“Business-friendly” Utah Unfriending New Startup

Governor Herbert declared November 29th as “Small Business Saturday.” This was a well needed reprieve from the anti-business Thursday just one week prior when the Utah Insurance Department attempted to shut down online HR startup Zenefits, or the previous anti-business Tuesday when the Salt Lake City Council decided to impose unnecessary regulations on ridesharing apps Uber and Lyft. When it comes to creating a business-friendly regulatory environment in Utah, government officials know how to talk, but do they know how to walk?

We applaud the Governor for his recent work to reduce administrative regulations on business but are left to wonder, in light of recent events, if the momentum is beginning to sputter.

In 2013, a San Francisco startup, Thumbtack, surveyed 12,000 small business owners around the country to find out which states provided the best environment for business. They found that Utah was the most business friendly state in the nation and subsequently decided to locate their customer support operation here where they are now growing rapidly. Utah received an A in the regulatory category in the 2013 survey and improved to an A+ in 2014, indicating low regulatory burdens on small business in Utah. Utah has also ranked as the number one state for business for three years in a row by Pollina Corporate Real Estate and tops the list in a number of other rankings.

Thumbtack economist Jon Lieber said that “thousands of small business owners across the country told us that the keys to a pro-growth environment are ease of compliance with tax and regulatory systems and helpful training programs.” Perhaps a locksmith is needed—the existence of the keys to a pro-growth environment in Utah needs to be re-evaluated. While significant progress has been made in reducing regulation on businesses, more can still be done. Zenefits is a prime example of where a regulatory system, and the decisions of its bureaucrats, is hampering growth.

Zenefits is an innovative startup that offers free access to their online human resources and benefits management software to small businesses. They make money when their client businesses choose insurance benefits for their employees through Zenefits as a broker. However, not all clients use them as an insurance broker and their software is still free to use for all. In Utah, the Insurance Department’s “Market Conduct Division” recently ruled that the free software is a “rebate” and violates state statute governing the sale of insurance.

It is illegal, according to Utah law, for a broker to induce a client business to purchase insurance through them via a bonus, rebate, or kickback. The Insurance Department’s ruling argues that free access to the Zenefits software is such a kickback. This ruling is in contrast to other states with similar laws, such as Texas, that have not found Zenefits’s unique model illegal. The application of the rule in this way is a short-sighted attempt to provide economic protectionism for current brokers that are unlikely to survive in open competition with Zenefits.

Just as Lyft and Uber are disruptive innovations in the taxi transportation market, Zenefits is a disruptive innovator in the HR and insurance market. Instead of allowing the market to reward innovation by allowing competition to drive better value for customers, government regulators in Utah have opted instead to regulate innovative competition to the detriment of both entrepreneurs and consumers. Zenefits now faces penalties up to $97,000 if it does not cease its current business model in Utah.

On their website, the Utah Insurance Department states that their mission is to “foster a healthy insurance market by promoting fair and reasonable practices to ensure available, affordable, and reliable insurance products and services.” As the law is currently written, discretion has been given to the Insurance Department with which it has broadly interpreted the statute, in an unfair and unreasonable manner, to restrain trade.

The Utah Constitution is clear in Article XII, Section 20:

It is the policy of the state of Utah that a free market system shall govern trade and commerce in this state to promote the dispersion of economic and political power and the general welfare of all the people. Each contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce is prohibited. Except as otherwise provided by statute, it is also prohibited for any person to monopolize, attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of trade or commerce.

It is not the role of the government to promote one type of business model over another merely because they do not fully understand or appreciate new innovations. The law, as has been interpreted by the Insurance Department, represents a restraint of trade and is, in theory, prohibited by the Utah Constitution.

We applaud the Governor for responding to the petition and the concerns from those opposed to unfair regulatory protectionism, but we question why the Insurance Department interpreted the statute so broadly to begin with. This is the risk of overregulation—placing interpretation and enforcement of rules and laws that can shut down innovative businesses into the discretionary hands of unelected bureaucrats.

If Utah wants to remain a business-friendly state and a competitive place for tech startups to move to, it needs to correct this—and quickly. To that end, and with the legislative session just weeks away, Representative John Knotwell has opened a bill file to explore legislative reform to this insurance issue. While this law should be tightened up, the process cannot end there; protectionism and overregulation exist in more areas than just insurance.

Many might not be aware that Utah was ranked as the 12th most extensively and onerously licensed state for occupations. The state also bans energy power purchase agreements for residential customers who might want to take advantage of innovative rooftop solar arrangements with companies like Utah-based Vivint Solar. Utah also bans the sale of cars at dealerships for more than six days in a row with protectionist Sunday blue laws. Salt Lake City has imposed regulations on new innovative app-based ridesharing companies like Lyft and Uber. Counties across Utah are also jumping on board the regulation train to protect big tobacco from the innovative competition of electronic cigarettes. If you thought crony capitalism or overregulation didn’t exist in Utah, sadly, you would be wrong.

It’s time that Utah’s bureaucrats mean what they say when they talk about creating a business-friendly environment. Do they mean friendly to existing businesses only, or to innovative and disruptive startups as well?