Utah Wants To Kill Zenefits For Giving Away HR Software For Free

from the no-disruption-allowed dept

Wed, Dec 3rd 2014 11:35am — Mike Masnick

Another day, another example of regulators protecting legacy businesses and trying to shut down quite useful disruptive innovations. Zenefits is an incredibly fast growing company that has become the rather de facto standard for HR software for startups in Silicon Valley. Part of the key? It gives away the software for free -- software that, from competitors, costs quite a lot (to the point that many startups don't adopt HR software until much later in their lifecycle). A great NY Times profile from a few months ago detailed the rise of Zenefits and how its business model developed. In short, Zenefits had started building some online HR software, and was trying to figure out a business model, when it realized that it could give away the software for free and just get commissions by also acting as an insurance broker. The full story is much longer (and fascinating), but here's a snippet from that profile:

When businesses buy health coverage for their workers, they often go through brokers, who play the role that travel agents once did for the airlines. They are middlemen who figure out the best fit between buyers and sellers of health care, then take a percentage of the sale. And the commissions can be quite hefty. After connecting a small business with a health care provider, a broker collects a monthly fee of about 4 to 8 percent of a company’s health premiums.

The commission rates are set by care providers and aren’t usually disclosed to the small-business purchasers. But the fees amount to several hundred dollars or more per employee annually, and they generally continue for as long as a business keeps its health coverage. The broker collects the monthly fee from the care provider even if the business never talks to its broker again.

“I was thinking, wait a minute, that is a ton of money, and these guys don’t do very much for it,” Mr. Conrad said. This presented an obvious business model for Zenefits. It would become a broker itself. Thanks to the Affordable Care Act, health insurance providers now publish set rates. This meant that Zenefits could offer brokerage online, letting small businesses buy health insurance pretty much the same way people shop for airline tickets.

From there, the "software" just became a hook and a selling point. Yes, it's still the core of the actual "business," but it's just an insanely effective promotion for the insurance brokerage part, which the company has also made super simple. Businesses pay the same exact price they would normally pay for their health insurance -- but they get this great HR software as part of the deal (and Zenefits collects the commissions that traditional insurance brokers would have collected for doing much, much less). Of course, as the article also notes, it's not easy to become a brokerage, but Zenefits put in all of the effort to become a registered insurance broker in various states to make this work -- and it's made the company grow like gangbusters.

And... of course, traditional insurance brokers absolutely hate it. The NY Times article noted that brokers have complained to regulators in four states, including Utah. And that brings us to the latest story. While the investigations in Texas and Washington went nowhere, in Utah, the Utah Insurance Department -- which is run by a former insurance broker named Todd Kiser (founder of Kiser Insurance Agency) -- has told the company that it has violated a bunch of rules for daring to give its software away for free. Specifically, the Insurance Department calls out [pdf] the fact that the free software somehow violates rules against "inducements" or "rebates" for insurance.

The full letter is an astounding example of regulations designed to protect incumbents over innovators. First it attacks the use of free software, despite the fact that the end result is better for companies:

Zenefits' providing free software use of its electronic platform and dashboard violates Utah's inducement and indirect rebate insurance laws. By Zenefits offering clients the free use of its electronic platform and dashboard, by which employers can control and coordinate payroll functions and manage tax-related elections; generate tax forms; access FSA, HSA, and accounts; and administer 401k retirement savings plans and stock options; Zenefits has created a significant free inducement for clients to purchase insurance products through Zenefits. This software use is neither part of the insurance contract nor directly related to the insurance contract. Also, Zenefits connecting of the various HR benefits and insurance together creates advantages for customers to have a single internet access site to manage all HR and insurance needs; however, again, because Zenefits does all of this for free, it creates an violating inducement and indirect rebate for clients to purchase insurance through Zenefits.

Nowhere does the Insurance Department appear to recognize that it's basically saying "offering a better product is illegal." Instead, later in the document, it flat out admits that its goal here is to protect the legacy players who didn't innovate:

Concerning Utah's insurance public policy and State interest, the Utah Insurance Department has the important responsibility to maintain a fair, competitive insurance business environment for all licensees. Some of the main purposes of the Utah Insurance Code are to ensure not only that insurance consumers are protected and treated fairly, but that licensees are also treated fairly within a financially healthy and adequate insurance market that is not only characterized by innovation, but also by fair conditions of competition for all insurance licensees. See Utah Code Sec. 31A-1-102. For these reasons, Utah's specific unfair inducement and rebating laws are strongly enforced.

In short, disrupting the old way of doing business is illegal, because the non-innovators can't keep up. The Utah Insurance Department further makes it clear that innovation that offers a better solution for companies who buy insurance is flat out not allowed under Utah law:

Insurance Department Bulletin 2010-7 emphasizes that a licensee that provides a benefit that is not specified in an insurance contract offered to an insured or potential insured is a violation of state law. This includes offering benefits not specified in the insurance contract at no cost or at a cost below fair market value. Also explained is the fact that providing other value added services not specified in an insurance contract are also insurance violations.

In short: offering insurance buyers a better deal is illegal. The state then says it will fine Zenefits and that the company needs to stop "violating" these rules, and instead come up with a "compliance plan." Of course, for Zenefits, the only really sensible solution is to not do business in Utah, meaning that Utah-based businesses are objectively (and significantly) worse off. That's crazy -- but it's the sort of ridiculous regulatory attacks presented to disruptive businesses all too frequently.

248816808 Utah Insurance Letter to Zenefits (PDF)248816808 Utah Insurance Letter to Zenefits (Text)

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Filed Under: competition, disruptive innovation, incentives, innovation, insurance, rebates, regulations, todd kiser, utah, utah insurance department
Companies: zenefits

25 Comments

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redrum, 3 Dec 2014 @ 12:17pm

Ok, there's now a $25 one-time fee to purchase and use the software. Payable to me please.
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DocGerbil100 (profile), 3 Dec 2014 @ 12:18pm

Other options
There are almost certainly other alternatives to giving up and shutting down services: legislators are notorious for leaving dirty great loopholes in the laws they build, especially in the USA.

For example, if selling insurance-plus-"inducements" is unlawful, then flip it around: sell the HR software and give the insurance away for free.

If it's not legal, Zenefits might get fined to buggery, but in the meantime, the PR-driven profits will be through the roof nation-wide and the competition will be butchered, which will serve them right. :)
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Eric, 3 Dec 2014 @ 12:34pm

Charge a low rate
I'd say just charge an insanely low rate per employee supported using Zenefits. Maybe that would give them the ability to get around this issue as it is no longer free!
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TasMot (profile), 3 Dec 2014 @ 12:42pm

Charge a low rate
If the problem is not charging, then charge a one time sign up fee of $1.00. Then it's not free but the cost is a non-decision.
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Gwiz (profile), 3 Dec 2014 @ 12:47pm

Re: Charge a low rate
I'd say just charge an insanely low rate per employee supported using Zenefits.

I had that same thought also - until I read to quote above dealing with Utah's Insurance Department Bulletin 2010-7:

This includes offering benefits not specified in the insurance contract at no cost or at a cost below fair market value. Also explained is the fact that providing other value added services not specified in an insurance contract are also insurance violations.

That last part confuses me a little too. Does that mean an insurance agent cannot do a "discount double check" because it's a "value added service"?
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Jay Fude (profile), 3 Dec 2014 @ 12:47pm

Paperwork
They didn't file the paperwork properly. Just write it in as part of the policy, then charge the paperwork fees back to the commissioner, as a legitimate cost of doing business. (Sorry to badly paraphrase Frank Herbert's Dune)
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That One Guy (profile), 3 Dec 2014 @ 12:50pm

That's a feature, not a bug
Of course, for Zenefits, the only really sensible solution is to not do business in Utah, meaning that Utah-based businesses are objectively (and significantly) worse off. That's crazy -- but it's the sort of ridiculous regulatory attacks presented to disruptive businesses all too frequently.

It's not crazy if it's exactly the outcome the regulators and incumbents want. They want Zenefits to simply decide that doing business in Utah is too much trouble and go elsewhere, as it removes any competition they might have presented.
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Gumnos (profile), 3 Dec 2014 @ 12:52pm

Unfair services offered for free
“Our competitors are using this new-fangled Internet thing to grant customers free access to manage their accounts. That's an unfair advantage over those of us who require all services to be performed over the phone or via mail!”
—the old-guard a decade or two ago
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John William Nelson (profile), 3 Dec 2014 @ 12:59pm

Free Zenefits publicity!
I wish I had heard of this before! Now that I know about Zenefits, when I am looking to expand more I will definitely be looking them up. The lack of this kind of option has led me to slowly adopt the more complicated HR process such as hiring employees (just went this route this year), providing benefits (very limited right now to 401k, no health), and more.

With something like this, perhaps I will be able to more easily offer the more complicated benefit packages with more paperwork because this will reduce my time overhead in managing them.

As a truly small business, this kind of thing is a godsend.
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John William Nelson (profile), 3 Dec 2014 @ 1:00pm

Re: Free Zenefits publicity!
Which I meant to add my have the opposite effect Utah and its cronies were looking for! Now I know about Zenefits, whereas I didn't before!
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Ambrellite, 3 Dec 2014 @ 1:16pm

The many cases of politicians attacking new businesses to favor their own careers lays bare the vapidity of asking whether politicians are pro- or -anti business. They are all pro-politician.
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R.H. (profile), 3 Dec 2014 @ 1:17pm

Rebating, really?
I don't know about Utah but, as someone who has just finished studying to become an insurance producer in Michigan there shouldn't be an issue as long as they don't discount the software for people who buy insurance. If their software is freeware regardless of the purchase of insurance it shouldn't be considered rebating.
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sumquy (profile), 3 Dec 2014 @ 1:44pm

what if they gave the software away to anyone who wanted it? seems to me, it then becomes difficult to say that it is related to the insurance agreement.
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Anonymous Coward, 3 Dec 2014 @ 1:50pm

How is the software any different than the software used by insurance companies to run their websites- servers, certs web pages etc., surely they don't charge the customer for use of their systems and the cost of their servers.
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bob, 3 Dec 2014 @ 2:23pm

Re: Other options
they can't give the insurance away for free, the fees are set by the providers. this company is just the salesman.
the question that needs to be asked of the legislator is what an acceptable minimum price (as mentioned in the current law) would be for the service people have been enjoying for free for months/years across multiple states.

the legislature can't put a price-tag on it without opening a huge can of worms, and at that point they can't just demand the company come up with a price without giving them guidance as well.

it's a bad position for the politician or a court to be in. and leaves a lot of room to wiggle this case into federal court if they keep pushing. at which point it would be shut down.

that's the logic as the world existed before we were all forced to but healthcare.. nowadays it's anyones guess as to what will/won't work.
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aerinai (profile), 3 Dec 2014 @ 2:38pm

*cough* Aereo *cough*
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Ed Allen, 3 Dec 2014 @ 3:33pm

Not to worry, you can't make any money if you give things away
Zenefits growth must be a delusion or a fraud.

Zenefits should be hoarding that software as their vital IP.

What kind of loonies are these Zenefits people ?
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cm6029 (profile), 3 Dec 2014 @ 3:36pm

so I guess Utah state doesn't use Google either then?
I mean, if using some service at no cost (I.e. Google Search) is a violation of state law, any legislator who ever used Google to search for anything at all related to, say, insurance premiums, has violated state law and should immediately surrender him/herself for incarceration. Just sayin'.
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Anonymous Coward, 3 Dec 2014 @ 4:13pm

Zenefits 'Zioned' in Utah?
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tqk (profile), 3 Dec 2014 @ 5:20pm

Can haz tar & feathers?
I look forward to reading the news articles reporting on the results of the impending pitchfork and torch bearing mobs Zenefits' business customers are currently organizing with their employees. As if health insurance wasn't a mess already, this crony-anticapitalist prat wants to penalize a new outfit which is making sense of it, and adding value, and lowering costs, and excluding middlemen?

Assuming there is still a functioning fourth estate in Utah, this guy is in for the flame-fest of a lifetime. What an astonishingly stupid move.
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Atkray (profile), 3 Dec 2014 @ 8:04pm

"Assuming there is still a functioning fourth estate in Utah"

That would be a faulty assumption.
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John85851 (profile), 4 Dec 2014 @ 7:54am

Re:
Don't they do this already? Is there anything in the software contract that requires companies to get insurance services and get those services from Zenefits?
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Bergman (profile), 5 Dec 2014 @ 4:06pm

Re: Re: Charge a low rate
Well, what's the fair market value of freeware?
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Gwiz (profile), 5 Dec 2014 @ 4:18pm

Re: Re: Re: Charge a low rate
Well, what's the fair market value of freeware?

Lol. That is a good point.

Although, I would imagine that an average price of similar software would be used, which would most likely never be zero.
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tqk (profile), 5 Dec 2014 @ 6:22pm

Re: Re: Re: Charge a low rate
Well, what's the fair market value of freeware?

Priceless.
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