(Bloomberg) -- After HR startup Zenefits lost its founding chief executive officer thisyear in an embarrassing regulatory compliance scandal and cut 250jobs, another San Francisco startup saw an opportunity tocapitalize on its larger rival's implosion.

Gusto, a venture-backed unicorn specializing in payrollsoftware, is pushing harder into Zenefits' main business:selling insurance to small companies.

Josh Reeves, co-founder and CEO of Gusto, said Zenefits'recent stumbles have helped send customers its way."It definitely creates an even bigger opportunity because wehave a lot of clients, who were on Zenefits, who are moving toGusto," he said.

Gusto plans to begin selling health insurance plans to customerson Tuesday, putting it in direct competition with Zenefits.

Gusto's software pulls what thecompany knows about its 30,000 small-businesscustomers from their payroll data —such as the number ofemployees, their salaries, and Zip codes—and then recommendsthe best benefits plans for a given business.

When a customer buys a plan, Gusto said it typically gets a5 percent to 8 percent cut of each monthly premium from theinsurance provider.

Gusto began in 2011 under the name ZenPayroll. Sensing anopportunity to sell its customers other things they might need asthey grow, Gusto started work on a benefits service morethan two years ago, Reeves said.

Last fall, the company ditched its old name and encouragedclients to input their health insurance information and manageaccounts using Gusto's system. It offered to help customers renewtheir insurance plans via licensed brokers, but they couldn'tshop for new plans.

Zenefits and Gusto had previously existed harmoniously in theWeb browsers of HR departments across the U.S.

Many companies rely on Zenefits for its knownservices—in this case, insurance and otheremployee benefits—and Gusto for others, such as payrollmanagement. They separately grewinto venture-capital darlings, with Zenefits attracting a$4.5 billion valuation and Gusto a $1 billion valuation.

But Reeves saw an opening: "It was very clear—thefrustration with data syncing and client-service problems they werefacing."

He said Zenefits took shortcuts by hiring too quickly, spendingmoney irresponsibly, and skimping on customer service, according toReeves. "They hired 1,000 people to do a lot of these thingsbehind the scenes by hand," he said. "But this has to be done insoftware. When you transmit lots of documents and data, it's notjust more efficient; it's more accurate."

Zenefits CEO David Sacks countered, saying hiscompany is "years ahead" in providing a service that combinespayroll, HR, and benefits. "Payroll-only solutions appeal to a verylimited segment of the market, which is why a few of thesecompanies are trying to copy our all-in-one model," he said in ane-mailed statement. "We wouldn't be hearingthis competitive rhetoric if they didn't thinkZenefits was the company to beat."

Meanwhile, Zenefits has been moving onto Gusto's turf.

Zenefits started offering a payroll tool in November.Sacks, who took over as CEO in February, has said the company isrefocusing on small businesses. The average business usingGusto's services has 10 employees.

Gusto's expanded insurance sales will first be made available inCalifornia. Companies in seven other states can transferexisting insurance policies to Gusto's software in themeantime.

"Our approach has been to build payroll as the core and addthese insurance services," Reeves said. "Zenefits took a differentapproach. By doing insurance first, you have to exist on top ofother payroll services. We feel we have a significant advantage andhead start."

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