Zenefits is taking the Utah Insurance Department ruling to stop offering free services to task. Utah Insurance Commissioner Todd Kiser issued a ruling last month that would ban Zenefits from giving away its cloud-based HR software for free, claiming this was a violation of Utah law and unfair to local insurance brokers.
Zenefits offers the management of hiring, firing, and all the details that need to be handled in-between such as benefits and the last paycheck. It makes its money on third-party services such as handling payroll and health insurance for current employees. Companies can choose to just use the free service without signing up for other offers. About 85 percent of customers do just that, according to Zenefits. But free is obviously difficult for insurance brokers to compete against.
There seemed to be some confusion over whether or not Zenefits was still allowed to operate in the state after the ruling. Lt. Governor Spencer Cox had said he approved of the HR startup’s continued operations for the meantime. However, Zenefits wrote in a December 5 blog post that the last official communication they had was an order from the department to shut down services in Utah “or face massive fines equal to $5,000 per violation, plus confiscation of all the company’s Utah revenue, plus penalties of 3 or 4 times that amount.”
Cox later told reporters that nothing had been decided, but that he understood Kiser’s ruling. “The interpretation taken by the commissioner is a logical interpretation — square peg in a round hole,” Cox said.
Zenefits says in the letter that if it is in violation of the law then so is Zion’s Bank for offering free checking, Marriott for offering free travel insurance and Hertz rental cars for offering perks such as skipping lines, under Kiser’s interpretation of the law.
Cox affirmed in a statement to Utah startup blog Silicon Slopes that the Utah legislature will have a chance to review before any final decisions are made.
Utah, a red state controlled entirely by the GOP, holds a part-time, citizen legislature. Kiser, an insurance broker himself, spent five terms in the State Legislature before taking over the commission.
Zenefits fired back in a letter dated December 15 that this ruling could make the state of Utah seem technologically backwards. “Not only is this conclusion unsupported by the facts or law, it sets Utah apart from every other state in the Union, to the detriment of its business environment and its consumers. It sends the clear message that Utah insurance regulators are hostile to innovation,” the response reads.
Utah Governor Gary Herbert has prided himself on making Utah a technology friendly state, courting bigger technology companies and encouraging innovation. Utah was named the Forbes Best State for Business again this year, a title it’s held for the last four years. It’s also now on the venture capital radar for being one of the best investments in startup dollar per deal. Local business leaders like to refer to their state as the “Silicon Slopes.”
Governor Herbert’s spokesman Marty Carpenter reaffirmed the governor’s willingness to work with both Zenefits and the State Insurance Department in an officially released statement, “As an administration, we understand Zenefits’ frustration and we are actively working toward a resolution in the upcoming legislative session. However, changing statute is something we strive to do with complete information. Ultimately, if we determine the law needs to be changed to benefit the people of our state, we are open to changing the law.”
Zenefits has asked for an official green light before continuing operations in the state. It is working with current customers but not on-boarding any new ones at this time.
“The Governor and Lieutenant Governor have expressed their desire to resolve this situation, and we appreciate that.” says Parker Conrad, Zenefits CEO. “But since last month when we received the Insurance Commissioner’s ruling shutting us down, we have gotten absolutely no official communication from the state of Utah saying that Zenefits is able to operate without incurring massive penalties. If the Governor is going to stand with innovation and competition and clear the way for Zenefits to compete in Utah, then we look forward to receiving that notice,” he says.
Steve Gooch, spokesman for the State Insurance Department told TechCrunch that Zenefits is not officially banned from offering the free services at this time. “It’s just a ruling based on our interpretation of the law,” he says. Though he couldn’t confirm whether or not Zenefits may incur those aforementioned fees for doing so.
For now it seems Zenefits’ further growth in the state all hangs on decisions in the next Utah Legislative session.
*Disclosure: I went to the same meeting house for church with Todd Kiser and his family as a youth, babysat his kids a time or two and his wife was my softball coach as a tween. I have also worked for the Utah State Legislature. This was a weird post to write.