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Zenefits Agrees To $7 Million Settlement With California Regulators

The landmark settlement in Zenefits' home state will resolve the most important regulatory inquiry facing the embattled human resources startup.

Last updated on November 28, 2016, at 8:14 p.m. ET

Posted on November 28, 2016, at 5:10 p.m. ET

Zenefits CEO David Sacks.
Steve Jennings / Getty Images

Zenefits CEO David Sacks.

Zenefits has agreed to pay a $7 million fine in a settlement with California regulators, a major milestone that will let the human resources startup continue operating in its home state, the regulators announced Monday.

The $7 million penalty, relating to the insurance licensing scandal that rocked the company earlier this year, is among the largest such penalties ever assessed against a company by the California insurance department. It also dwarfs the size of the fines levied against Zenefits by other states — including Washington, Arizona, Minnesota, New Jersey, and Tennessee.

More importantly for the San Francisco-based Zenefits, which ousted its founding CEO in February and has shed hundreds of staff, the deal will give the startup a second chance to play by the rules as an insurance broker in its biggest market. In a sign of the insurance department’s confidence in Zenefits’ turnaround, the startup will initially have to pay only half the $7 million penalty, pending a market conduct examination in 2018. If it fails that test, Zenefits will pay the suspended half.

"In California, we value innovation and new business models, including Internet-based startups, but we also insist that consumer protections laws are followed," Dave Jones, the state's insurance commissioner, said in a statement. "Zenefits is an example of an Internet-based start-up whose former leaders created a culture where important consumer protection laws were broken — a bad strategy that placed the company at risk and that other start-ups should not follow."

Capping a fall that stunned Silicon Valley, Zenefits acknowledged this year that its founding CEO, Parker Conrad, created and shared with his employees a piece of software to cheat on California insurance broker licensing requirements. Any employee who used this program to bypass the legally required 52 hours of online training would then be directed to certify under penalty of perjury that they had actually completed the work.

In addition, Zenefits apparently flouted insurance laws by allowing unlicensed brokers to sell health insurance in multiple states. That revelation, first reported by BuzzFeed News a year ago, touched off an internal inquiry at Zenefits that uncovered the cheating program created by Conrad.

The settlement announced Monday does not clear up a legal cloud hanging over Conrad, who could face his own investigation, the insurance department suggested. Zenefits agreed to cooperate with "any investigation and enforcement action that the department may pursue in connection with the conduct of Parker Conrad in this matter," the insurance department said in a legal document.

"We are not aware of any ongoing [Department of Insurance] investigation concerning Parker as an individual," a spokesperson for Conrad, Jason Kinney, said in a statement, adding that the insurance department "hasn’t even asked to meet with him. That being said, Parker has always been happy to meet with them and clear his name."

For Zenefits, the California settlement caps a months-long effort by the new CEO, David Sacks, to atone for past missteps. Of the total $7 million fine, $4 million is for subverting licensing education and study hour requirements, while $3 million is for transacting insurance without licenses, the California insurance department said in its announcement. Zenefits will also pay a $160,000 fee to reimburse the insurance department for the cost of the investigation, as well as the market conduct examination.

“We are pleased to reach a settlement with the California department of insurance, which recognized our remediation efforts by suspending half the fine," a Zenefits spokesperson said in a statement. "We now have a clean bill of health from our lead regulator as well as 16 other states. New management has righted the ship at Zenefits."

The company's violations in California — where many sales reps got their initial insurance broker licenses — had a ripple effect throughout other states where it did business.

While insurance brokers have to get licensed in each state where they sell insurance, they typically take a broker test only in their home state; with that credential in hand, getting additional licenses in other states is just a matter of filling out forms online. Cheating on the California test, then, means that any other state licenses acquired afterward are based on a rotten foundation.

Regulators in other states have been keeping a close eye on the inquiry in California. Its settlement will likely be seen as a vote of confidence by California regulators, which could help Zenefits quickly resolve other inquiries around the country.

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