Employee benefits start-up Zenefits is fined $3.5 million for licensing violations

California's insurance regulator will collect a $3.5-million fine from a San Francisco employee benefits start-up that cheated state education requirements for sales agents.

Zenefits admitted to regulators nationwide this year that would-be agents used software to circumvent online classes they needed to take to be licensed. In recent months, the firm agreed to pay hundreds of thousands of dollars to settle licensing violations in several states.

The California penalty, announced Monday, marks the largest one yet, according to state Insurance Commissioner Dave Jones. Zenefits would pay an additional $3.5 million, for a total of $7 million, if it falls out of compliance with the settlement over the next two years.

"Zenefits is an example of an Internet-based start-up whose former leaders created a culture where important consumer protection laws were broken," Jones said in a statement, describing the tactics as a “bad" strategy that other start-ups should avoid.

Founded in 2013, Zenefits lures in small businesses as users with a free online app for managing payroll, vacation time and other employee benefits. Zenefits generates revenue by collecting a commission when it sells insurance to its customers and by charging for extra features. Investors backed the company with nearly $600 million. 

But the licensing scandal, uncovered by BuzzFeed last year, sent the company in turmoil. Reports emerged of a disorganized company, rife with partying and an anything-goes culture. Chief Executive Parker Conrad resigned, and long-time Silicon Valley executive David Sacks took over. Hundreds of employees suffered layoffs. Investigations surrounded the company.

Some of those state inquiries are ongoing, but California regulators’ decision to waive the second half of the fine signaled they’re pleased with the remedies enacted since Conrad left.

Zenefits said Monday that “new management has righted the ship.”

paresh.dave@latimes.com / PGP

Twitter: @peard33

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