Sometimes cronyism in the business world takes the form of a company receiving special government favors and subsidies—the now-infamous Solyndra, for example—but sometimes it takes the form of being singled out for punitive action instead. The software company Zenefits seems to have ended up in just such a scenario in Utah, where, along among the 50 states, it has been forbidden from operating.
Zenefits offers free human resources software to small businesses and nonprofits, while offering optional insurance brokerage services. If a company decides to buy insurance through them, they make a commission. If not, their clients are free to continue using Zenefits’ services free of charge. According to the company, about 80 percent of their clients are currently in the free-of-charge category.
This model is, not surprisingly, a potential competitive threat to other firms in the HR and insurance businesses, and insurance regulators have decided that offering free services in addition to being an insurance broker violates the Beehive State’s “anti-rebating” statute (see this explanation by Sarah Buhr of Tech Crunch). So despite being a legit operation everywhere else in the country, they are not welcome in Utah.
I was happy to see Zenefits CEO Parker Conrad stand up to this ruling in an op-ed in the Salt Lake Tribune recently, titled “My company is disruptive, but it shouldn’t be banned in Utah.” He emphasizes that recent innovation in the insurance industry has made regulations like Utah’s increasingly obsolete and anti-consumer, while also comparing the hostility to his company to the backlash that has greeted the arrival of Uber, Airbnb, and Tesla Motors dealerships across the country.
Fortunately, things seem to be looking up for the company. Fellow entrepreneurs and investors in Utah were quick to ridicule the decision, greeting it with comments like "Regulators, get out of (the) way. Ridiculous. Embarrassing," and "Last week we kicked Uber and Lyft out of Utah. This week Zenefits. The good (old) boy network is alive and well in the Beehive State." Better yet, the Utah legislature is now considering a bill that would clarify the language of Utah’s insurance regulation to allow businesses like Zenefits to operate in the state. Utah’s governor and lieutenant governor have also signaled support for the reform. It could be only a matter of days before Utah’s small businesses get a chance to check out Zenefits’ offerings for themselves.