Zenefits Faces Shutdown In Utah For Giving Its Cloud-Based HR Software Away For Free

Zenefits has become the latest startup to face regulatory scrutiny in a market it serves, as it now faces opposition from the Utah Insurance Department. The department is taking the company to task essentially for giving its cloud-based HR software away for free, which the regulator says violates local laws and is unfair to traditional insurance brokers.

The Utah Insurance Department began looking into Zenefits in June and released the findings from its investigation just a few weeks ago. In a letter sent to the company’s law firm on November 20, Utah Insurance Commissioner Todd Kiser said Zenefits violated the state’s rebates and inducement law by giving away its software for free.

Zenefits provides a cloud-based dashboard to HR departments designed to help small businesses manage hiring, termination and all the benefits and payroll details necessary in-between those events. The product is offered for free and enables its users to easily onboard new hires by entering their relevant information once and then handles all relevant tax, insurance, payment and other processes seamlessly.

While Zenefits essentially gives away its SaaS-based tools to anyone who wishes to sign up for them, the company makes money from commissions it generates as an insurance broker — that is, if companies decide they wish to sign over management of their insurance to the company.

Apparently more than a few companies are willing to do so, since Zenefits makes it just that much easier to manage the insurance piece once a business has authorized the company as its broker. And, as a result, more traditional insurance brokers are finding it difficult to compete with the company’s business model.

All of which seems to be why Kiser is stepping in. He spent five terms in the State Legislature before taking over the commission after he retired in 2012. Prior to that, he served 25 years as an insurance broker himself after founding Kiser Insurance Agency in 1976.

It turns out the Utah insurance community doesn’t like competing with free, and the commission there is pushing back as a result. The letter from Kiser (embedded below) states that by providing free, up-front services to all, Zenefits is violating Utah inducement and rebating laws for those who choose to have it manage their insurance as well.

For violating those laws, the department claims Zenefits can be assessed a penalty of $5,000 per violation and twice the profit gained from those violations. The total amount based on the department’s initial assessment would mean Zenefits could be penalized $97,000 if it fails to comply with local laws.

But the penalty itself is a small amount compared to the change in its business model if the local insurance department were to have its way. To comply with state laws, the department is urging Zenefits to stop advertising that it offers free HR cloud management services.

More importantly, however, the regulator argues Zenefits should have to charge a “fair market value” for its services to ensure fair competition with other insurance licensees in the state.

That’s not something Zenefits wants to do, of course, and the company says it will fight the department’s ruling in the courts to ensure it isn’t shut down in the meantime. Zenefits is also urging Utah Governor Gary Herbert to intervene as part of his commitment to support tech innovation in the state.

Of course, Zenefits is just one of many startups facing scrutiny from a state or local regulator which appears to be protecting the interests of the industry it’s supposed to oversee. And just as Uber has been forced to battle local taxi commissions and Airbnb has tussled with various hotel regulators, it seems Zenefits might come up against more insurance regulators over time.

Utah Insurance Letter to Zenefits