Payroll giant ADP has declared war on upstart Zenefits, blocking 'thousands' of Zenefits customers

Two-year old human resources startup Zenefits has gotten into a very public brawl with 60-year-old human resources company, ADP.

The fight started late last week.

Zenefits offers free HR software that does everything from manage payroll to enroll people into insurance programs. (It makes its money by selling HR services, like insurance.)

It doesn't build all these services itself. It puts an easy-to-use layer on top of existing services, such as ADP's payroll, that a company already uses.

On June 4, ADP started blocking "thousands" of their joint customers from accessing their ADP payroll accounts through the Zenefits software, ADP admitted in a PDF document posted to its website.

So Zenefits sent out a mass email to the affected customers accusing ADP of blocking Zenefits for competitive reasons and of lying to customers about the situation: (Zenefits sent a copy of the email to Business Insider).

Yesterday, without your permission, ADP systematically deactivated these accounts-accounts that you set up, in your payroll system, to allow Zenefits to work on your behalf. The reason for this is that ADP believes it can one day build software to compete with Zenefits, and in the meantime they would like to do anything they can to impede Zenefits.

ADP is claiming that they are taking this action for "security" reasons-but this is clearly not true. For years, ADP has let customers add third parties-a bookkeeper or an accounting firm, for example-to their payroll system to manage payroll on a company's behalf. What Zenefits does is no different. In fact, even today, ADP will let you add a third-party administrator to your payroll system unless they have a Zenefits.com email address.

Zenefits then asked its customers to sign a Change.org petition asking ADP to stop blocking Zenefits.

ADP responded with a very public, point-by-point rebuttal of the email, in which it accused Zenefits of grabbing inappropriate amounts of data from ADPs systems and violating customers' security:

On June 4, we disabled Zenefits access to ADP's RUN small business solution due to unusual and alarming demand for data from Zenefits far out of proportion to the number of clients who have allowed them access to our system. Despite Zenefits serving less than 0.25% of the clients on our system, they had been responsible for up to 25.0% of the total user traffic (in other words, a hundred-fold times ordinary user traffic).

The Zenefits approach was not only putting excessive and unnecessary demand on ADP's servers, but it was pulling sensitive information, including unmasked Social Security numbers and employee banking information, in a manner that did not comply with ADP's standards for data security. We would have been happy to discuss a solution with Zenefits, but they never reached out to us or responded to our requests to resolve the issue. Instead, they chose to impugn our motives and integrity in a public forum.

ADP's response went so far as to compare Zenefits access to payroll with the hack attacks that happened at the IRS. (By the way, experts suspect that Chinese hackers were responsible for the the IRS attack ... nothing to do with any American company.)

On Tuesday, Zenefits posted on its blog a point-by-point response, basically accusing ADP of lying about the alleged amount of data that Zenefits is pulling and about the security risks. 

ADP PR sent us this additional comment, noting that its beef was with Zenefits, not the customers, who can still access their accounts outside of the Zenefits software.

"Our security actions do not affect the ability of any ADP client - including those that use Zenefits - to access or make necessary changes to their payroll data in ADP's secure systems."

Zenefits may have a point: Old-school companies are increasingly looking at tech upstarts with wary eyes, especially now that Uber has upturned the taxi industry and Airbnb has done the same to hotels.

Just Monday, Cisco's outgoing CEO warned that 40% of all businesses won't survive thanks to young tech startups that will show up and eat their lunch.

One Zenefits customer has been tweeting support for Zenefits:

But ADP may have a point, too: Zenefits' claim to fame is that it gives small businesses one, easy place to do all their HR paperwork. If it's not creating legal partnership agreements with the software it says it integrates with, that could be a problem.

However, Zenefits isn't likely to shrivel up and die at this point just because a competitor gets feisty. It's growing like crazy and expects to reach $100 million in annually recurring revenue by January 2016. And it just raised $500 million on a $4.5 billion valuation.