Zenefits Allowed Back Into Utah After Insurance Brokers Tried To Kill The Innovative Startup

Late last year, we wrote about the ridiculous situation in which the state of Utah effectively banned Zenefits, the innovative HR software service provider that tons of companies now use. As we noted, Zenefits came up with a creative way to build a real business by giving away its (really useful) HR software for free: coupling it with an insurance brokering business. You get to use its software for free, and Zenefits also makes it easy for businesses to get insurance and takes a cut of those deals. Zenefits started out by first just building the software, but then realized that it could tack on this business model after it found that most insurance brokers collect huge fees without really doing anything all that useful. So here, Zenefits could provide a more useful service, offer it to companies for free, and have a really successful business model. A win for everyone. Well, except traditional insurance brokers who found it more difficult to compete.

And thus, the Utah Insurance Department, run by former insurance broker Todd Kiser, declared that Zenefits broke a bunch of rules in Utah by daring to give out its software for free. Kiser determined that this violated rules against "inducements" or "rebates." This was from the ruling against Zenefits last year:

Zenefits' providing free software use of its electronic platform and dashboard violates Utah's inducement and indirect rebate insurance laws. By Zenefits offering clients the free use of its electronic platform and dashboard, by which employers can control and coordinate payroll functions and manage tax-related elections; generate tax forms; access FSA, HSA, and accounts; and administer 401k retirement savings plans and stock options; Zenefits has created a significant free inducement for clients to purchase insurance products through Zenefits. This software use is neither part of the insurance contract nor directly related to the insurance contract. Also, Zenefits connecting of the various HR benefits and insurance together creates advantages for customers to have a single internet access site to manage all HR and insurance needs; however, again, because Zenefits does all of this for free, it creates an violating inducement and indirect rebate for clients to purchase insurance through Zenefits.

Thankfully, Utah policymakers appeared to realize fairly quickly just how backwards and anti-innovation this made the state appear. A bill -- HB 141 -- was quickly produced, modifying the state insurance code to make it clear that software like Zenefits was not considered an inducement or rebate. The bill overwhelmingly passed out of both legislative houses. And, as of this morning, Utah's governor Gary Herbert signed the bill allowing Zenefits to operate freely in Utah once again.

It's good that the state reacted quickly to make this possible, but it still seems ridiculous that it had to get to this stage in the first place. Innovation shouldn't be dependent on incumbents not getting upset and/or having to convince an entire legislative body and executive branch to change the rules just to let you provide a better service that people like.

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