We've written a few times about Zenefits
, a really interesting company that has been super innovative and creative in rapidly building a unique and useful company. In short, the company took on the market for "HR software" by building a nice web-based tool for managing HR. But that's not the interesting part: it's the business model innovation that was really smart. It gives away its software entirely for free. However it then also
acts as an insurance broker for companies, for which it takes in fees. This is kind of brilliant on a variety of levels. Currently, businesses have to go through brokers to get required insurance, and those brokers take a big cut for doing basically nothing other than connecting two companies. Zenefits realized that by building great HR software, it could give it away free, and then tack on
an insurance brokering business and basically everyone
is better off for it. Companies get free (really good) HR software plus
an insurance broker that actually adds value, rather than the typical broker.
It's a true win-win situation, which is what innovation should create.
Of course, there are some
losers and it tends to be the traditional companies who have dominated the HR and insurance brokerage spaces in the past. Zenefits ran into some problems last year when Utah sought to ban Zenefits
, arguing that it was an illegal "inducement" or "rebate." Thankfully, that was fixed
a few months ago -- but Zenefits is onto its next big battle with an incumbent entrenched interest.
Enter ADP -- the payroll giant. Even if you're unfamiliar with the company, there's a decent chance that your own payroll is handled by ADP. They are, truly, the 800lb. gorilla of the payroll space. And, apparently, the company has an issue with Zenefits. There's a lot of he said/she said involved in this dispute, but it escalated insanely quickly to the point that ADP has already sued Zenefits -- but we'll get to that. Two days ago, however, Zenefits posted a blog post, letting its customers know that ADP had begun de-activating Zenefits accounts with ADP
. Previously, many Zenefits customers who also used ADP basically allowed Zenefits access to the ADP account in order to handle payroll. This is fairly typical and there's nothing strange about this at all. Outside HR/accounting organizations are frequently given access to company payroll accounts to make it all work. Zenefits had made it easy for companies using its software to use ADP (apparently to the point of even having an ADP salesperson working out of Zenefits' offices).
According to Zenefits, ADP gave a bunch of conflicting and nonsensical reasons for cutting its customers off:
Initially, ADP claimed they had disabled our access because an unusual traffic spike on June 3-4 placed undue load on their servers. Interestingly, ADP actually started blocking clients from connecting their payroll with Zenefits about a week before this spike supposedly occurred. After we shared our traffic logs, which showed no such spike, ADP shifted its justification to “security concerns”, without a lot of detail. We’ve repeatedly asked to confer with their security team, only to be directed to their lawyers instead. Make no mistake about it: if there are indeed true threats, we want to know about them. We want to work with the ADP security team to address them, but we have yet to be given that opportunity.
In the meantime, we have reviewed our system and practices, and we’ve identified no threats to the security of our clients’ data. We take the safeguarding of our clients’ information very seriously, employing bank-level security protocols and constantly probing our systems for vulnerabilities. Our clients’ data is secure, and we believe Zenefits has best-in-class security.
Zenefits further noted that ADP started making claims about Zenefits that are either untrue or highly misleading:
ADP accuses Zenefits of “un-masking Social Security numbers.” Zenefits does not expose Social Security numbers. Any accusation to the contrary is false. ADP is also confused about how our system actually works. Typically, employees of companies that use Zenefits onboard through Zenefits. New employees enter their Social Security numbers into Zenefits, and then Zenefits enters that information into ADP. That’s one of the benefits of the Zenefits service: we set up employees in payroll for you. We do the same thing with health insurance, 401ks, commuter benefits, PTO systems, and more.
ADP is spreading a lot of fear about how Zenefits integrates with our clients’ payroll systems. But this is misleading. Zenefits accesses payroll systems when our clients create an administrative account in their payroll system for us to use. In every single case, the customer themselves set up these accounts explicitly for Zenefits to use. And this practice is quite common: ADP has for years allowed third-parties such as accountants, bookkeepers, and HR services firms to manage ADP payroll systems on behalf of their clients. The only difference is that we’ve built software to automate some of these tasks. This is a benefit to customers because it allows us to offer the service at scale for free and it also eliminates human error. Although we have automated this process, we obtain and transmit data through the same secure link, encrypting data both in transit and at rest.
Zenefits also offered to pay companies $1,000 to switch to Intuit's competing payroll product and asked people to sign a Change.org petition
. The story started to spread around the startup world...
... and then things got even weirder.
Zenefits CEO Parker Conrad claims that ADP's CEO Carlos Rodriguez called him over the weekend
threatening to sue him. According to comments to Business Insider:
"He called me on on my cell phone Saturday night. It was like a Dirty Harry conversation," Conrad told us. "I’ve never been sued before, it's pretty scary. We really thought about this. We took those threats seriously."
Conrad remembers, "He closed the conversation by saying 'You're going to hear from our lawyers about this and you're really going to hear from us on Monday."
Monday would be the day before
Zenefits put out its public blog post. ADP told BI that the phone call did happen but that "it didn't start out hostile." Instead, the company claims: "Rodriguez had 'made a good faith offer to properly partner' with Zenefits." That doesn't make much sense. Again, there's no direct need for the two companies to partner. Obviously, if both of them to voluntarily agree to a partnership, that could make sense -- but it seems clear from the context that the offer was "take our terms or we cut you off." And this is even though there is no legitimate reason for ADP to cut off Zenefits.
And... from there, things escalated even further. By Wednesday ADP had actually sued Zenefits
for defamation, trademark violations and unfair competition. For reasons that make no sense to me, no one seems to be posting the actual lawsuit, but you can see it right here
The lawsuit, frankly, is a bunch of weak sauce. It focuses on the fact that Zenefits (accurately) told companies that it could work with ADP -- which is a true
statement. ADP claims that because Zenefits hadn't officially "integrated" with ADP that this is not true. But that's meaningless. Again, tons of companies allow third parties to access and run their payroll accounts. Hell, we've done exactly that for years -- including with ADP, who handles some of our own payroll. And the bookkeeping/accounting service that we use doesn't have some big "integration" with our payroll providers. They just have a login.
The lawsuit also repeats the claims about traffic "spikes" and "security" concerns, that don't hold up under much scrutiny.
The "defamation" claims are ridiculously weak as well. Here are the first three:
The June 5 letter falsely stated to clients that ADP took the protective
measures to block Zenefits’ automated scraping of data from ADP RUN to protect the continuing
service “without your permission.” This statement was false, as ADP’s agreements with its
customers expressly give ADP the right to take such protective measures to protect continuity of
service and sensitive employee data.
The June 5 letter falsely claimed that ADP systematically deactivated
Zenefits’ admin user access to ADP’s RUN payroll system because “ADP believes it can one
day build software to compete with Zenefits, and in the meantime they would like to do anything
they can to impede Zenefits.” No factual basis exists for this claim.
The June 5 letter also falsely dismissed ADP’s security reasons as “clearly
not true,” implying that ADP lied about the basis for its actions as pretext for, as Conrad
characterized, ADP’s “unethical” behavior. These statements are false, since ADP’s statement
about security concerns in the communication that ADP sent to clients who gave Zenefits admin
user access was not related to the specific protective measure that ADP took on June 4, 2015.
Indeed, nothing in ADP’s June 5 client communication indicated that ADP would completely
block the Zenefits admin user access. In fact, ADP took the preventive measures to protect all of
ADP’s RUN clients from Zenefits’ careless and unauthorized automated processes by which
millions of data requests flooded ADP’s systems and potentially put at risk the continuity of the
operation of ADP’s system.
There certainly may be disagreements about the nature of the discussion and what has happened, but to argue that any of these three claims reaches the level of "defamation" is laughable. With the first one, in context, it's quite clear what Zenefits meant: which is that ADP didn't ask these customers if they wanted to be cut off. The next two are clearly statements of opinion or general hyperbole. It's hard to see how they raise to the level of defamation at all.
Also, on that second point -- about whether or not ADP was building a competitor to Zenefits -- things got even stranger yesterday. Because just hours after the lawsuit was filed, Zenefits posted a second blog post showing an email from an ADP salesperson
to a Zenefits customer, directly pitching a Zenefits competitor:
ADP now claims that the person who sent that email was "mistaken" and that there is no "Opum" offering, but rather was pushing a different third party platform:
With respect to “Opum,” in responding to a direct client inquiry, the sales associate confused the name with Optum Insight, which is a third party platform from United Health Group that we have integrated into our current offering and improves our ability to support benefits enrollment for our clients. This is a core service ADP has offered clients for many years, and is a service that we charge for
Even if that's true, the salesperson claims that it's "free." So, at the very least, ADP has a problem with its sales people making totally false promises to customers. Either way, it would be nice to see the "screen shots" that were supposedly included in the email, as that would clarify things.
As things kept escalating, ADP responded with a PDF
* claiming to explain "the facts" behind the situation, but which just repeats the same claims that were made earlier and are in the lawsuit.
It's pretty clear what's happening here: Zenefits figured out a way to "integrate" with ADP without coming to an agreement with ADP first. And, yes, lots of 3rd parties get access to ADP accounts, but Zenefits is bigger than most of those. ADP tried to come to some sort of agreement with Zenefits to make the integration "official" -- which likely means getting Zenefits to cough up some cash to ADP -- and Zenefits declined. ADP then decided to throw its weight around, with claims about traffic spikes and security concerns, which are dubious, at best. Zenefits fought back the way many internet-era companies do -- by going public about it. And ADP fought back by doing what many old school companies do -- by going legal about it.
Honestly, much of this seems like a straight up culture clash between old style giants and new upstarts. It wouldn't be surprising to see them come to a settlement before this actually goes anywhere in court, because it really looks like both sides may have overreacted -- with ADP massively overreacting and perhaps Zenefits marginally overreacting in response. The legal claims from ADP seem incredibly weak, and ADP and its lawyers have to know that. And so far, ADP is clearly losing the PR battle as well. Hopefully the company isn't so stubborn that it can't realize this fact.
Zenefits is providing a useful service in an innovative way. And tons of small businesses are using it -- because it works. And none of them seem to be complaining about the way Zenefits works with ADP -- they like it. ADP should get with the program, whether or not it's actually trying to build a competing service.
* It seems worth noting that the young internet upstart company is using blog posts and Change.org petitions to make its case, while the old school mega-giant corporation is using PDFs and lawsuits...