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Utah: You’re Business Model’s Not Welcome Here

Zenefits, the fastest-growing start-up of 2014, is fighting back against state regulators in Utah who want to outlaw its business model.

According to Tech Crunch, “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 “makes its money on third-party services such as handling payroll and health insurance for current employees,” allowing it to provide its software to companies for free by charging commissions to the service providers those companies hire through the program.

However, “free is obviously difficult for insurance brokers to compete against,” leading Kiser to conclude that Zenefits had violated “inducement and rebating laws” designed to prevent unfair competition. (RELATED: White House Quietly Releases Plans for 3,415 Regulations Ahead of Thanksgiving Holiday)

Although Kiser’s ruling does not explicitly ban Zenefits from operating in Utah, it imposes “a penalty of $5,000 per violation and twice the profit gained from those violations,” which was sufficient to induce the company to stop offering its services to new customers in Utah.

The total fine could reach as high as $97,000, but in order to resolve the issue “in a timely and cost efficient manner,” the Department of Insurance is offering a settlement reducing the amount to $50,000 if Zenefits agrees to “refrain from committing additional violations” and undergo a 24-month probationary period.

Rather than submit to the ruling, Zenefits responded on Monday with a letter rejecting the settlement offer and claiming that, “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. The Department’s decision is the equivalent of planting a sign at the state line that says, ‘Innovation Not Welcome’.”

The letter goes on to describe the ruling as an affront to free markets, saying “this rule reduces to an assertion that Zenefits makes it so convenient for consumers to buy its insurance products, that they just might do so.” (RELATED: Will Government Regulation Crash Driverless Cars?)

Zenefits points out that it is hardly alone in “adopting innovative business models that integrate insurance and non-insurance products,” and says the anti-rebating statute could as easily be applied to banks that offer free checking or bill pay services, car rental companies with loyalty rewards programs, or hotels that offer discounted travel insurance.

Kiser, though, claims his hands were tied by state law, according to the Deseret News. “Utah probably has the strictest rebate inducement laws in the nation,” he said, adding that, “It is not my stick in the ground—it is the Legislature’s.” (RELATED: Rethinking Regulation: Moving Away from Black-and-White Views)

That argument appears to have gained traction with Republican Gov. Gary Herbert, who issued a statement saying that, “While we have to uphold the law on the books, there are times our laws must adapt to changes in the marketplace. With the legislative session just a few weeks away, I am willing to work with all stakeholders to ensure Utah has the right policy to embrace innovative ideas while protecting consumers.”

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