In Wake of Data Access Dispute, Startup Zenefits Is Sued by Payroll Company ADP

A spat between the payroll services giant ADP and the cloud benefits software startup Zenefits has led to a federal lawsuit filed today in California, and as many as 850 small companies that are customers of both are being caught in the crossfire.

The squabble dates back to late last month, and pits Zenefits — a startup worth $4.5 billion backed by significant investments from the venture capital firm Andreessen Horowitz — against ADP, a 66-year-old company that is the dominant player in the business of helping companies manage their payroll and numerous other personnel-related matters.

Zenefits uses a cloud-based software to help small companies manage their health care benefits programs, time and attendance tracking, flexible spending accounts and other benefits. The chief way it makes its money is by acting as an insurance broker. Companies using the software have the option of buying their employee health insurance through Zenefits, which resells policies from health insurance companies and books a percentage of revenue from the sale.

The dispute emerged when ADP started cutting off some of its customers from using Zenefits to access data tied up within its services. The two companies share some 850 customers that use both services. The two have a history of competing on benefits services, but they work together because Zenefits doesn’t do payroll services. Zenefits has worked not only with ADP, but also with Paychex, Zenpayroll and Intuit, all of which help companies process their paychecks.

There have been a flurry of dueling statements in the last 24 hours or so, but there’s a few main points. The way ADP tells it, it cut off Zenefits’ customer access to its payroll data after it saw a spike in traffic that it thought looked a bit like a denial of service attack during the night and early morning of June 3-4.

Zenefits says in a blog post by CEO Parker Conrad that its customers started experiencing these blockages a week before that.

In a statement to Re/code, ADP said that it never authorized Zenefits’ access to the data in the first place, and was concerned about it accessing data like Social Security numbers and employee banking information “in a manner that does not comply with ADP’s high standards for data security. … Zenefits chose not to engage ADP to find a safe and effective solution, and instead deployed automated systems to circumvent ADP’s safeguards, forcing ADP to take immediate action to protect clients.”

In a rebuttal statement, Zenefits says it never accessed ADP’s data in a manner that’s different from how any other third party accesses it, and that the cut-off has more to do with worries about a competitive threat that Zenefits represents.

The legal filing, made today in the U.S. District Court in San Francisco, says that’s not true, and that ADP has no plans to offer a software service that competes with Zenefits by integrating payroll and benefits into a single offering. Within hours of the lawsuit being filed, Zenefits put out a second blog post saying ADP sales reps started offering a new product called Opum that does exactly that. “ADP didn’t even wait for the ink to dry on their lawsuit before starting to sell the very product that invalidated their lawsuit’s central claim,” Zenefits wrote in the post, citing a forwarded email from a customer that is also an ADP client.

ADP says that’s a clerical error: “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.”

Below is a copy of ADP’s legal complaint. The lawsuit is going to force companies in the middle to pick a side, but the simple fact is that there’s no rule saying that ADP is obligated to allow Zenefits access to its data. The only thing Zenefits can do is direct its customers to other payroll companies like Paycheck, Zenpayroll and Intuit. Shares of ADP have risen by more than 1 percent.

This article originally appeared on Recode.net.