Why the Utah Department of Insurance is Wrong About Zenefits

Some of you may have seen that the Utah Department of Insurance has issued a letter demanding that the new California based benefits broker/technology Company named Zenefits cease conducting their business as is or they will face major fines and need to return their commissions earned in Utah. Zenefits is providing a free HR/Benefits system in exchange for naming them the benefits broker. Zenefits claims they give their system away to any firm and don’t require the benefits business, but let’s stop pretending, we all know that nothing is free. To the best of my knowledge 100% of their revenue is from receiving commissions as a benefits broker. The State of Utah says that Zenefits is engaging in rebating through this practice. I believe the State of Utah is wrong but also believe the other interested parties are somewhat disingenuous with their arguments including those supporting Zenefits and those supporting the State.

Let’s start with the rebating issue. I am not going to get too technical with the legal ease. The Utah Insurance laws allow the free distribution of a benefits enrollment system but not a HR System. Their language is as follows:

According to R594-154-11. Electronic Platform and Application Systems – Producers or agencies may provide electronic platforms that provide directly related services of the insurance products to the employees. Fair market value must be charged for items such as human resources and legal services whether electronic or paper.

The State is saying Zenefits is giving away a HR system. They also add some other things to their letter to Zenefits such as it is illegal to require an upload of data before the purchase of benefits and the way Zenefits advertises is illegal, but it is all related to the HR system. Zenefits can be back in business and avoid fines if they charge fair market value for the system. The main issue is the free HR system. In my opinion all other claims are secondary.

Here is why the State of Utah is wrong. Benefits enrollment systems, HR systems, and Payroll systems are becoming one system. At my company, HR Technology Advisors, we recently conducted a national survey that found that over 80% of the employer market is looking for a single technology platform that manages HR and Benefits and sometimes Payroll in a single system. Zenefits and almost all the leading HR and Payroll vendors including ADP, Paychex, Ultimate Software, Workday, Oracle, and many more are responding to this market demand by delivering these more robust platforms. When they sell their systems many don’t draw the lines between HR and Benefits the way the State of Utah has. They are different parts of the same body. If I buy the system I get the HR and benefits parts whether I use them or not. One of the leading systems I know charges $5 PEPM for their system. Without the HR it is $5. With the HR it is $5. The Utah Insurance laws treat these systems like they are different systems when they are not. The vendors don’t make a distinction. In fact some brokers give away Private Exchange technology that cost $6 PEPM when some HR systems with benefits enrollment systems costs $5 or less. This is why the State of Utah is wrong. They are assuming these systems come in pieces and that a fair market value for the HR part can be pieced out. The world has changed and the Utah State laws have not.

Think of this for a minute. If the market is moving to single systems for HR and benefits then many of the benefit system provider will need to add HR functionality to compete with Zenefits and others. What happens if you are a broker providing a free benefits enrollment system within Utah law and the vendor adds some HR functions in their next product release? They do this with an update on a weekend overnight. Do you have to send a bill to all your Utah customers for the fair market value? What if the vendor does not charge for this new feature? Is there a fair market value? Also, how many brokers give away HR Libraries, HR Call Centers or Compliance Alerts, that aren’t just benefits? I looked at the websites of other benefits firms in Utah and they promote other HR type systems. Zenefits is definitely more open about what they are giving away but I guarantee they aren’t the only benefits firm that may in some way be breaking the Utah rebating laws as currently defined.

Here is another reason why the State of Utah is wrong. Rebating laws would imply that the buyers are making their purchase decision based on the free offering. I don’t think the Zenefits buyers are choosing Zenefits because of a free $5 PEPM HR system. They aren’t attracted to the incentive/rebate as the State implies. They are buying Zenefits because Zenefits is promising to make their HR/Benefits lives easier. You don’t get 2000 new clients in two years because of a free $5 PEPM system. You get 2000 new clients because you are solving a big problem. If in fact Zenefits is getting the business because of a free $5 PEPM system then that doesn’t say much for the value of a benefits broker. It would imply the benefits broker is highly over-compensated which should then be a bigger issue for the State Insurance Department.

Let’s also not pretend what Zenefits is and isn’t. I saw one article with the title, “Utah Gov. Herbert: Don’t Shut Down Zenefits; Stand Up for Innovation and Online Competition”. To me Zenefits is neither real innovation nor online competition. For the most part they are a benefits broker using a large marketing budget to do what others are already doing. Their technology is not unique as there are many vendors that do the same thing. In fairness to Zenefits they aren’t claiming to have invented something new. They are saying that they are helping employers with a problem by leveraging technology. Any broker can do this in 48 hours if they wanted to. In my opinion what Zenefits really is is a disruptive business model. Is Uber a great technology or a disruptive business model? How about Orbitz and Amazon? Many brokers have a business model similar to Zenefits. What most brokers don’t have is the $66 million to market this model across the country and disrupt the market as Zenefits is doing.

So the State of Utah should understand that benefits enrollment systems and HR systems are one system. They are two arms on the same body and can’t be disconnected. They need to get with the times. Benefits brokers also need to adapt and stop filing complaints against Zenefits with the State Insurance Bureaus. Many are delivering HR things for free already and they can deliver a Zenefits-like model but it takes work. And Zenefits should almost stop pretending they aren’t a benefits broker. Sure they have a nice technology and they have a lot of money to disrupt the benefits distribution channel. But they are what they are. They are knowingly giving away technology in exchange for benefits commission. That’s OK because they are helping employers by solving problems. All parties are somewhat twisting the story but in my opinion this is just noise created when change happens.

One final thought. If benefits commission is so lucrative that it can fund the development of HR software that many companies often spend tens of millions of dollars to build, then don’t expect the rest of the world sit on the sidelines. Paychex is already a broker. Will other firms that compete with the Zenefits technology jump into the benefits brokerage business? How does a HR technology vendor compete with free? They have to access the revenue source that funds free. The world will change. Let the games begin.

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