Why Troubled Startup Zenefits Was Just Fined by Tennessee Regulators

July 25, 2016, 7:17 PM UTC
David Sacks, chairman and chief executive officer of Yammer Inc., smiles during a Bloomberg West television interview in San Francisco, California, U.S., on Friday, Jan. 24, 2014. Yammer Inc. develops tools for internal corporate communications that bring together all employees inside a private and secure enterprise social network, which reduces the need for meetings, increases communication across silos, and connects remote workers. Photographer: David Paul Morris/Bloomberg via Getty Images
Photograph by David Paul Morris — Bloomberg/Getty Images

Software startup Zenefits must pay the state of Tennessee $62,500 for violating insurance requirements, state officials said on Monday, marking the first settlement with regulators as the scandal-hit company seeks to redeem itself after revelations it had flouted the law.

“Under the company’s past leadership, compliance with insurance laws and regulations was almost an afterthought,” Julie Mix McPeak, commissioner of the Tennessee Department of Commerce and Insurance, said in a statement. “Under the old Zenefits model, they were not complying with state laws. Fortunately, new company leadership has demonstrated a dedication to righting the ship.”

Zenefits, which makes human resources software, may continue operating in Tennessee. While the penalty in Tennessee is relatively light, investigations of the company’s business practices continue in Washington, Massachusetts and California, according to a source familiar with the matter.

The San Francisco-based 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.

In a statement on Monday, Zenefits CEO David Sacks called the Tennessee decision a watershed moment that shows the company “has moved past its historical issues.”

Sacks, a serial entrepreneur who had been serving as chief operating officer, took over as CEO after co-founder Parker Conrad resigned in February amid revelations that employees were not meeting training and licensing requirements to sell health insurance.

The company disclosed that Conrad had written a software program called Macro that helped employees circumvent licensing requirements in California.

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Additional states also have asked Zenefits to turn over more information; it is unclear whether they will fine the company or impose more severe penalties.

Sacks said Zenefits now mandates brokers complete 52 hours of continuing education courses from the National Association of Health Underwriters, including 12 hours of ethics training.

Zenefits was once deemed by investors to be the fastest growing software startup in Silicon Valley history. The company last month slashed its valuation from $4.5 billion to $2 billion in a deal that sought to appease investors by increasing their combined stake from 11% to 25%.

Zenefits has laid off about 350 employees in recent months and another 100 employees took a severance offer. It has more than 900 employees.

July 25, 2016 (8:30 pm ET): The secondary headline of this article was adjusted from the original.

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