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Should Zenefits be worried? Payroll upstart takes on employee benefits

Another day, another startup dedicated to the cause of disrupting how small businesses manage employee benefits, particularly health insurance. What makes this one notable: 20,000 companies from all 50 U.S. states already use its payroll processing services.

Let me be among the first to introduce you to Gusto, which has been doing business as ZenPayroll for the past four years. Clearly, its original name was too limiting for the next phase of the company’s business plan.

Over the past few months, Gusto has quietly tested health benefits and workers’ compensation products. Now, it will offer both services to existing and new accounts, starting in California. (Workers’ comp is already available nationally.)

That shift will put the San Francisco-based company in head-to-head competition with Zenefits, the powerful online health insurance broker. The rivalry becomes even more intriguing in the context of a BuzzFeed report this week suggesting that Zenefits may be preparing its own payroll services.

Traditionally, the two startups have been partners: Zenefits uses payroll data from the likes of ADP and ZenPayroll to manage its plans, but wants to reduce that dependency. That’s a rational strategy given pending litigation with ADP, which has sued for defamation (the next hearing is Sept. 24.) Zenefits has no official comment on its plans for a payroll processing service.

Gusto co-founder and CEO Josh Reeves said his 275-person company began planning its expansion beyond payroll shortly after it was founded. An early indicator emerged in late July, when the company disclosed plans to hire up to 1,000 people in Colorado. Presentations for its seed funding even included ideas for tax services, health insurance, retirement plans, and other benefits, he added.

“Today, people are treated like ID numbers and transactions. They are not empowered to be treated like people. We want to put humans at the center,” Reeves said.

So far, Gusto has raised approximately $86.1 million, including a massive $60 million round from Google Capital last April. As a side note, Google Capital just put $32.5 million into another disruptive insurance startup, Oscar Health.

Entrepreneur Tom Sheahan, founder and CEO of messaging service company Red Oxygen, said Gusto “took all the hard stuff off my hands” by dramatically reducing the paperwork associated with benefits administration.

Gusto will find itself competing with a well-funded, aggressive rival. As of late June, Zenefits claimed more than 10,000 accounts. Last year, it generated around $20 million in revenue and as of May its valuation was around $4.5 billion. CEO Parker Conrad told Fortune sales could quintuple this year.

There are also plenty of other companies seeking a piece of the action, including those hoping to empower existing insurance brokers with cloud software, such as EaseCentral and Maxwell Health. The latter company, co-founded by brothers Vinay and Veer Gidwaney, has more than doubled its staff this year to 150 people just to keep up with growth.

“When an idea gets into your mind, there’s not much you can do to stop it,” said Veer Gidwaney, when we chatted about his company’s model in August. “If you make health and benefits work together, that’s a good thing for the health system overall.”

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