Zenefits-ADP Settlement Points to Changing Benefit Services

Consider issues such as data security, data ownership and scalability with any HR solution

By Dinah Wisenberg Brin Nov 10, 2015

The recently resolved legal battle between business-outsourcing giant ADP and startup HR technology firm Zenefits points to a changing, more competitive market for benefits and payroll administration.

San Francisco-based Zenefits, founded in 2013 and flush with more than $580 million from venture investors, is repeatedly referred to in business media as an HR “disruptor.”

Through its software platform, Zenefits offers small- and medium-sized employers a portfolio of free HR services, including health insurance and other benefits enrollment and administration, along with payroll, onboarding and compliance automation, among others.

Because the company is paid by the benefits providers on its system, Zenefits says it can offer at no charge to employers a range of services for which other HR outsourcers and software providers usually charge. It also offers some paid options.

“They provide the platform for free along with going around the traditional insurance brokers—in other words, they make their money from the transactions with the insurance companies. In all industries, we’ve seen the role of the broker or middleman lose ground to technologies that provide direct access to the consumers— auto insurance, real estate, travel agencies, etcetera,” said Stacey Harris, vice president for research and analytics at technology consulting firm Sierra-Cedar, based in Alpharetta, Ga.

“In some industries, the brokerage model figured out how to leverage the technologies and government regulations enough to maintain their hold on the market while leaving space for the technology firms”—for example, real estate brokers are coexisting with home-listing sites such as Zillow. “In other cases, like travel agencies, we simply saw most of them disappear,” Harris told SHRM Online.

Suit and Settlement

While Zenefits positions itself as a competitor to traditional benefits brokers, its arrival led to a legal battle with long-established business services outsourcing behemoth ADP, a well-known payroll vendor.

Earlier this year, ADP, citing security concerns, cut off Zenefits’ access to payroll data that the startup needed to automate payroll administration for the companies’ shared customers. In response, Zenefits co-founder and CEO Parker Conrad asserted that ADP was trying to spread “fear, uncertainty and doubt” about a “new, innovative company,” and that it aimed to develop software to compete with Zenefits’ offerings.

ADP quickly filed suit against Zenefits and Conrad, claiming defamation.

Months later, in October, a settlement was reached in which ADP dropped the defamation suit, saying it knows of no security problems with Zenefits’ software, while Zenefits stated it has no cause to believe that ADP has acted unethically, as the online news site Tech Crunch reported.

Shaking Things Up

“The competition and lawsuit between ADP and Zenefits is another proof point that ADP and other legacy HR companies are in trouble. The HR, benefits and payroll space is in desperate need of updating and modernizing, which was very apparent to me when I opened a U.S. location” for his Australia-founded business, commented Tom Sheahan, founder and CEO of Red Oxygen, a provider of enterprise messaging software and services.

Red Oxygen uses Gusto (formerly ZenPayroll) rather than either ADP or Zenefits, although Sheahan said he looked closely at Zenefits.

“As a small business owner, I’m not very interested in business politics, unicorn status or any of the drama. I just care that my payroll and benefit systems work—that they’re easy to use, that actual people are available when I need help and that my employees are paid on time without any mistakes,” he said.

Sheahan said he chose Gusto “because they offer an intuitive product, treated me with respect and personally helped me navigate the complex process of picking a health plan.” In addition, he said, Gusto owns the payroll data, which can prevent errors, security issues and lack of coverage.

New Players

R.J. Irving, co-founder of employee financial wellness platform Melius, noted that innovative startups—Gusto, Namely, BambooHR, Nimble—are emerging and “driving change across the HRIS [human resource information system] landscape.”

“Competition between platforms is great news for employers. It means smarter, easier solutions to streamline a myriad of HR tasks. This frees up HR departments to be proactive, strategic leaders of organizations as opposed to reactive task managers,” he said.


“Competition between platforms is

great news for employers.”


David Eichner, CEO of technology-focused CPA firm ICAN Software Corp., uses Zenefits for his business, in combination with Gusto, and recommends it to clients.

“It works with various payroll processors so it gives flexibility to companies to choose the payroll provider that works best for them,” whether it’s Gusto, Intuit Payroll, PayChex or ADP, Eichner said, noting that most Zenefits services are free.

“Competition breeds innovation,” added Joey Price, CEO of Jumpstart: HR, an HR outsource firm for small business. “You will continue to see greater enhancements to [user experience and user interface] and hopefully this comes from feedback from HR professionals and employees.”

“You'll still need a qualified HR professional running the show. I often use the analogy that software companies are like treadmills: If you have a goal, you still need to know how to use it,” Price continued. “Software companies don't inherently resolve all of your workplace HR issues but [they] can make administration easier. If you're buying these software apps as a way to augment staff, you can leave yourself at risk to many workplace management, compliance and culture issues.”

Sierra-Cedar’s Harris noted that platforms such as Namely and Zuman are growing their direct offerings by partnering with insurance organizations, although “Zenefits was the first to make big noise about it. The bigger disruption is the free platform, and the focus on automating almost every touch point to make the free platform scalable.”

Employers need to consider issues such as data security, data ownership and scalability with any HR solution they choose, according to Harris, who wasn’t commenting specifically on the security of Zenefits, Namely or Zuman. “It is one of the concerns these new solutions need to address with the market as a whole.”

Complex Requirements

“As organizations grow in size, complexity or even global scale, can these solutions scale with the organizations? … Our data show that in today’s complex, virtual work environments we are seeing organizations as small as 50 employees that often have complex HR requirements,” said Harris.

“Finally, who owns the data and how easy is it to move it? The whole point of the cloud model is easy in—and generally the thought was easy out, but we find that many organizations struggle leaving a cloud solution because the data ownership and transfer protocols haven’t been set up early in the relationship. With free or low-cost services, how does this change?” Harris asked.

Rhonda Marcucci, founder and partner of HR tech consulting firm Gruppo Marcucci Research Marketplace, which serves benefits brokers and consultants and their clients, sees a limited need for Zenefits’ offerings.

“I absolutely believe there is a place for their model in the market, but it’s a very, very narrow market. It’s a less than 50, potentially less than 100 [employee] group,” said Marcucci, who consults with ADP on a project basis and doesn’t see Zenefits as competition for ADP. The free software model has been in the market since 1998, she said, but Zenefits has “done a great job marketing it.”

In the last two years, 10 Zenefits-like tech companies have entered the market, she said, noting that Zenefits has “woken up the broker community” to a client technology need. “They came in and solved clients’ problems that weren’t being solved by the brokers.”

Marcucci, however, questioned the long-term viability of Zenefits’ business model, and said employers need broker consultants more than ever.

Dinah Wisenberg Brin is a freelance reporter based in Philadelphia. She previously worked as a staff reporter for The Associated Press, Dow Jones Newswires and other news organizations.​

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