Zenefits hit with $7 million fine by California insurance regulator

SAN FRANCISCO (Reuters) - Software company Zenefits has been fined $7 million by California’s insurance regulator, marking the biggest penalty yet for the startup that has faced multiple investigations for flouting insurance laws.

California Insurance Commissioner Dave Jones said in a statement posted on the state insurance department’s website that Zenefits was charged with allowing unlicensed employees to sell insurance and circumventing education requirements for insurance agents.

Regulators called the fine “one of the largest penalties for licensing violations ever assessed in the department’s history.”

San Francisco-based Zenefits makes human-resources software, helping HR professionals manage health benefits, maternity leave, payroll and other employee services.

The company offers free software to businesses and makes money acting as a health insurance broker, working as the middleman between businesses and providers, such as Anthem Blue Cross, and charging a broker fee.

The California Department of Insurance launched an investigation in 2015 after receiving complaints that Zenefits employees were transacting insurance without a license.

“Zenefits is an example of an internet-based startup 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 startups should not follow,” Jones said in the statement.

A spokeswoman for Zenefits did not immediately respond to a request for comment.

Zenefits co-founder and former Chief Executive Parker Conrad resigned in February amid revelations that employees were not meeting training and licensing requirements. Multiple states launched investigations into the company’s practices.

David Sacks, an entrepreneur who had been serving as Zenefits’ chief operating officer, took over as CEO. He immediately put into place mandated education courses and ethics training for insurance brokers, and hired an auditing firm to root out licensing violations and reported those to all state departments of insurance.

Zenefits will not have to pay the full $7 million to California up front. In recognition of the changes already made by Sacks, the insurance department said half of the fine will be waived if the company passes an exam of the company’s business practices scheduled for 2018.

In addition to the $7 million fine, Zenefits must pay California $160,000 toward the costs of its investigation.

Other states have fined the company, including Tennessee, which in July levied a $62,500 penalty, while others have agreed to take no action. But California, Zenefits’ home state, was considered the most important resolution, and other states are expected to follow its lead.

Reporting by Heather Somerville; Editing by Bill Rigby