You may have seen that the Utah Insurance Department has issued a letter demanding that California-based benefit broker/technology company Zenefits cease conducting its business as-is or it will face major fines and need to return commissions earned in Utah.

Zenefits provides a free HR/benefits system to an employer in exchange for the employer naming Zenefits as its benefit broker. Zenefits claims it gives its system away to any firm and doesn’t require the benefit business, but let’s stop pretending. We all know that nothing is free.

To the best of my knowledge, 100% of Zenefits’ revenue is from receiving commissions as a benefit broker. The State of Utah says that Zenefits is engaging in rebating through this practice. I believe the state of Utah is wrong, but I also believe the other interested parties are somewhat disingenuous with their arguments. This includes 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 legalese. The Utah insurance laws allow the free distribution of a benefits enrollment system but not an HR system. 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 an HR system. It also adds some other things to the letter to Zenefits, such as it is illegal to require an upload of data before the purchase of benefits and says 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 it charges fair-market value for the system. The main issue is the free HR system. In my opinion, all other claims are secondary.

Why Utah is wrong

Here is why the state of Utah is wrong. Benefit 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 more than 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 of 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 done.

Instead, 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 its 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 cost $5 or less. This is why 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 providers 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 its next product release? They do this with an update on a weekend overnight. Do you have to send a bill to all of 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 benefit 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 benefit firm that may in some way be breaking the Utah rebating laws as currently defined.

Why employers are buying Zenefits

Here is another reason why 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 2,000 new clients in two years because of a free $5 PEPM system. You get 2,000 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 benefit broker. It would imply the benefit 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 a petition on 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 benefit 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 do so.

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. Benefit 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 benefit 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 benefit 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 benefit brokerage business? How does an HR technology vendor compete with free? They have to access the revenue source that funds free. The world will change. Let the games begin.  

Markland is president of HR Technology Advisors, LLC. Reach him at

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