Payroll services giant ADP filed a defamation lawsuit against Zenefits Tuesday, heating up a quarrel between the companies that ignited when ADP disabled Zenefits’ access to its systems for shared clients.

ADP says the company on June 4 disabled Zenefits’ access due to data security concerns and an alarming and “excessive and unnecessary demand on ADP’s servers.” Zenefits disputes the claim, saying it has found no security threats, nor any data traffic spikes. The HR tech firm calls the move by ADP an anti-competitive fear tactic.

“ADP’s business model is to offer a bundled solution to customers, and evidently they don’t want small businesses using Zenefits for the HR and benefits portion of their business. Instead, we believe ADP is using a tried and true tactic in enterprise software: Whenever a new, innovative company enters a market, the incumbent tries to spread fear, uncertainty and doubt about the new market entrant. This tactic is so common it even has an acronym — FUD (fear, uncertainty, & doubt),” Zenefits CEO and co-founder Parker Conrad said in a June 9 blog post on the company’s website.

Also see: 'Why Zenefits isn't anti-broker.'

He added, “While it is always impossible to make inferences about anyone’s motives with total certainty, we and our shared customers have been treated in such a way that makes it seem like ADP is willing to make life harder for its small business customers in order to get a leg up on Zenefits. That may be good for a threatened incumbent, but it’s certainly not good for the small businesses ADP is burdening with more admin work.”

ADP filed suit in the U.S. District Court of San Francisco accusing Zenefits and Conrad of launching “a manipulative and malicious public relations campaign, ignoring its own conduct, to defame ADP and drive away ADP clients.”

Zenefits also defamed ADP when it alleged the payroll giant “intentionally sought to cause harm to ADP’s clients solely to gain unfair competitive advantage against Zenefits,” the lawsuit claims.

A spokesman for ADP said he couldn’t comment on pending litigation.

In response to Zenefits’ claims, however, ADP issued a fact sheet saying, amongst other things, “We do not block our customers from using third-party vendors. To the contrary, there are many third parties that cooperate with us in a way that allows our systems to work effectively for our mutual clients in concert with those of third parties and provide maximum security of our clients’ data. Zenefits never contacted ADP to work out such cooperation.”

ADP says, "We have never integrated with Zenefits in any sense and have never authorized their method of extracting data from our RUN payroll system. They gained access to our systems by convincing clients to give them administrative access to our platform. Despite having many legitimate ways to integrate with ADP properly, Zenefits chose an unsecure and indirect approach.”

Conrad disagrees and says Zenefits uses the same secure link to ADP’s system that the payroll company has designated for all third-party administrators — such as bookkeepers and accountants — to manage payroll on a company’s behalf.

“In fact, we have been using this process for two years, without incident,” says Conrad. “During that time, although ADP and Zenefits competed with respect to insurance services, we cooperated with respect to payroll — a service Zenefits does not directly provide. Now, ADP seems intent on changing that relationship.”

Competing product

“There is an important question here about ADP’s motivations for blocking us,” says Conrad. “We believe that ADP, in an attempt to compete with us, sees us as a startup that poses an existential threat to their company. Zenefits is a system marker for employee information and, if Zenefits is successful, ADP is not the center of the universe anymore.”

Although ADP claimed they had disabled Zenefits’ access because an unusual traffic spike on June 3-4 placed undue load on their servers, Conrad says ADP actually started blocking clients from connecting their payroll with Zenefits about a week before this spike supposedly occurred.

Also see: 'Zenefits releases 'biggest evolution' in product since company launch.'

“After we shared our traffic logs, which showed no such spike, ADP shifted its justification to ‘security concerns,’ without a lot of detail,” he says. “We’ve repeatedly asked to confer with their security team, only to be directed to their lawyers instead.”

In fact, Conrad tells EBA that during a June 6 phone conversation with ADP President and CEO Carlos Rodriguez, Rodriguez denied requests to have both companies’ teams work together to evaluate and solve any data or security problems and instead told Conrad, “’You will be hearing from our lawyers soon and you will really be hearing from our company on Monday.’”

The lawsuit was filed Tuesday, and Conrad says that same day he heard from several Zenefits clients that ADP sales reps were contacting them to inform them about a new ADP product offering that will compete with Zenefits, a full service integrated online payroll and benefits solution called “Opum.”

Zenefits posted a PDF of one of the e-mails from an ADP sales rep on its website. Conrad says it was sent within an hour of the lawsuit being filed and calls it “the smoking gun.”

“The central charge of the suit was defamation, specifically that Zenefits defamed ADP by claiming that ADP’s actions to block Zenefits’ users were motivated by competitive reasons. ADP took issue with our statement that we believed ADP was developing a competing product to Zenefits,” he says. “In ADP’s filing with the court, their lawyers wrote, ‘No factual basis exists for this claim.’”

“It’s totally legitimate for ADP to launch a product that competes with us,” Conrad concedes. “But it does indicate that everything they’ve been saying about us and their reasons for deactivating us, in my view is bull s***. And it’s unfair that they’re calling into question our security and suing us. And it’s really all just in service of this forthcoming product.”

Also see: 'Where is Zenefits headed?'

Dick Wolfe, senior director of corporate communication for ADP, says the e-mail showcased on Zenefits’ website was a sales rep’s response to a direct client inquiry.

“The sales associate confused the name with OptumInsight, which is a third-party platform from UnitedHealth Group that we have integrated into our current offering and improves our ability to support benefits enrollment for our clients. This is a core service ADP has offered clients for many years, and is a service that we charge for,” he says.

Conrad says he’s heard from several Zenefits clients, however, about messages from ADP sales reps touting a forthcoming product that competes with Zenefits.

Client impact

Conrad says Zenefits clients are frustrated with the disabling of Zenefits’ access to ADP’s payroll service system and some clients say they will drop ADP. Likewise, he says, Zenefits may lose a few customers, too, before the row is worked out.

He says Zenefits is helping current clients with a workaround to help them manually enter the data that Zenefits no longer has access to do.

Zenefits is also helping some clients switch to new payroll service providers.

As far as ADP, he says, “If there are indeed true threats, we want to know about them. We want to work with the ADP security team to address them, but we have yet to be given that opportunity.”

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