Drew Clark: Is Utah friendly to disruptive innovation? Zenefits poses a test
SALT LAKE CITY — In the abstract, innovation is good. But in practical terms, innovation always harms some concrete group of incumbent businesses. They do what they can to fight innovation.
This appears to be the case with Zenefits, the latest technology company in a tussle with incumbents. Worse, it is Utah's state government targeting this innovator.
San Francisco-based Zenefits offers online human resources services to small businesses free of charge. Zenefits makes money on commissions if these small businesses then choose to purchase health or other insurance through Zenefits.
In other words, for small businesses that want it, Zenefits becomes their new insurance broker. Guess who doesn't like that? Current insurance brokers!
On Nov. 20, Utah Insurance Commissioner Todd Kiser, a former legislator and former insurance broker, told Zenefits that its free business model was a no-go in Utah: "Zenefits' offering of up-front, free-to-all, HR benefits violates Utah's insurance inducement and indirect rebating laws," his office wrote in a letter to the company.
That action knocked many of Utah's techies off balance. "We're kicking Zenefits out of (Utah because it's) giving away free services?" tweeted Josh James, CEO of Utah Valley Web analytics firm Domo. "Regulators, get out of (the) way. Ridiculous. Embarrassing."
Salt Lake City's Bryce Roberts, a venture capitalist, tweeted, "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."
Beehive Startups, a website cataloging the controversy, questioned how Zenefits "is offering rebates when its service is free to all users — whether they decide to buy insurance through Zenefits or not." With 80 percent of Zenefits' users not purchasing insurance, reporter Clint Betts wrote, "Can something be a rebate if it's offered on equal terms to everyone?"
This tempest in the tech community did attract the attention of Gov. Gary Herbert. On Wednesday, he released a statement touting Utah's tech-friendly reputation and said, "We also pride ourselves on our willingness to embrace innovation and have proactively eliminated outdated and unnecessary regulations. While we have to uphold the law on the books, there are times our laws must adapt to changes in the marketplace. With the legislative session just a few weeks away, I am willing to work with all stakeholders to ensure Utah has the right policy to embrace innovative ideas while protecting consumers."
Lt. Gov. Spencer Cox joined the pile-up. He tweeted Wednesday night that Herbert was "very concerned" about the Insurance Commission's stance on Zenefits. It was "obvious that [the] law never anticipated this model," and said that "we have been assured that final (administrative) decision will not be made until after legislative session and opportunity to update law."
Back-peddling by the governor's office didn't satisfy Zenefits. It is poised to use negative publicity about the Insurance Commission's decision to tell the world about its pro-consumer business model — at Utah’s expense.
"What's unfair about Zenefits?" company co-founder Parker Conrad said in a blog post. "I assume it's that traditional brokers don't have the same online capabilities that we have; and are losing clients to us. I know that's painful for those brokers, but in a free market, competition — not regulatory protection — is the right answer."
Conrad said the company wasn't backing down or buckling under. It isn't "fair to Utah businesses to have to pay for a service that is free in 49 other states." And then: "The irony here is that Utah proudly touts itself as a great place for tech businesses, and Gov. Herbert is working hard to attract tech companies to 'Silicon Slopes.' But Utah can't have it both ways — you can't say you're open to innovation and technology — but only when it doesn't disrupt existing businesses or tread on the toes of entrenched interest groups."
Meanwhile, over at the Insurance Commission, Kiser said that Utah was obligated to follow its law, and that "Utah probably has the strictest rebate inducement laws in the nation." He had no choice but to declare the company in violation and propose a penalty of up to $97,000.
Still, Kiser told me, "we have not taken their license away." The commission has granted the company until Dec. 15 to formally reply to its investigative order. And Kiser said he told Herbert that the administrative process before any fine was put in place wouldn't happen until "well into the 2nd quarter of next year." Representatives from at least three other insurance brokerages urged Kiser not to go after Zenefits, he said.
But Kiser concluded: “It is not my stick in the ground — it is the Legislature’s.”
It sounds like the Utah Legislature has just been handed a must-do item for next session: Change Utah's antiquated insurance rebate laws without letting incumbents get in the way.
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