Zenefits’ Saga in Washington State Continues: Reviewing Officer Reverses ALJ and Finds that Provision of Free Software to General Public Constitutes Improper Rebate

by Akin Gump Strauss Hauer & Feld LLP

Akin Gump Strauss Hauer & Feld LLP

Key Points

  • Zenefits’ practice of providing free software to the general public constitutes an improper rebate under the state’s anti-rebate provisions
  • Ruling could have significant impact on brokers’ ability to provide complimentary products/services

On November 30, 2017, Washington Reviewing Officer William G. Pardee issued his much-anticipated findings of fact and conclusions of law regarding whether Zenefits’ practice of providing free software to the general public constitutes an improper rebate under the state’s anti-rebate provisions. His conclusion: it does. This is a significant step backward from the general trend, which has been to approve these arrangements because they ultimately benefit consumers.  

For a full recap of the parties’ moves and countermoves to date, see here.

For those who are crunched for time, it is sufficient to know two things:

First, most states prohibit insurance brokers from offering to pay to an insured—as an “inducement” to purchase insurance—any “rebate” or “any other valuable consideration” not expressly provided for in the insurance policy. 

Second, Zenefits’ business model was to offer to small businesses free software-as-a-service for human resources functions, such as onboarding, payroll, benefits and vacation tracking, and make money on broker fees when users of the software choose to buy insurance from it.

So the issue arose: Does the provision of free software to the general public constitute an “inducement” under state anti-inducement laws—even when access to the software is not conditioned on purchasing insurance?

The majority of states that have sounded off on this topic have found that the practice does not amount to an improper rebate. The Office of the Insurance Commissioner (OIC), however, initially reached a different conclusion. 

On November 21, 2016, the OIC and Zenefits entered into a consent order, with the OIC finding that Washington law prohibited Zenefits from “offering valuable software functions or other valuable benefits for free or at less than fair market value to the public.” As a result, Zenefits was in the odd position of being required to charge its customers for a product—its software platform—that it previously gave away for free. 

Subsequently, Zenefits challenged the consent order before Administrative Law Judge (ALJ) Lisa N.W. Dublin, and, on October 26, 2017, after conducting evidentiary hearings over a four-day period, Dublin issued her order

It was a mixed bag for Zenefits. 

On the one hand, Dublin disagreed with the OIC, stating that, “Contrary to the Consent Order entered into by the parties in November 2016 . . . [Washington law does] not prohibit Zenefits . . . from offering valuable software functions or other valuable benefits free or at less than fair market value to the public.” 

On the other hand, Dublin found that Zenefits’ provision of “Full HR Integration” to those who purchased its insurance did violate Washington’s anti-rebate laws. (As Dublin describes in her order, there are various tiers of functionality found in Zenefits’ software.) In other words, it was okay to give the general public—free of charge—the basic software package, but Zenefits ran afoul of anti-rebate laws by giving the premium, fully integrated software package to its customers. 

Some argued that Dublin’s ruling had the effect of bringing Washington more closely into line with the anti-rebating approach of other states. 

But the order issued by Pardee yesterday—in which Pardee reviewed Dublin’s findings—brings everything back full circle, once again leaving Washington as an outlier on the issue.  While Pardee agreed with Dublin that providing additional functionality in the form of full HR integration constituted a violation of anti-rebate laws, he disagreed with Dublin’s finding that providing software—free of charge—to the general public was permissible.  According to Pardee, this second conclusion was supported by the dictionary definitions of the terms “inducement” (e.g., to entice, persuade or lure) and “valuable consideration” (e.g., services). Pardee summarized both conclusions as follows:

Simply put, Zenefits, prior to issuance of the Consent Order . . . persuaded, lured, and enticed their customers in the state of Washington to name Zenefits their broker of record (BOR) by giving them a taste of the functionality of their online HR automation platform by letting them access certain free ‘core HR services’ and the employee benefits management app, which represented services or enticements in violation of [anti-rebate law]. . . . Similarly, once a customer named Zenefits as their BOR, they could then access employee benefit management services from Zenefits, with additional functionality, even though not a part of their policy, which also represented services or enticements in violation of [anti-rebate laws.]

Like the two orders before it, this ruling may not be the end of this story. If Zenefits wishes to fight, and win back some of the gains it had made after Dublin’s ruling, it has 30 days to appeal to the Superior Court. In other words, stay tuned.

Written by:

Akin Gump Strauss Hauer & Feld LLP

Akin Gump Strauss Hauer & Feld LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.