Paychex 2012 Annual Report Download - page 27

Our business and reputation may be affected by security breaches and other disruptions to our
information technology infrastructure, which could compromise Company and customer information: We
rely upon information technology networks and systems to process, transmit, and store electronic information,
and to support a variety of business processes. Vulnerabilities, threats, and more sophisticated and targeted
computer crime pose a risk to the security of our systems and networks, and the confidentiality, availability, and
integrity of our data. While we attempt to mitigate these risks by employing a number of security measures and
constantly updating and adapting security requirements, our networks, products, and services remain potentially
vulnerable to advanced persistent threats.
If we experience a problem with the functioning of key systems or a security breach of our systems, the
resulting disruptions could have a material adverse effect on our business. Our business involves the use of
significant amounts of private and confidential client information including employees’ identification numbers,
bank accounts, and retirement account information. This information is critical to the accurate and timely
provision of services to our clients, and certain information may be transmitted via the Internet. This information
could be compromised by a cyber attack. There is no guarantee that our systems and processes are adequate to
protect against all security breaches. If our systems are disrupted or fail for any reason, or if our systems are
infiltrated by unauthorized persons, both the Company and our clients could experience data loss, financial loss,
harm to reputation, or significant business interruption. We may be required to incur significant costs to protect
against damage caused by disruptions or security breaches in the future. Such events may expose us to
unexpected liability, litigation, regulation investigation and penalties, loss of clients’ business, unfavorable
impact to business reputation, and there could be a material adverse effect on our business and results of
operations.
We may be adversely impacted by any failure of third-party service providers to perform their
functions: As part of providing services to clients, we rely on a number of third-party service providers. These
service providers include, but are not limited to, couriers used to deliver client payroll checks and banks used to
electronically transfer funds from clients to their employees. Failure by these service providers, for any reason, to
deliver their services in a timely manner could result in material interruptions to our operations, impact client
relations, and result in significant penalties or liabilities to us.
We may be exposed to additional risks related to our co-employment relationship within our PEO
business: Many federal and state laws that apply to the employer-employee relationship do not specifically
address the obligations and responsibilities of the “co-employment” relationship. As a result, there is a possibility
that we may be subject to liability for violations of employment or discrimination laws by our clients and acts or
omissions of client employees, who may be deemed to be our agents, even if we do not participate in any such
acts or violations. Although our agreements with the clients provide that the client will indemnify us for any
liability attributable to its own or its employees’ conduct, we may not be able to effectively enforce or collect
such contractual obligations. In addition, we could be subject to liabilities with respect to our employee benefit
plans if it were determined that we are not the “employer” under any applicable state or federal laws.
We may be adversely impacted by changes in health insurance and workers’ compensation rates and
underlying claims trends: Within our PEO business, we maintain health and workers’ compensation insurance
covering worksite employees. The insurance costs are impacted by claims experience and are a significant
portion of our PEO direct costs. If we experience a sudden and unexpected increase in claims activity, our costs
could increase. In addition, in the event of expiration or cancellation of existing contracts, we may not be able to
secure replacement contracts on competitive terms. Increases in costs not incorporated into service fees timely or
fully, could have a material adverse effect. Incorporating cost increases into service fees could also impact our
ability to attract and retain clients.
We may be adversely impacted by volatility in the financial and economic environment: During periods
of weak economic conditions, employment levels tend to decrease and interest rates may become more volatile.
These conditions may impact our business due to lower transaction volumes or an increase in the number of
clients going out of business. Current or potential clients may decide to reduce their spending on payroll and
other outsourcing services. In addition, new business formation may be affected by an inability to obtain credit.
The interest we earn on funds held for clients may decrease as a result of a decline in funds available to invest
and lower interest rates. In addition, during periods of volatility in the credit markets, certain types of
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