information submitted by an applicant and the fact that an applicant has applied in strictconfidence, except for basic public information, the announcement of approved applicants, and as specificallyprovided in this manual and in the PEO Participation Agreement attached as Exhibit A and incorporated herein.The proceedings of ESAC are not subject to any Freedom of Information or Sunshine laws. Such information isfor the exclusive use by ESAC for the purpose of accreditation and program administration, and is not released toanyone outside of ESAC, except upon an order from a court of competent jurisdiction or as specifically provided inthis manual.

5) All Board members, Board advisors, ESAC staff and service providers are required to execute a comprehensive,enforceable non-disclosure agreement protecting the confidentiality of information submitted by applicants and

ESAC-accredited PEOs, and such individuals are subject to removal for violating the terms of such agreement.6) All financial statements provided by an applicant or an ESAC-accredited PEO are submitted to ESAC for

evaluation by ESACs independent financial advisor and the surety and/or insurance carrier(s) backing the ClientAssurance Program, or their authorized agent. Such financial statements and the confidential informationcontained therein are not provided to the ESAC Board or any other party without the written consent of theapplicant or accredited PEO.


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Definitions

1) Adjusted Net Worth is defined to include stockholders equity determined in accordance with generally acceptedaccounting principles, increased by the amount of obligations subordinated to claims of general creditors(subordinated debt) with a remaining term to maturity in excess of three years, and mandatory redeemablepreferred stock with a remaining term to redemption in excess of three years.

2) An Affiliate of another Entity is an Affiliate for purposes of these standards if (i) at least 50% of the equity of one

Entity, determined on the basis of either voting power or value, is owned, directly or indirectly, by the other Entity;(ii) if the same Persons who have ownership in each Entity own, directly or indirectly, at least 50% of the equity ofeach Entity, determined on the basis of either voting power or value; or (iii) the same Person(s), whether by officeheld, contract or otherwise, control or direct or have the ability to control or direct material aspects of the affairs ofeach Entity. An Affiliate shall also include, with respect to an ESAC-accredited PEO, another PEO if (i) suchESAC-accredited PEO owns, directly or indirectly, any equity interest in such other PEO; (ii) such other PEO ownsdirectly or indirectly, any equity interest in such ESAC-accredited PEO or (iii) any Person owns, directly orindirectly, any equity interest in such ESAC-accredited PEO and in such other PEO. The determination of whetheran Entity is an Affiliate of another Entity may be made by ESAC in its sole discretion. ESAC may, in its solediscretion, disregard any ownership that would otherwise result in another Entity being an Affiliate of an ESAC-accredited PEO if ESAC determines in its sole discretion that treating such other Entity as an Affiliate is notnecessary for the furtherance of ESAC stated purposes.

3) An Affiliated Party Transaction is a transaction between an ESAC-accredited PEO and a Non-PEO Affiliate inwhich (i) either party provides goods, services, or a benefit of any kind to or for the benefit of the other, or (ii) thereis a sharing of employees, assets or other resources between the parties.

4) A Captive shall mean an entity that insures a risk of the accredited PEO, whether directly or indirectly through theuse of a fronting company or similar arrangement, without regard to whether any portion of such risk is reinsured, ifthe accredited PEO or an affiliate thereof has an ownership interest in such entity. A publicly-traded company inwhich the PEO or an affiliate thereof owns less than one percent (1%) shall not be considered a Captive.

5) A Certified Actuary is an actuary who is independent of the PEO, is a member of the American Academy ofActuaries and complies with any other requirements of state law.

6) A Certified Public Accountant is a public accountant who is independent of the PEO, as prescribed by the Codeof Ethics of the American Institute of Certified Public Accountants (AICPA), duly licensed by the state as a CPAand who also is a member in good standing of the AICPA.

7) The Client Assurance Program shall mean that certain program of financial assurance as defined in the PEOParticipation Agreement attached as Exhibit A.

8) A Controlling Person is defined as:

a. Any individual owning or directly or indirectly controlling 10% or more of the voting stock of a PEO or the PEOsultimate parent, if the PEO or its ultimate parent is a closely held company, or 20% or more of the voting stockof a PEO or of the PEOs ultimate parent, if the PEO or its ultimate parent is a publicly traded company. Forthese purposes, voting stock shall include stock which is convertible to voting stock or has voting rights uponoccurrence of some condition or event and shall include other forms of equity that possess voting rights withrespect to the Entity.

b. Any officer or manager of the PEO with apparent authority to obligate the PEO with respect to a material matter,including by rebuttable presumption the Chief Executive Officer, President, Chief Operating Officer, ChiefFinancial Officer, and Chief Marketing Officer, or any equivalent position by whatever name used. Having been

delegated the authority to sign checks on behalf of the PEO shall not alone be considered authority to obligatethe PEO.

c. Any director of the PEO; provided however, an individual who is a director, but neither an officer or employee, ofa publicly traded PEO Entity that maintains an annual average aggregate market value in excess of $100million, shall not be considered a Controlling Person solely by reason of this paragraph 5.c.

d. Any natural person with apparent authority to obligate an Entity with respect to a material matter if that Entityowns more than 50% of the voting stock of the PEO, including by rebuttable presumption the Chief ExecutiveOfficer, President, Chief Operating Officer, Chief Financial Officer, and Chief Marketing Officer of such Entity, orany equivalent position by whatever title used.


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e. Any individual who is a Controlling Person or the equivalent thereof pursuant to any state licensing orregistration law to which the PEO is subject.

f. Any other individual who has by contract or otherwise or in fact exercises the authority or power to control theoperation or direction of the PEO or to obligate the PEO with respect to a material contractual matter such asentering into a service contract with a client company.

g. In the case of any publicly traded Entity that owns 20 percent or more of the stock of the PEO, provided thatsuch Entity maintains an annual average aggregate market value in excess of $100 million, such Entity maysatisfy its Controlling Person requirements by virtue of ownership by disclosing the names of such Entitysofficers and directors and putting forth one duly authorized and appointed officer as the Controlling Personrepresenting the publicly traded Entity.

h. The determination of whether a person is a Controlling Person shall be made by ESAC based on informationprovided by the applicant or accredited PEO or otherwise obtained by ESAC, whose determination shall beconclusive and final.

9) Employer Responsibilities shall mean responsibilities generally performed by an employer including payment ofwages and taxes, the right to provide benefits and to hire, direct, control, discipline and terminate employees.

10) Employment-Related Service shall mean any service provided by an Entity to one of its clients: (a) which serviceat a minimum includes payroll and tax administration services, and (b) whereby the Entity collects or otherwise hasaccess to funds of the client, other than fees charged by the Entity for its services.

11) "Entity" means a corporation, limited liability company, sole proprietorship, general or limited partnership,association, trust, estate or other entity of any kind or nature.

12) Fully Insured insurance policy means, for purposes of determining compliance with these standards, any policy ofinsurance for which all benefits under the policy are guaranteed by an insurance company licensed to conductbusiness in the state or states in which such benefits are provided.

13) Fully Funded insurance policy means, for purposes of determining compliance with these standards, a type ofFully Insured insurance policy pursuant to which total premium cost is fully paid by the PEO in advance of theperiod for which coverage is provided and the PEO bears no risk of loss based upon actual claims experience.

14) Loss sensitive insurance policy means, for purposes of determining compliance with these standards, a type ofFully Insured insurance policy for which the final premium is determined after the end of the policy period based onactual claims experience and pursuant to which the licensed insurance company agrees to share contractually aportion of the financial risk with the PEO.

15) PEO Service Arrangement means a service arrangement wherein the rights, duties, and obligations of anemployer which arise out of an employment relationship are allocated between the service firm and its client as co-employers pursuant to a written service agreement. A PEO Service Arrangement does not include:

a. Service arrangements wherein an Entity does not in fact employ all or part of a clients workforce, and suchservices are provided to the client for a fee without assumption of associated employer responsibilities andliabilities;

b. Service arrangements wherein an Entity, whose principal business activity is not entering into PEO ServiceArrangements and who does not hold itself out as a PEO, shares employees with a commonly ownedcompany within the meaning of section (414)(b) and (c) of the Internal Revenue Code of 1986, as amended;

c. Service arrangements that are outsourced arrangements by which the service firm assumes responsibility as acontractor for a product produced or a service delivered by the clients business, as well as assumes primary

direction and control over the work performed; ord. providing Temporary Help Services.

16) "Person" means an individual, corporation, limited liability company, general or limited partnership, association,trust, estate or other entity of any kind or nature.

17) Presumed Imminent Material Risk is present with regard to the financial condition of an accredited PEO when thePEOs quarterly (or monthly, if applicable) financial report shows a negative net income, which net loss, if itreoccurred in the next two like reporting periods, would result in a violation of one or more of ESACs FinancialResponsibility Standards, absent any curative action by the PEO, unless ESAC determines, in its sole discretion,that the subject net loss is a cyclical or isolated event that will not reoccur within the next two like reporting periods.


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18) Professional Employer Organization or PEO means any Person engaged in the business of providing servicesunder a PEO Service Arrangement. The term PEO is to be liberally construed so as to include any and all servicefirms meeting the above criteria by whatever term known. An Entity that does not hold itself out as a PEO and forwhich less than five percent of its total gross wages paid to all employees is paid to employees under a PEOService Arrangement during its fiscal year shall not be considered a Professional Employer Organization orPEO.

19) Self Insured or Partially Self Insured plan of insurance means for purposes of determining compliance withthese standards, any plan of insurance under which all or any portion of the benefits to which insureds and

beneficiaries are entitled are not payable under a Fully Insured insurance policy.20) Total Adjusted Liabilities equals, for purposes of determining minimum equity standards, total liabilities as stated

in the financial statements less obligations subordinated to claims of general creditors with a remaining term tomaturity in excess of three years.

21) Ultimate Liability shall mean the total maximum liability of an accredited PEO or PEO Group from the source ofliability being considered. For purposes of these Standards, primary sources of PEO liability include the paymentof wages, payroll taxes, workers compensation and group life and health insurance premiums and/or claims,contributions to employee welfare and retirement plans, and general trade payables. Ultimate Liability shall includeboth (i) amounts currently due and payable as of the reporting date, and (ii) all amounts due and payable in thefuture for obligations incurred as of the reporting date. Generally Accepted Accounting Principles and generallyaccepted actuarial standards shall be used in determining Ultimate Liability, including in the case of insuranceclaims, appropriate consideration of incurred but not reported insurance claims, claims development, and effects ofinflation on claims cost.

22) Worksite Employee is defined as any individual whose employment status with the PEO has been recognized bycompletion of Internal Revenue Service Form W-4, who is treated as an employee of the PEO on its payrollrecords, and who provides services for a client of the PEO pursuant to a PEO service contract.

23) Working Capital is defined as Current Assets less Current Liabilities, determined in accordance with generallyaccepted accounting principles. Cash and Cash Equivalents exclude any restricted cash or cash equivalent thatwill remain restricted for at least one year.

24) Positive Working Capital is defined as Working Capital in excess of zero.

25) Quick Working Capital is defined as the total of Cash and Cash Equivalents, Accounts Receivable-Trade,Unbilled Revenue, and Affiliated Party Trade and Affiliated Party Loan Receivables less the total of AccruedSalaries and Wages, Payroll Taxes Payable, Other Payroll Deductions, Unearned Revenue, Group InsuranceLiabilities Payable, and Workers Compensation Liabilities Payable.

Working Capital Components:

a. Cash & Cash Equivalents is defined as currency on hand, demand deposits with banks or other financialinstitutions, savings accounts, certificates of deposit, or other highly liquid investments with original maturities of90 days or less, excluding any restricted cash or cash equivalent that will remain restricted for at least 90 days.

Any liability that is fully secured or collateralized by restricted cash or cash equivalent that is excluded from theCash & Cash Equivalents (as defined above) may be excluded as a liability from the computation of eitherWorking Capital or Quick Working Capital. If restricted cash or cash equivalent is used as security or collateralfor liabilities excluded from the computation of Working Capital or Quick Working Capital and other liabilities, theamount of restricted cash or cash equivalent used in the computation must be first reduced by the full amount ofthe other liabilities. An accredited PEO must provide documentation acceptable to ESAC with respect to anyexclusion of a liability from the computation of either Working Capital or Quick Working Capital.

b. Accounts Receivable-Trade is defined as amounts due from clients in the normal course of business, lesstrade receivables in excess of 30 days past due and any other known uncollectible accounts except forallowances already made to the Accounts Receivable for doubtful accounts.

c. Unbilled Revenue is defined as fees for worksite employees related to the period from the last pay periodending date through the financial statement date, which have not yet been billed.

d. Affiliated Party Trade Receivables is defined as Affiliate trade receivables due within 90 days and incurred inthe ordinary course of business with terms of payment similar to that of non-related clients and which, as of thereporting date, are not past due or otherwise in default.


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e. Affiliated Party Loan Receivables is defined as Affiliate loan receivables due within 90 days and: (1) evidencedby a promissory note or similar instrument bearing a reasonable rate of interest, (2) amortized in substantiallyequal payments of principal and interest over not more than 60 months from the date of original advance, and(3) not past due or otherwise in default as of the reporting date.

f. Accrued Salaries and Wages is defined as salaries and wages due to worksite employees for work performedthrough the balance sheet date and which have not yet been paid.

g. Payroll Taxes Payable is defined as all payroll taxes withheld from worksite employees gross wages and theaccrued portion of the PEOs share of payroll taxes.

h. Other Payroll Deductions is defined as deductions withheld from worksite employee wages (e.g. garnishments,levies, savings accounts, all insurance and retirement benefit plan contributions, etc.) aside from taxes.

i. Unearned Revenue is defined as payments received from clients prior to delivery of services or the invoicedate, including any client cash security deposits.

j. Group Insurance Liabilities Payable is defined as accrued or payable premiums, claims and administrativecosts for group insurance benefit plans less any worksite employee contributions included in Other PayrollDeductions, excluding those amounts not due within 90 days.

k. Workers Compensation Liabilities Payable is defined as accrued or payable workers compensationpremiums, claims and administrative costs, excluding those amounts not due within 90 days.

l. Other Liabilities is defined as all other accrued liabilities not included above (such as trade payables or loan

payments) due and payable in the next 90 days.

26) Positive Quick Working Capital is defined as Quick Working Capital in excess of zero.

STANDARDS

The standards for ESAC accreditation and for participation in the Client Assurance Program are organized into threebroad categories as outlined below. The determination of whether an ESAC-accredited PEO or applicant, or aControlling Person or an Affiliate thereof meets any of the following standards shall be made by ESAC in its solediscretion. Without limitation, ESAC may determine the current relevance or effect of prior events or acts and the

impact upon whether an ESAC-accredited PEO or applicant, or a Controlling Person or an Affiliate thereof currentlymeets any of the following standards. In determining compliance with the standards, ESAC has the authority to requirethe submission of any information, document, attestation or certification from an ESAC-accredited PEO, applicant,Controlling Person or Affiliate that it deems necessary to grant or maintain accreditation or to grant or maintainparticipation in any program administered by ESAC.

Ethical Conduct

1) No PEO shall be granted new or continuing accreditation unless such PEO is determined to be qualified andoperates in accordance with these standards and unless all Controlling Persons are determined to be qualified tooperate as a Controlling Person pursuant to the standards prescribed herein. No ESAC-accredited PEO shallpermit an individual who is not recognized as a qualified Controlling Person to perform duties associated with

Controlling Persons.2) All Controlling Persons must be at least 18 years of age, must be honest, trustworthy, competent and ethical in

managing the affairs of a PEO, and must have a history of complying with the laws of the state and nation in whichthey live and conduct business. Accreditation shall be denied to any PEO that is affiliated with, associated with oremploys a Controlling Person who does not meet these requirements. Likewise, accreditation shall be denied toany PEO that is not operated and managed in a competent and ethical manner so as to benefit its clients andworksite employees. Accreditation shall also be denied to any PEO that is an Affiliate of any Entity that does notmeet these requirements. For these purposes, competent shall mean knowledgeable and experienced in one ormore of the business disciplines required to successfully operate a PEO. In the case of a PEO with less than 24months of successful operating history, the Controlling Persons, as a group, must clearly demonstrate by


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documented and verifiable work history or by written certification of third-party references, substantial knowledge,experience, and/or education in several of the key business disciplines required to successfully operate a PEO.For these purposes, key PEO business disciplines shall include general business management, finance andaccounting, human resources management, employment law, payroll and tax administration, employee benefits,workplace safety, and employment-related risk management.

3) In evaluating the honesty, trustworthiness, ethics, and respect for state and federal laws of an ESAC-accreditedPEO, an applicant or Controlling Person, ESAC shall investigate the accuracy of representations made by theaccredited PEO, applicant or Controlling Person and shall conduct a thorough background investigation initially

and annually thereafter of the PEOs history of business conduct and of each Controlling Persons history ofpersonal and business conduct. ESAC shall also enroll each ESAC-accredited PEO in a nationally recognizedalert service that continuously monitors key factors of business conduct. In evaluating the resulting information, theESAC Board of Directors shall consider the nature, frequency, timing, and relevancy of the information to theoperation of the PEO and to the protection of the PEOs clients, worksite employees, insurers, and taxingauthorities.

4) An ESAC-accredited PEO shall notify ESAC within 30 business days of any change in its Controlling Persons.

5) As a condition of accreditation, a PEO must maintain and promote to its internal staff ethical conduct guidelines inaccordance with and in furtherance of these Standards of Ethical Conduct. An example form is provided as ExhibitB.

Financial Responsibility

1) An ESAC-accredited PEO, its Controlling Persons and Affiliates must have a demonstrated history of responsiblefinancial management of their business and personal affairs. Accreditation shall be denied to a PEO if the PEO, aControlling Person or an Affiliate thereof has documented incident(s) of failing to meet personal or businessfinancial responsibilities unless ESAC in its sole discretion determines that the incident(s) are not relevant due tothe nature and/or the time since occurrence.

2) An ESAC-accredited PEO must have Adjusted Net Worth in an amount which is the larger of $100,000 or fivepercent of Total Adjusted Liabilities as demonstrated by a Schedule of Net Worth included as part of its auditedfinancial statements and interim financial statements in a form prescribed by ESAC.

3) An ESAC-accredited PEO must maintain an adequate level of financial liquidity as demonstrated by maintainingPositive Working Capital. Provided however, an accredited PEO may have Working Capital that is not PositiveWorking Capital for a period not to exceed six consecutive months so long as current liabilities are not more thantwo times current assets and the PEO maintains Positive Quick Working Capital. A calculation of the PEOsWorking Capital and Quick Working Capital shall be included as part of its audited financial statements and interimfinancial statements as required by ESACs application and accreditation maintenance procedures.Notwithstanding the above financial liquidity requirements, all applicants for accreditation must be able todemonstrate Positive Working Capital, and applicants and accredited PEOs must maintain the level of financialliquidity necessary for licensure or registration in the states in which it operates.

4) A PEO which has not had sufficient operating history to provide ESAC with audited financial statements basedupon at least 12 calendar months of operations, must have sufficient capitalization at all times to meet FinancialResponsibility Standards 2 and 3, above, based upon monthly projections of cash flow and profit-loss and monthlyor quarterly pro-forma balance sheets, on an ongoing basis during the subsequent 12 calendar months.

5) In lieu of an ESAC-accredited PEO meeting the Adjusted Net Worth and financial liquidity standards specifiedabove, the PEO may provide a guaranty, irrevocable letter of credit, surety bond or other security, in all cases

acceptable to ESAC and in sufficient amount to offset any deficiency. Provided however, a guaranty will not beacceptable to satisfy a deficiency unless the PEO submits adequate evidence that the guarantor has sufficient networth and liquidity in the sole judgment of ESAC to satisfy the obligation of the guaranty. The deficiency beingcovered by the guaranty shall not exceed 25% of the amount required to meet ESAC net worth and liquiditystandards. Such guaranty shall be in a form provided by ESAC (Exhibit C). Annual audited financial statements ofthe parent corporation or other guarantor must be submitted to ESAC in the same manner as required for the PEOby ESACs accreditation maintenance procedures.

If an ESAC-accredited PEO chooses to submit an irrevocable letter of credit to offset any deficiency, suchirrevocable letter of credit will be acceptable so long as: (a) ultimate responsibility for repayment of any sums


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disbursed under the letter of credit is not an obligation of the PEO or any Affiliated PEO; (b) the letter of creditcontains an evergreen clause, which automatically renews the letter of credit unless the issuer notifies the PEOand ESAC by 60 days prior written notice of the decision not to renew; and (c) the letter of credit is issued by afinancial institution authorized to do so under applicable state or federal banking laws.

6) An ESAC-accredited PEO must have adequate reserves for all state and federal tax liabilities incurred but unpaidand for all plans of self-insurance, loss-sensitive insurance policies or plans, and employee benefit plansmaintained as permitted by state law. These types of insurance programs include but are not limited to self-insuredplans, partially self-insured plans, minimum premium plans, captive plans, large deductible plans, and

retrospective rating plans where the maximum financial liability to the applicant is not Fully Funded by currentpremium payments. Reserves for such insurance and benefit plans shall be equal to the estimated ultimateliability, based upon generally accepted actuarial methods, including but not limited to incurred but not reportedclaims, incurred but unpaid claims, future claims development, retrospective premium adjustments, inflationarytrends and the degree of risk. A Certified Actuary, who is independent of the PEO and is a member of theAmerican Academy of Actuaries, must opine as to the reasonableness of the reserves of such insurance andbenefit plans at the end of each fiscal year, unless one or a combination of the following apply:

a. The policy(ies) or plan(s) of insurance are fully insured by a licensed insurance carrier(s) and an appropriatecorporate underwriter or actuary employed by such carrier(s) has provided a written certification that theadequacy of the financial reserve amount for such policy(ies) or plan(s) is at least equal to the estimatedultimate liability, based upon generally accepted actuarial methods, including but not limited to incurred but notreported claims, incurred but unpaid claims, future claims development, retrospective premium adjustments,inflationary trends and the degree of risk; or

b. The reserves for the portion of loss-sensitive insurance policies or plans with respect to dental, vision and/orprescription drugs at all times are equal to or greater than 125% of the prior calendar quarters total reportedclaims for dental and vision plans and equal to or greater than 125% of the prior calendar months total reportedclaims for prescription drugs. A written certification by the third party claims administrator or insurance carrier(s)must be submitted along with the PEOs audited financial statements attesting to the amount of the priorcalendar quarters total reported claims for dental and vision plans and the amount of the prior calendar monthstotal reported claims for prescription drugs and attesting that all such reported claims have either been paid bythe response date of the third party claims administrator or insurance carrier or that as of such date the thirdparty claims administrator or insurance carrier has sufficient funds to pay such reported claims.

An ESAC-accredited PEO must submit along with its quarterly financial statements: (i) a certification bymanagement that financial reserves for all policy(ies) or plan(s) of insurance subject to the requirements of thisFinancial Responsibility Standard #6 have been estimated and adjusted if necessary for such financial statementsand, if requestedby ESAC, provide a description of the methods and a copy of the computations and workpapers

used to estimate the ultimate liability of all plans of self-insurance or loss-sensitive insurance plans or policies; and(ii) an attestation of management that such plans were operated in compliance with Financial ResponsibilityStandard #6 at all times during the reporting period.

(Note: Upon request, ESAC will provide applicants and ESAC-accredited PEOs with a list of qualified actuariesknowledgeable of PEO operations and ESAC requirements if an actuarial opinion is required.)

7) An affiliated party receivable must be excluded from a PEO's assets for purposes of meeting ESAC financialstandards, unless:

a. The receivable qualifies as a current trade receivable incurred in the ordinary course of business with terms ofpayment similar to that of non-related clients and which, as of the reporting date, is not past due or otherwise indefault;

b. The receivable is immaterial because its exclusion would not result in a failure to meet net worth or liquidity

standards;

c. The PEO submits additional documentation that verifies to the satisfaction of ESAC the authenticity andcollectability of the receivable for purposes of complying with ESACs standards; or

d. The receivable is a loan receivable that meets the following three criteria:

i. Such receivable is evidenced by a promissory note or similar instrument bearing a reasonable rate of interest,

ii. Such receivable is amortized in substantially equal payments of principal and interest over not more than 60months from the date of original advance, and


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iii. Such receivable is not past due or otherwise in default as of the reporting date.

For purposes of d., above, the date of original advance shall be the date(s) on which the accredited PEOadvanced funds or extended credit to the affiliated party without regard to the form of receivable at the time ofadvance. Affiliated trade receivables shall not be converted into loan receivables.

Any portion of an affiliated party receivable that qualifies as an asset under the above provisions and is due withinone year of the reporting date may be treated as a current asset. Any portion of an affiliated party receivable thatqualifies as an asset under the above provisions and is due within ninety days of the reporting date may becounted as a quick asset.

If the total amount of affiliated party receivables otherwise treated as assets exceeds 33% of the accredited PEOsreported Net Worth as of the reporting date, the accredited PEOs Net Worth shall be reduced by the amount ofaffiliated party receivables exceeding this 33% limitation. However, to the extent that an affiliated party receivablefrom the parent is excluded by the preceding sentence, it may be included in net worth provided that the parent isa publicly-traded company as of its last quarter ended, with Positive Working Capital and a net worth of at least10% of its total liabilities. As an alternative to complying with the 33% limitation, an accredited PEO may presentaudited consolidated financial statements in which the affiliated party(s) financial statements are consolidated withthose of the accredited PEO, if such consolidation is otherwise permitted under generally accepted accountingprinciples. In such case, the consolidated entities must meet ESAC financial standards on a consolidated basis.Each non-PEO Entity must execute a cross guaranty agreement in a form acceptable to ESAC guaranteeing theliabilities of each PEO Entity included in the consolidated financials and each PEO Entity must execute a crossguaranty agreement in a form acceptable to ESAC guaranteeing the liabilities of all other PEO Entities included inthe consolidated financials. All PEO Entities included in the consolidated group of companies must be accredited.

8) For purposes of meeting ESAC Adjusted Net Worth and financial liquidity standards as specified in FinancialStandards #2 and #3, a Captive that insures any risk of an accredited PEO must be audited at least annually and acopy of the audited statements provided to ESAC as part of the PEOs annual submittal of audited financialstatements.

The financial condition of the Captive shall be considered by ESAC for purposes of determining the adequacy ofrecorded liabilities of the accredited PEO and for calculating Adjusted Net Worth and Working Capital and QuickWorking Capital. Such consideration may include, without limitation, whether the Captive has sufficient assets andcash flow to pay its liabilities, including claims attributable to the accredited PEO, in the ordinary course of itsbusiness as such liabilities become due and payable, such that the Ultimate Liability with respect to claimsattributable to the accredited PEO can be satisfied from: (i) the assets and cash flow of the Captive available forsuch claims, and (ii) the recorded liability of the accredited PEO. Such consideration may also include the potentialliability of affiliates of the accredited PEO with respect to the Captive and the effect of such potential liability on any

assets of the accredited PEO, including receivables from such affiliate.In connection with the submission of its audited financial statements, an accredited PEO, any of whose risk isinsured through a Captive, shall clearly identify and tie back to such audited financials and the audited financialstatements of the Captive the PEOs Ultimate Liability with respect to the risk insured through the Captive as of thereporting date and shall identify the amount and location of such liability included in the PEOs balance sheet.

A Captive that insures any risk of an accredited PEO must be domiciled in and subject to the regulation of anapproved jurisdiction, as evidenced by the listing of approved jurisdictions for Captives as maintained on the ESACwebsite. An accredited PEO that desires to utilize a Captive not domiciled in and subject to the regulation of anapproved jurisdiction may utilize such a Captive only upon approval of ESAC, which approval shall not beunreasonably withheld if the proposed jurisdiction provides adequate regulatory oversight as determined by ESACin its sole discretion.

9) An ESAC-accredited PEO shall pay in a timely and accurate manner all wages, payroll taxes, employee benefit

contributions, and workers compensation and group insurance premiums for all plans of insurance sponsored orco-sponsored by the PEO.


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10) An ESAC-accredited PEO must carry the following minimum amounts of insurance coverage:

Errors & Omissions Coverage Fidelity Coverage(for PEO Internal Operation) (for PEO Internal Operation)

PEO Total Minimum Maximum Minimum Maximum Umbrella LiabilityAnnual Wages Coverage*/Type Deductible Coverage*/Type Deductible Coverage

0 to 25 million $500,000 $25,000 $250,000 $25,000 $1 million25 to 100 million $1 million $50,000 $500,000 $25,000 $1 million100 to 250 million $1 million $100,000 $1 million $25,000 $2 million

250 to 500 million $2 million $100,000 $1 million $25,000 $3 millionAbove 500 million $3 million $250,000 $1 million $25,000 $5 million

*Coverage limits should be both per occurrence and in the aggregate.

11) A PEO that chooses to submit consolidated financial statements of a parent corporation must submit a guaranty bythe parent of all the obligations of the PEO (or PEO Group), executed in favor of the clients, worksite employees,insurers, and taxing authorities thereof.

12) Each Affiliated PEO of a PEO Group must submit a cross guaranty of all the obligations of each other AffiliatedPEO in the Group, executed in favor of the clients, worksite employees, insurers, and taxing authorities thereof.

13) Audited financial statements must be prepared and audited by an independent CPA, who is a member of theAICPA and who has an unmodified report from the most recent peer review by the AICPA Peer Review Board, in aform and manner that fairly represent the financial condition of the PEO in accordance with general acceptedaccounting principles and shall include a balance sheet, statements of income, equity and cash flows, including allschedules and footnotes pertaining thereto.

14) An ESAC-accredited PEOs financial statements shall reflect all Affiliated Party Transactions whereby the value orcost of any goods, services or benefits provided by or to the PEO shall be fully and accurately recorded inaccordance with Financial Responsibility requirement 7 and generally accepted accounting principles, including anadequate footnote description of the nature of the transaction.

15) An ESAC-accredited PEO shall maintain its financial condition and operations in a manner that does not presentan imminent material risk, including a Presumed Imminent Material Risk, to the financial soundness of such PEOor to ESACs Client Assurance Program. An ESAC-accredited PEO shall be in violation of this standard at suchtime as ESAC provides written notice to the PEO that ESAC has determined, in its sole discretion, that animminent material risk exists. However, if in such written notice, ESAC grants the PEO a time period within whichto submit a corrective action plan, a violation of this standard shall occur upon (i) the expiration of such time periodwithout the submission of such a plan or (ii) the rejection by ESAC, in its sole discretion, of a corrective action plan

timely submitted by the PEO. In the event ESAC accepts a corrective action plan, the PEO shall be in violation ofthis standard if ESAC determines, in its sole discretion, that the PEO has failed to maintain the requirements ofsuch corrective action plan and provides written notice of such finding to the PEO and the PEO fails to cure suchdeficiency within five (5) business days of receipt of the notice.

Operational Requirements

1) An ESAC-accredited PEO and its Controlling Persons shall operate in conformity with all applicable laws andregulations, including but not limited to state licensing and registration laws and regulations relative to PEOactivities, shall not engage in any deceptive trade practices, shall not engage in misrepresentations of employerobligations and liabilities, and shall have a history free of such misrepresentations, illegal activities, violation oflaws, acts of moral turpitude, and violations of PEO licensing and/or registration laws and related regulations. In

reviewing such history, the Board may give consideration to mitigating circumstances and the severity of theoffense.

2) An ESAC-accredited PEO shall establish and maintain adequate internal controls as reasonably required toprevent acts of infidelity by either owners or employees and to maintain its financial and operational integrity.

3) An ESAC-accredited PEO shall participate in the Client Assurance Program by executing a PEO ParticipationAgreement (Exhibit A, as may be amended from time to time) and shall maintain with ESAC a current list of allclients, updated at least monthly, including such information as ESAC shall require, to enroll clients in the ClientAssurance Program and provide information required by state licensing and registration. All clients reported toESAC shall participate in the Client Assurance Program.


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4) The agreement documenting the terms of all PEO Service Arrangements shall be in writing and shall include thefollowing:

a. An allocation of the rights and responsibilities of the PEO and the client with respect to the co-employment ofthe worksite employees;

b. ThePEO shall have responsibility to pay wages to worksite employees and to withhold, collect, report andremit applicable payroll taxes with respect to worksite employee wages; provided wages shall not include anyobligation between a client and a worksite employees for compensation beyond or in addition to the worksiteemployees salary, draw or regular rate of pay, unless the PEO has expressly agreed to assume liability forpayment of such compensation;

c. The PEO shall have responsibility to make payments for employee benefits for worksite employees to theextent the PEO has assumed responsibility for such benefits in the PEO Service Arrangement;

d. The PEO shall have a right to hire, discipline, and terminate a worksite employee, as may be necessary tofulfill the PEOs responsibilities under applicable law and the PEO Service Arrangement; provided that theclient shall also have a right to hire, discipline, and terminate a worksite employee;

e. A specific allocation to either the client or the PEO of the responsibility to obtain workers compensationcoverage for worksite employees as required by applicable law, from a carrier licensed to do business in thestate(s) in which services are performed by the worksite employees;

f. The rights and responsibilities of the PEO and the client with respect to service fees, terms of payment,effective date and termination; and

g. Any other provisions required by applicable law to be included in a PEO Client Service Agreement.

5) An ESAC-accredited PEO shall obtain from all worksite employees a written acknowledgment that they understandthe nature of their employment relationship with the PEO and voluntarily accept such employment. Suchacknowledgment may be included as part of another document or form executed by all worksite employees, or itmay be a separate document used exclusively for this purpose.

6) An ESAC-accredited PEO shall provide all worksite employees with written employment policies and procedures,although such policies and procedures may be supplemented with, or modified, to reflect specific policies andprocedures applicable at each client worksite.

7) In the event of termination of a PEO Service Arrangement, an ESAC-accredited PEO shall provide timely writtennotice of termination of employment from the PEO directly to any affected worksite employee.

8) An ESAC-accredited PEO that maintains a self insured employee welfare benefit plan (e.g. group health plan), ifpermitted by state and federal law, must meet the following minimum requirements:

a. The plan shall comply with all applicable employee welfare benefit plan laws including but not limited to ERISA,COBRA and HIPAA, and any state law to the extent not pre-empted by federal law;

b. If the plan provides major medical or hospitalization coverage, the plan must have excess loss insurancecoverage;

c. The plan must use a third party claims administrator (TPA) licensed as required by state law;

d. The self-funded nature of the plan must be adequately disclosed to each eligible worksite employee, as requiredby ERISA;

e. Adequate financial reserves for the plan must be maintained in compliance with Financial Responsibility

Standard number 6; and

f. Plan assets, including participant contributions, must be held in trust for the exclusive benefit of participants andbeneficiaries. The trust requirement is applicable to any self insured employee welfare benefit plan maintainedby the PEO, whether provided through a cafeteria plan or not. However, a flexible spending account maintainedpursuant to a cafeteria plan shall not be considered a self insured employee welfare benefit plan for the purposeof this trust requirement.

9) An ESAC-accredited PEO shall be responsible for providing for workers compensation coverage for everyworksite employee in accordance with state law. Such coverage shall be obtained from carriers or through plans ofinsurance admitted or otherwise approved by the states where the worksite employees perform their primary


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duties, pursuant to coverage provisions of state law. A PEO may allow the worksite employer to cover theassigned worksite employees under the worksite employers policies or plans of insurance, if permitted or requiredby state law, so long as the PEO obtains a certificate or policy endorsement naming the PEO as an additionalinsured or the equivalent evidence of coverage under state law. Under such circumstances, the PEO shall beresponsible for ensuring that coverage is in fact provided for all assigned worksite employees. In states that permitemployers to obtain alternatives to workers compensation insurance, a PEO may do so, provided the alternativecoverage provided meets or exceeds the statutory minimum coverage required under workers compensation lawsand written disclosure of the nature and limitations of the coverage, including exposure to tort suits, if applicable, isprovided to all clients affected by the coverage.

10) An ESAC-accredited PEO shall adopt and enforce payment and credit policies and monitoring procedures thatrepresent reasonable practices and procedures within the industry that are prudent with respect to the financialcondition of the PEO.

11) An ESAC-accredited PEO shall not knowingly use the PEO/Client relationship to help the Client evade or avoid itsobligations under the National Labor Relations Act or any collective bargaining agreement.

12) An ESAC-accredited PEO shall not represent or imply that it is a seller of insurance in any of its sales andmarketing materials or activities or engage in any activity that constitutes the sale of insurance except through dulylicensed insurance agents.

13) An ESAC-accredited PEO shall be able to provide to regulatory agencies in each applicable jurisdiction and toinsurance carriers the following minimum information upon request:

a. The name, address and tax I.D. number of any client added or terminated within 10 business days, or asrequired by state law.

b. Payroll data by client, client SIC number, and workers compensation classification code.

c. A listing of all worksite employees covered by workers compensation insurance by client worksite location andby classification code.

d. Workers compensation certificates of insurance, or certificates of alternative coverage where permitted by statelaw.

14) Except as provided in this standard, an ESAC-accredited PEO shall not be an Affiliate with a non-accredited PEO.An accredited PEO shall provide written notification to ESAC on or before the effective date of any transaction inwhich the accredited PEO becomes an Affiliate with a non-accredited PEO. Within ten (10) business days of theeffective date of such a transaction, such accredited PEO shall notify its affected clients of the transaction in a form

satisfactory to ESAC and shall provide ESAC with evidence satisfactory to ESAC that such notice was sent toclients. An affected client shall be a client of the ESAC-accredited PEO, if as a result of the transaction, either theownership of the accredited PEO has changed or the services provided to such clients have changed or arereasonably expected to change in the foreseeable future.

a. If the transaction is an acquisition, directly or indirectly, by (i) the ESAC-accredited PEO, (ii) an Affiliate of theESAC-accredited PEO, or (iii) a Controlling Person with respect to the ESAC-accredited PEO, the followingprovisions shall apply:

i. Within thirty (30) days of the effective date of such a transaction, such accredited PEO shall:

(1) Remit to ESAC an Acquisition Fee for each separate non-accredited PEO that became an Affiliate ofthe accredited PEO as a result of the transaction and a Controlling Person fee for each newControlling Person; and

(2) Provide notice of any changes in Controlling Persons with the submission of applications for any newControlling Persons; and

(3) Provide ESAC the terms of the transaction and information concerning any new Affiliates of theaccredited PEO on such forms as ESAC may prescribe.

ii. In the event that after the transaction, there are no non-accredited PEOs that are Affiliates of the accreditedPEO (whether by reason of merger of any acquired non-accredited PEO into the accredited PEO oracquisition of assets of a non-accredited PEO, or otherwise) the accredited PEO shall:

(1) Merge the financial affairs of the non-accredited PEO into the accredited PEO as of the effective dateof the transaction, in which case the accredited PEO must submit a pro-forma balance sheet and


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computation of Adjusted Net Worth, Working Capital, and Quick Working Capital, indicating the impactof the merger on its financial position as of the effective date of the transaction no later than 90 daysafter the transactions effective date. Subsequent financial statements for the accredited PEO shall besubmitted at the time required by accreditation maintenance procedures.

(2) With respect to ESAC operating standards not specifically required by applicable state or federal laws,within 12 months following the effective date of the transaction, bring the affairs and operations of thenon-accredited PEO into compliance with such standards.

iii. In the event that the transaction is such that, after the consummation thereof, there is one or more non-accredited PEOs as an Affiliate(s) of the ESAC-accredited PEO:

(1) The ESAC-accredited PEO shall cause each non-accredited PEO that is an Affiliate of the accreditedPEO to apply for accreditation within 90 days of the effective date of the transaction;

(2) Until such time as each non-accredited PEO that is an Affiliate of the accredited PEO becomesaccredited, the accredited PEO shall:

(a) Continue to operate as a separate Entity with respect to each such non-accredited PEO;

(b) Market and provide its services under a separate and distinct trade name from each such non-accredited PEO and not allow any non-accredited PEO to use the trade name of the accreditedPEO in any manner in sales and marketing or in client service or otherwise use the name of theaccredited PEO in a manner that implies that such Entities are affiliated;

(c) Not guarantee or otherwise share in or be responsible for the liabilities of any non-accreditedPEO;

(d) Not participate in any benefit or group workers compensation insurance policy or plan held,sponsored or co-sponsored by any non-accredited PEO or in which any non-accredited PEO alsoparticipates, nor allow any non-accredited PEO to cover clients or worksite employees by aworkers compensation policy or plan, a benefit plan or group insurance program sponsored or co-sponsored by the accredited PEO; and

(e) Not engage in the transfer of clients from accredited PEOs to any non-accredited PEO or viceversa or allow a client sold by either of the Entities to be signed or serviced under a PEOarrangement with the other Entity.

(3) In the event any non-accredited PEO does not become accredited within 180 days from the effectivedate of the transaction, the accredited PEO must either (i) cease to be an Affiliate of the non-accredited PEO, or (ii) cease to be an accredited PEO as of the expiration of such 180 day period.

b. If the transaction results in one or more non-accredited PEOs becoming an Affiliate of the ESAC-accreditedPEO and such transaction is not described in paragraph a. above, the following provisions shall apply

i. Within thirty (30) days of the effective date of such a transaction, such ESAC-accredited PEO shall:

(1) Remit to ESAC an Acquisition Fee for each separate non-accredited PEO that became an Affiliate ofthe accredited PEO as a result of the transaction and a Controlling Person fee for each newControlling Person;

(2) Provide notice of any changes in Controlling Persons with the submission of applications for any newControlling Persons;

(3) Provide ESAC the terms of the transaction and information concerning any new Affiliates of the

accredited PEO on such forms as ESAC may prescribe; and

(4) Provide ESAC with security in a form acceptable to ESAC, determined in its sole discretion, in anamount equal to the amount of financial assurance provided to the clients and employees of theaccredited PEO, which security shall remain in effect until such time as all non-accredited PEOs thatare Affiliates of the accredited PEO have become accredited.

ii. The following provisions shall apply as set forth below:

(1) Each non-accredited PEO that is an Affiliate of the ESAC-accredited PEO shall apply for accreditationwithin 90 days of the effective date of the transaction;


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(2) Until such time as each non-accredited PEO that is an Affiliate of the ESAC-accredited PEObecomes accredited, the accredited PEO shall:

(a) Continue to operate as a separate Entity with respect to each such non-accredited PEO or anAffiliate of any non-accredited PEO, which shall prohibit without limitation, commingling funds ofthe accredited PEO with a non-accredited PEO or an Affiliate of any non-accredited PEO;withdrawal of funds of the accredited PEO by a non-accredited PEO or an Affiliate of any non-accredited PEO; and the transfer of assets by the accredited PEO to or for the benefit of a non-accredited PEO or an Affiliate of any non-accredited PEO;

(b) Make from its own accounts all payments of employment taxes, employee benefit premiums andcontributions, and workers compensation premiums of the accredited PEO directly to the taxingauthority, insurance carrier or plan administrator, as the case may be;

(c) By the 20th

day of the following month, provide ESAC with a monthly certification signed by allControlling Persons and a verification by an independent CPA of the timely and accurate paymentof all payroll taxes, employee benefit contributions and insurance premiums of the accredited PEOin a manner acceptable to ESAC;

(d) Market and provide its services under a separate and distinct trade name from each such non-accredited PEO and not allow any non-accredited PEO to use the trade name of the accreditedPEO in any manner in sales and marketing or in client service or otherwise use the name of theaccredited PEO in a manner that implies that such Entities are affiliated;

(e) Not guarantee, assume or otherwise share in or be responsible for the liabilities of any non-accredited PEO or an Affiliate of any non-accredited PEO;

(f) Not participate in any benefit or group workers compensation insurance policy or plan held,sponsored, co-sponsored, issued or provided by any non-accredited PEO or an Affiliate of anynon-accredited PEO or in which any non-accredited PEO or an Affiliate of any non-accreditedPEO also participates, nor allow any non-accredited PEO or an Affiliate of any non-accreditedPEO to cover clients or worksite employees by a workers compensation policy or plan, a benefitplan or group insurance program sponsored or co-sponsored by the accredited PEO;

(g) Not engage in any merger, combination or similar transaction in which the separate legalexistence of the accredited PEO ceases;

(h) Not engage in the transfer of clients from accredited PEOs to any non-accredited PEO or anAffiliate of any non-accredited PEO or vice versa or allow a client sold by either of the Entities to

be signed or serviced under a PEO arrangement with the other Entity; and

(i) Comply with all other standards and procedures required for maintaining accreditation, includingthe timely submission of any and all information requested by ESAC regarding Affiliates andControlling Persons of Affiliates.

(3) In the event any non-accredited PEO that is an Affiliate of the accredited PEO does not becomeaccredited within 180 days from the effective date of the transaction, the accredited PEO must either(i) cease to be an Affiliate of non-accredited PEO, or (ii) cease to be an accredited PEO on theexpiration of such 180 day period.

iii. In the event of merger of such accredited PEO or similar transaction, prior to such time as all non-accredited PEOs that are Affiliates of the accredited PEO become accredited, in which the separate legalexistence of the accredited PEO ceases, the accredited PEO shall cease to be accredited on the effectivedate of such merger or similar transaction.

15) An accredited PEO shall not contract with a client to provide any Employment-Related Service other than througha PEO Service Arrangement. If such non-Employment-Related Service is offered, it must be provided through aseparate subsidiary or Affiliated Entity of the accredited PEO.

16) An accredited PEO shall not engage in a legal, financial or operational practice (Practice) that has beendesignated as a Reportable Practice by ESAC, unless the accredited PEO provides written evidence acceptableto ESAC in its sole discretion that such Reportable Practice as practiced by the PEO is not reasonably likely toresult in a material risk to the financial or operational viability of the accredited PEO. An accredited PEO shall havethe responsibility to provide timely written notice to ESAC of any Reportable Practice in which the accreditedPEO engages or plans to engage.


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Where a question of law is involved, acceptable evidence may include a written opinion of a qualified legalcounsel, acceptable to ESAC in its sole discretion, which specifically opines that it is more likely than not that theReportable Practice complies with Applicable Law. At a minimum the opinion must: (i) be addressed to theaccredited PEO or to ESAC; (ii) be written on the letterhead of qualified outside legal counsel engaged in thepractice of an area of law specifically applicable to the Reportable Practice in question; and (iii) set forth inreasonable detail the assumed facts upon which the opinion is based and an analysis of the Applicable Law as itrelates to the Reportable Practice as practiced by the accredited PEO. Applicable Law shall include (i) an existingstatute of a jurisdiction to which the accredited PEO is subject, (ii) a regulation or ruling of an agency withregulatory authority governing the PEO or the Reportable Practice, or (iii) a reported decision of a court of

competent jurisdiction.

A Practice shall be designated as a Reportable Practice by ESACs Board of Directors if the Board determines inits sole discretion that the Practice: (i) potentially represents a material risk to the safety and financial soundness ofan accredited PEO or a material risk to ESACs financial assurance program and (ii) is not otherwise specificallycovered by another ESAC standard. ESACs determination that a Reportable Practice is or is not reasonably likelyto result in a material risk to the financial or operational viability of the accredited PEO shall in no way beconsidered or interpreted as an endorsement of or rejection of the Reportable Practice.

APPLICATION AND PARTICIPATION PROCEDURES

Initial Application

1) Each PEO applicant shall submit a completed Accreditation Application, with all required attachments, and anexecuted PEO Participation Agreement, if applicable, along with the first years accreditation fee. The PEO shallspecifically include as part of its initial application a copy of all certificates of licensing and registration as may berequired to operate a PEO in the states in which the applicant does business.

2) Each PEO applicant shall submit as part of its application the names of all its Controlling Persons and a ControllingPersons Application for each individual. Each Controlling Person applicant shall sign a statement authorizingESAC, its staff, and/or service providers to conduct a background investigation of the applicant to ascertain theaccuracy of the statements made in the Controlling Persons Application. Such authorization shall include a releaseof information that ESAC may send to sources it deems necessary to verify the validity of the information. In lieu ofthe Controlling Persons Application, a Controlling Person applicant may submit other forms containing similarinformation which have been filed with the U.S. Securities and Exchange Commission or with any securities orbanking regulatory agency so long as the applicant also provides a signed statement of authorization and releaseof information identical to the statement contained in the Controlling Persons Application. A Controlling Personwho has been evaluated by ESAC within the previous 6 months and currently is in good standing, is not requiredto be reevaluated if that person changes affiliation or employment from one applicant or ESAC-accredited PEO toanother.

3) Each PEO applicant shall submit within 90 days of becoming accredited a Certificate of Insurance from the PEOsinsurance provider for each workers compensation policy, or alternative if permitted by law, and for eachinsurance policy held to comply with Operational Standard 9. Each certificate must show ESAC listed as acertificate holder for notification in the event of policy cancellation. The PEO shall also provide a certificate listingESAC as a certificate holder for notification for the excess loss insurance policy required for any plan of self-insurance. Such certificates must contain confirmation by the carrier that ESAC will receive at least 30 daysnotification prior to cancellation of coverage.

4) Each applicant PEO shall submit with its application a copy of the following documents, including a representativeexample of all versions or modifications of these documents now in use that contain material differences in contentor form, including different versions used by different Affiliated PEO entities or used for different types of clients:

a. Sales brochure;b. Sales proposal;c. Client service agreement/contract;d. Employment application form;e. Form or statement signed by worksite employees documenting their understanding and acceptance of the

employment relationship;


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f. Written employment policies given to worksite employees and/or supervisors; andg. Worksite employee handbook or manual, if such is used in addition to f., above.

5) All confidential financial information provided as part of the PEOs initial application shall be submitted for reviewby ESACs independent financial advisor and surety/insurance carrier. Such information shall be held in strictestconfidence except as specifically authorized in writing by the applicant PEO.

6) An applicant PEO shall submit at the time of application its audited financial statements for the immediatelypreceding fiscal year. Such audited financial statements will include an audited balance sheet as of the end of themost recent fiscal year and audited statements of income, equity, and cash flows for the most recent fiscal yearincluding such accompanying notes as may be required by generally accepted accounting principles. As part ofsuch financial statements, an applicant PEO also shall submit the computation of its Working Capital and its QuickWorking Capital as well as schedules and related footnotes documenting the calculation of financial reserves forany loss sensitive or self-insured workers compensation or group employee welfare benefit plan or policy. TheCEO and CFO of the PEO shall attest to the audited financial statements filed by the applicant PEO, in a formprescribed by ESAC in its Initial Application.

7) Audited financial statements shall be accompanied by a certification by management disclosing the methods andsources used to properly project the ultimate liability for all plans of self-insurance or loss-sensitive insurance plansor policies, which shall be in a form provided by ESAC in its Initial Application. A Schedule of Net Worth andFinancial Ratio Calculation and a Schedule of Loss Sensitive or Self-Insured Plan Reserves shall also accompanythe audited financial statements, as prescribed by ESAC in its Initial Application.

8) For applications filed within 120 days of the applicants most recently completed fiscal year, and where audited

financial statements have not yet been completed, audited financial statements for the previous fiscal year shall befiled accompanied by unaudited interim financial statements for the most recent fiscal quarter, which shall alsoinclude statements of year-to-date results of operations. Such financial statements shall present fairly the financialposition and results of operations of the PEO in accordance with generally accepted accounting principles forinterim financial information. As part of such financial statements, the applicant also shall submit the computationof its Working Capital and its Quick Working Capital. The CEO and CFO shall attest to the quarterly financialstatements filed by the applicant PEO, in a form prescribed by ESAC in its Initial Application. The applicant PEOwill submit its audited financial statements upon completion of the audit, but in any event, no later than 120 daysafter the PEOs most recently completed fiscal year.

9) For applications filed after 120 days from the end of the applicants fiscal year, unaudited interim financialstatements for the immediately preceding fiscal quarter and for the year to date shall be submitted in addition tothe annual audited financial statements. Such financial statements shall present fairly the financial position andresults of operations of the PEO in accordance with generally accepted accounting principles for interim financial

information. As part of such financial statements, the applicant also shall submit the computation of its WorkingCapital and its Quick Working Capital. The CEO and CFO shall attest to the quarterly financial statements filed bythe applicant PEO, in a form prescribed by ESAC in its Initial Application.

10) For applicants with insufficient operating history to have audited financial statements for at least 12 calendarmonths of operation while serving clients as a PEO, the application shall be accompanied by interim financialstatements for the fiscal quarter ending at least 45 days before the date of application, which shall also includestatements of year-to-date results of operations, if applicable. As part of such financial statements, the applicantalso shall submit the computation of its Working Capital and its Quick Working Capital. The CEO and CFO shallattest to the quarterly financial statements filed by the applicant PEO, in a form prescribed by ESAC in its InitialApplication. The PEO will also submit its audited financial statements no later than 120 days after the PEOs firstfull fiscal year of operations. Start-up applicants with no operating history shall submit a beginning balance sheetaudited by an independent CPA.

11) For applicants covered by 10), above, the application shall be accompanied by monthly projections of cash flow

and profit-loss and monthly or quarterly pro-forma balance sheets for the 12 months following the end of the periodcovered by the interim financial statements. Such projections must be based upon conservative assumptions ofincome and expenses in the judgment of ESAC as compared to industry norms and the applicants prior operatingresults, if applicable. The applicant also shall provide such additional information as may be requested by ESAC toevaluate the reasonableness of the applicants financial projections and business plan. Applicants covered byFinancial Responsibility Standard 4) and Initial Application Procedure 10) must provide written authorization toESACs independent financial advisor to provide a copy of the financial projections and business plan to ESACsApplication Review Committee. Such information shall be held in confidence by the Application ReviewCommittee. The names of the current members of the Application Review Committee may be obtained from ESACat any time, and such members are bound by a comprehensive non-disclosure agreement. Decisions by the


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Application Review Committee regarding the adequacy of the Applicants financial projections and business planare subject to appeal to the ESAC Board upon written request of the Applicant.

12) An applicant PEO shall submit a certification by an independent CPA, the form of which shall be prescribed byESAC, verifying the appropriate and timely payment of withholding and employment taxes, worksite employee andemployer contributions to any employee benefit plan as defined in Section 3(3) of ERISA that is sponsored or co-sponsored by the PEO, and workers compensation and group life and health insurance premiums for policies orplans that are sponsored or co-sponsored by the PEO.

Accreditation and Participation Maintenance

1) ESAC reserves on an ongoing basis the authority to request additional information or the release of data forverification procedures to insure that it has up-to-date information regarding the PEO and each Controlling Person.

2) An ESAC-accredited PEO is obligated to notify ESAC within 10 business days if it, or any of its ControllingPersons, are indicted for or convicted of any criminal activity or wrong doing, or receive any disciplinary action,suspension or revocation of any business license, or file for any sort of bankruptcy protection.

3) An ESAC-accredited PEO is obligated to notify ESAC within 10 business days of learning of any ESAC-accreditedPEO or Controlling Persons, or Affiliate, as that term is defined herein, which is charged, arrested, indicted orconvicted of any criminal activity, wrong doing, disciplinary action, suspension or revocation of any businesslicense or that files for any sort of bankruptcy protection.

4) An ESAC-accredited PEO shall submit all confidential financial information required by these procedures forreview by ESACs independent financial advisor and surety/insurance carrier. Such information shall be held instrictest confidence except as specifically authorized in writing by the accredited PEO.

5) An ESAC-accredited PEO shall submit audited financial statements to ESAC within 120 days of the end of its fiscalyear. Such financial statements will be prepared in accordance with generally accepted accounting principles andwill include an audited balance sheet as of the end of the most recent fiscal year and audited statements ofincome, equity, and cash flows for the most recent fiscal year including such accompanying notes as may berequired by generally accepted accounting principles. As part of such financial statements, an ESAC-accreditedPEO also shall submit the computation of its Working Capital and its Quick Working Capital. The CEO and CFO ofthe PEO shall attest to the financial statements, in a form prescribed by ESAC in its Quarterly Report.

6) Audited financial statements shall be accompanied by a certification by management disclosing the methods andsources used to estimate the ultimate liability for all plans of self-insurance or loss-sensitive insurance plans or

policies, which shall be in a form provided by ESAC in its Renewal Application. A Schedule of Net Worth andFinancial Ratio Calculation and a Schedule of Loss Sensitive or Self-Insured Plan Reserves shall also accompanythe audited financial statement, as prescribed by ESAC in its Renewal Application.

7) An ESAC-accredited PEO shall submit interim quarterly financial statements to ESAC within 45 days of the end ofeach calendar quarter beginning with the calendar quarter in which accreditation is granted. The PEOs interimquarterly report for the quarter ending December 31 shall be submitted within 60 days after December 31. Suchfinancial statements shall present fairly the financial position and results of operations of the PEO in accordancewith generally accepted accounting principles for interim financial information. As part of such financial statements,an ESAC-accredited PEO also shall submit the computation of its Working Capital and its Quick Working Capitalas well as schedules and related footnotes documenting the calculation of financial reserves for any loss sensitiveor self-insured workers compensation or group employee welfare benefit plans or policies. The interim financialstatements shall include an attestation by the CEO and CFO of the PEO, in a form prescribed by the QuarterlyReport provided each quarter by ESAC.

8) If an ESAC-accredited PEOs annual financial report or quarterly report fails to meet the Adjusted Net Worth orfinancial liquidity ratios as required by Financial Standards 2) and 3), the deficiencies shall be deemed to be curedif, at the time the annual or quarterly reports are due, the ESAC-accredited PEO files additional informationevidencing action taken subsequent to the period covered by the required reports which shows that the PEOscurrent financial status is in compliance.

In the case of audited annual financial statements, the information must take the form of a subsequent events noteto the audit report issued by the independent CPA that shows that the ESAC-accredited PEO has corrected anyfinancial deficiencies that existed in the financial statements as of the audit date.


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Standards & Procedures for ESAC Accreditation and Client Assurance Program Participation

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Transcript of Standards & Procedures for ESAC Accreditation and Client Assurance Program Participation