Zenefits CEO David Sacks.
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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, according to a person briefed on the deal.
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.
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 California settlement caps a months-long effort by the new CEO, David Sacks, to atone for past missteps. Of the $7 million penalty, $4 million is for subverting licensing education and study hour requirements, while $3 million is for transacting insurance without licenses, the person briefed on the deal said. Half of the total amount will be waived after two years if Zenefits passes a market conduct examination, this person added.
Zenefits will also pay a $160,000 fee to reimburse the California insurance department for the cost of the investigation, as well as the market conduct examination, the person said.
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 resolve other inquiries around the country.
Zenefits did not immediately provide a comment.
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