Zenefits, the freemium HR administration platform for small businesses, has been fined $7 million in a settlement reached with California’s insurance department. It’s the largest penalty so far assessed against the software startup, and one of the largest penalties ever levied by California insurance regulators.
The state’s insurance department said half the penalty is suspended because Zenefits admitted its employees had sold health insurance without a license and moved quickly to remedy the situation.
California and 16 other states investigated the Silicon Valley firm after reports about its business practices began to surface late last year. The principal way the company made money was by selling health insurance plans to employers using its software.
“Businesses and consumers should have confidence that anyone selling insurance to them in California is doing so in compliance with our consumer protection laws,” said Insurance Commissioner Dave Jones. “In California, we value innovation and new business models, including Internet based start-ups, but we also insist that consumer protections laws are followed.”
Founded in 2013, Zenefits grew rapidly and quickly attracted investors who poured almost $600 million into the company, giving it a $4.5 billion valuation at the time questions about its business practices began to surface.
The company undertook an internal investigation, disclosing to regulators in all 50 states that its licensing was out of compliance. In addition, the company found that its then CEO Parker Conrad, a co-founder, had created a program allowing Zenefits to skirt training requirements for its sales people.
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The disclosures triggered the state investigations and lead to Conrad’s resignation in February of this year. In the months that followed, the company laid off about a third of its workforce, and was forced to reduce the company value to $2 billion in a deal giving many investors a larger share of the company.
Last month, after settling with several states for amounts in the tens of thousands, Zenefits unveiled its next generation platform, a human resources app platform and marketplace called Z2.
In addition to paying California $3.5 million, the company will also pay $160,000 to cover the costs of the investigation. The other half of the $7 million could be reinstated, said the state insurance department, “if Zenefits fails to confirm continued compliance with licensing and regulatory mandates based on an examination of the company’s business practices to be conducted in 2018.”