Zenefits, the cloud-based, free online HR software provider, has just been dealt another blow by regulators — this time directly to their business model.
Zenefits’ basic business model of distributes HR software for free to insurance customers. But after a two-year investigation, Washington State Insurance Commissioner Mike Kreidler ordered Zenefits to cease the free distribution of its employee benefits software, arguing that the tactic violates Washington state insurance law against inducements.
Washington State’s incumbent law prevents providers from undermining competition with extreme incentives.
“The inducement law in Washington is clear,” Kreidler said. “Everyone has to play by the same rules.”
With its free software offer, Zenefits provided premium features to clients for a paid commission. Accessing these premium features required clients to designate Zenefits as their company’s insurance broker of record — and Zenefits collected the commission.
Zenefits has reportedly agreed to charge $5 a month per user to Washington State businesses for the software and has until January 1, 2017, to implement it.
Zenefits General Counsel Josh Stein wrote in a letter to customers,”These anti-rebating statutes are designed to protect consumers from discriminatory pricing. Unfortunately, the Washington commissioner seeks to use a consumer protection statute to raise prices for Washington consumers, a counterintuitive decision that we disagree with.”
Kreidler’s office reportedly fined Zenefits $100,000 in October 2016 for selling insurance without proper licensing. California also recently announced it had levied a $7 million fine on Zenefits for the same offense.
It is unclear whether other U.S. states will follow Washington’s example.