California Fines Online Benefits Firm Zenefits $7M Over Unlicensed Employees

California Insurance Commissioner Dave Jones today levied $7 million in penalties against online benefits broker Zenefits for multiple license violations.

Zenefits was charged with allowing unlicensed employees to transact insurance and circumventing insurance agent education requirements. This is the largest penalty assessed by any commissioner against Zenefits and one of the largest penalties for licensing violations ever assessed in the department’s history, according to the California Department of Insurance.

Zenefits is a San Francisco-based company and its business model is to provide free online human resources software to businesses and then encourage those same businesses to use Zenefits as an insurance broker.

“Businesses and consumers should have confidence that anyone selling insurance to them in California is doing so in compliance with our consumer protection laws,” Jones said in a statement. “Our enforcement action has resulted in Zenefits paying substantial monetary penalties for their licensing violations and ensures Zenefits complies with all of California’s insurance laws and regulations or they will face additional automatic penalties and sanctions.”

The CDI reportedly launched an investigation in 2015 after receiving complaints that Zenefits employees were transacting insurance without a license.

California is not alone; several other states including Tennessee and Texas have also fined the firm for licensing violations and other states including Massachusetts and Washington are investigating the broker.

After the investigations into Zenefits’ business practices and compliance began, the company acknowledged publicly that it was not complying with insurance laws and regulations and its CEO, Parker Conrad, resigned. The company in February announced it replaced Conrad with David Stacks, a former PayPal executive.

The settlement agreement obtained by Jones includes a $3 million penalty for licensing violations, including allowing unlicensed employees to transact insurance, a $4 million penalty for subverting the pre-licensing education and study-hour requirements for agent and broker licensing, and a $160,000 payment to reimburse the CDI for investigation and examination expenses.

In recognition of the self-reporting and remedial actions already implemented by the company, including the replacement of the former CEO, retraining of all licensed producers, and implementation of an automated process to verify that only licensed individuals solicit and sell insurance products, the settlement provides that half of the total $7 million in monetary penalties are suspended.

The suspended portion of the monetary penalty will be reinstated 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, according to the CDI.

Zenefits, founded in 2013, was very successful in attracting investors as a startup. It rose within two years to the “Unicorn Club” of start-ups valued at $1 billion. The ongoing controversy over its agent training and licensing practices has slowed its growth and led to layoffs.