Zenefits will cease being a broker of record and transition into solely providing technology for outside firms, the company announced today.

The San Francisco-based firm’s existing book of 7,000 accounts will be transferred to OneDigital, an Atlanta-based brokerage, as Zenefits undergoes a transformation “to embracing the broker community and partnering with them in a pretty significant way,” Zenefits Chairman and CEO Jay Fulcher says.

“Zenefits has always been a tech firm that was trying to build a digital brokerage,” Fulcher explains. “Today, we want to enable traditional brokers to become digitized.”

“We think we can have much a more expansive opportunity for embracing and working with brokers versus competing with them,” Fulcher adds.

Also see: "Why OneDigital is partnering with Zenefits."

Both OneDigital and Zenefits declined to discuss financials, but the deal is being presented as a partnership and will fall in line with OneDigital’s other partner relationships where both firms share revenue.

OneDigital began talking with Zenefits about a year ago to determine if an alignment of the two companies would make sense, explains OneDigital’s Chief Growth Officer Mike Sullivan.

Initially, in addition to OneDigital, Zenefits will license its technology to five other firms the company is calling certified brokers, which they declined to name. Zenefits will then expand its offerings to any broker nationwide.

To become a certified broker, the agency must work closely with Zenefits, go through training courses, education and certification. “We have developed and built a curriculum,” Fulcher says. “We will [provide] a variety of programs focused on their customer base and helping them deliver a more technology-enabled level of service.”

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“They missed out on first-to-market status with some cutting-edge technology.”

Fulcher envisions the firm’s technology as a destination for brokerages “struggling with and evaluating trying to drive good results related to employment and health benefits, which especially SMB companies are working through.”

This is the business model Zenefits should have had from the beginning, Kevin Trokey, partner and coach at brokerage consultancy q4Intellegnece in St. Louis, says. “They missed out on first-to-market status with some cutting-edge technology.”

A checkered past
Zenefits launched in 2013, raising $82 million in funding. At its peak in 2015, it was valued at more than $4.5 billion, but the company has not been without its issues and legal challenges.

In June 2015, ADP filed a defamation lawsuit against Zenefits, heating up a quarrel between the companies that ignited when ADP disabled Zenefits’ access to its systems for shared clients. ADP filed suit in the U.S. District Court of San Francisco accusing Zenefits of launching “a manipulative and malicious public relations campaign, ignoring its own conduct, to defame ADP and drive away ADP clients.” That suit was dropped four months later.

In early February 2016, then-CEO Parker Conrad resigned from the firm, citing “inadequate” processes and regulatory compliance, with David Sacks taking the helm in an interim capacity.

In November 2016, Zenefits agreed to pay as much as $7 million over licensing violations in California. The company paid $3.5 million upfront and was to be on the hook for the rest if additional violations are found or if it fails a follow-up compliance test in 2018, the California insurance regulator noted. It was one of many settlements that year. Fines from other states in 2016 totaled about $1 million, resolving issues in 17 states for Zenefits.

As Fulcher took over in February 2017, Zenefits cut 430 jobs (45% of its workforce), the third round of staff reductions.

Despite its issues, Fulcher says one of his first tasks when he took the helm was to spend money on a marketing and branding agency to collect data from focus groups and customers to see if there was brand damage. “We discovered [there] isn’t,” he says.

According to data provided by Zenefits, 94% of employees don’t know who Zenefits is and 80% of HR buyers don’t know the firm. Of those who had heard about Zenefits, 10% had negative impressions, with 50% positive impressions and 40% neutral impressions.

However, Jack Kwicien, partner at Baltimore-based brokerage consultancy Daymark Advisors, finds that level of anonymity to be a stretch. “How does somebody function in our industry now and not know about Zenefits and their story?” he says.

But Fulcher contends, “So much of the market does not know about us. The vast majority of where we sell .. our value proposition, people are receptive to us.”

He has spent a lot of time meeting with larger well-known brokers around the country and they are receptive to working with his firm, he adds.

Despite that claim, Trokey believes Zenefits has “burned their reputation on the adviser side.”

“They have taken one black eye after another on that side of their business and all’s that left is the technology piece,” Trokey says.

Kwicien also questions if many advisers will partner with Zenefits. “[This] will be a little bit of a tough sale because benefit brokers have long memories,” he says. “ I don’t know if they want to embrace Zenefits because I’m not sure they have established enough trust," given their past licensing issues.

Fulcher says, however, brokers may have been publicly talking about the company as a competing adversary, but at the same time were privately meeting with him and wondering how to partner. “We will not change our name or rebrand the company, but [you] will see us refresh the narrative and some changes around how we position in the marketplace,” he explains.

Consulting and technology
Fulcher says exiting the broker business was a result of a “fairly comprehensive evaluation” he undertook when he joined Zenefits. One main factor in the decision was the firm’s customer base, who want to work with local brokers to “take advantage of the consultative capabilities of those brokers, but don’t want to leave the Zenefits platform.”

For Zenefits, the change was “fairly obvious,” Fulcher says, “to transition to a situation where we don’t want to be adversarial with the broker community.”

Zenefits chose to partner with OneDigital because it is a well-known brokerage and early adopter of best-in-class technology, he says.

Fulcher would not provide specifics as to what will happen with his company’s staff, other than to say they have a process to handle the licensed brokers, with some of the team going to OneDigital, but many remaining with Zenefits.

“We are still very much in the benefits business, but as a technology provider and not a broker,” he says. “Those who have broker expertise are still quite valuable to our company in terms of what they can bring to our technology.”

OneDigital’s Sullivan spent a couple of days in early September at Zenefits’ offices in Arizona to talk with the team about their future. OneDigital plans to create new jobs as a result of the partnership, Sullivan says.

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