Human resources has always been something of an afterthought in the business world; a necessary evil. Budding businesses, startups, and small shops make up over 99% of U.S. enterprises and create more than 70% of our new jobs. But creating a small business or launching a startup comes with a hefty risk. Indeed, all too often entrepreneurs are risking everything (including their home and car) to bring something new into the world. In a litigation-happy world with literally millions of pages of rules governing small business hiring, firing, and employee policies, HR can quickly be the downfall of a great idea.
Such was the story of Parker Conrad, a two-time startup entrepreneur. Conrad had twice been in that unfortunate situation, serving as President, CEO and HR director at the same time. His days had clogged with painful calls to dozens of insurance brokers, forms in triplicate, and late nights parsing through insurance legalese. The bureaucracy of small business had stifled him twice and it wouldn’t happen again. Conrad paired up with co-founder and software engineer Laks Srini to develop a business founded on making entrepreneurship easier and letting innovators spend their time at the workbench, not parsing insurance policies.
That’s the story of Zenefits.
If you think it sounds like a smart idea, you’re right. The company was a quick success story and has been described by tech investor Mark Andreessen as “the fastest growing SaaS business in history.” Its 30% month-over-month growth has it on pace to blow other startups out of the water and, already signed up more than 2,000 businesses.
But not everyone’s a winner when Zenefits succeeds. They have a model that some might call disruptive to competitors. Zenefits offers their HR software free of charge and makes money on brokerage fees if their software users later decide to sign-up for the insurance policies it manages. Like travel agents when Priceline landed in the market, insurance brokers and middlemen had a real problem on their hands – competition doing it better, faster and cheaper.
“Disruption” expert Larry Downes writes of those middlemen in the Washington Post:
“They had a secret weapon I hadn’t begun to appreciate — powerful professional organizations and long-standing regulations that successfully excluded the new entrants. Including those that had invested in technologies that made business transactions both better and cheaper.”
Now, enter lobbyists and politicians. You see, not unlike what Priceline does for travelers, Zenefits foregoes the typical advertising model and instead offers itself as a quick and easy marketplace for employee benefits. With its beautifully laid out software, it makes shopping, “on boarding” new hires, and HR management incredibly easy. That software is free, and revenues are only collected via brokerage fees for the folks that sign up for insurance.
So, insurance middlemen set out to do what they do best: create bureaucracy. And it’s paying off. Early in December, Utah insurance commissioner sent a letter of violation to Zenefits. Lawmakers, surely driven by insurance brokerage lobbyists, are claiming that the Zenefits software—it’s core offering—was an unfair rebate given to insurance buyers. Never mind that the law clearly defines a rebate as “inducement” only when it “is offered in exchange for buying insurance.” (Note: 85% of Zenefits customers don’t use the platform as a means to buy insurance.) Offering their HR software for free was essentially deemed an unfair advantage in the market and would mean Zenefits is subject to fines of up to $5000 per employee and more unless they stop offering their free software immediately.
Unsurprisingly the man behind these threats, Utah Insurance Commissioner Todd Kiser, had spent the majority of his career owning and operating an antiquated insurance brokerage. He’s mandated that Zenefits needs to charge a fair market price which would likely exceed tens of thousands of dollars per year.
But Zenefits isn’t going quietly. They know they’re on the right side of both the law and history, and they’re quick to tell the world about it.
A few weeks ago, the company’s lawyers released a statement taking the Utah commission to task for “prejudicing consumers, discouraging innovation, and stifling competition.” The letter routs Utah for improperly using a “blunt tool” to “manipulate the market.” They also draw some helpful comparisons, suggesting other businesses that would be infringing on this anti-rebate law. Among them, Zion Bank for offering free checking “because they might ‘induce’ customers to buy its life insurance products and Hertz for offering a loyalty program which induces customers to buy rental insurance through them.
The letter concludes by declining the “deal” offered by Utah’s Insurance Commission and suggesting a narrower interpretation of the anti-rebate statute going forward.
Fortunately, a legislation proposal has just been introduced in Utah to clarify what constitutes an inducement. That proposal, if enacted, should end the commission’s latest effort to stifle innovation and make life harder for small business owners, as well as making things more expensive for consumers and workers.
Zack Christenson writes on digital tech issues for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization. For more information, visit www.theamericanconsumer.org.