Zenefits Pays the Piper

The California Department of Insurance this week announced fines totaling US$7 million against startup Zenefits, a provider of cloud-based human resources services.

The company’s former leadership “created an anything goes culture at the Internet startup, resulting in numerous violations of licensing requirements to protect consumers,” said Insurance Commissioner Dave Jones.

The fines are the culmination of investigations California launched last year after receiving complaints that Zenefits employees were selling insurance without a license.

Zenefits agreed to pay a $3 million penalty for licensing violations and $4 million in fines for subverting the prelicensing education and study-hour requirements for broker and agent licensing. The settlement also calls for the company to pay $160,000 to reimburse the Department of Insurance for expenses incurred during its probe.

The department suspended half the $7 million in fines because Zenefits took various remedial actions, including replacing its former CEO and retraining its staff.

Zenefits will have to pay the full sum if a 2018 examination of its business practices should find that it failed to comply with licensing and regulatory mandates.

Other State Actions

California fines represent the latest in a string of actions against Zenefits.

The firm has settled with Texas, Arizona, Minnesota, New Jersey, South Carolina and Tennessee, paying fines to all of them.

Delaware closed its investigation into the company’s licensing practices apparently without imposing a penalty.

In Washington and New York, investigations of Zenefits reportedly are under way.

The controversy led Zenefits to slash its valuation from $4.5 billion to $2 billion in June.

What Happened?

Bad behavior reportedly was rife at Zenefits in its early days.

Staff had posted photos on Instagram from the company’s offices and retreats showing them taking rounds of shots and champagne showers. Evidence of sexual activity in the stairwells of the company’s buildings reportedly was discovered, along with other unprofessional behavior.

That loose company culture apparently was symptomatic of other offenses, including the sidestepping of licensing requirements.

Zenefits once was billed as the fastest-growing startup in history, having attracted funding from major VCs including Andreesen Horowitz, Insight Venture Partners, Founders Fund, Khosla Ventures and Fidelity.

Andreesen Horowitz was involved in all three of the firm’s funding rounds, including the latest, in May 2015, when it raised $500 million.

“This looks like both the VCs and [Zenefits’] board didn’t do their respective jobs, and reflects poorly on both,” remarked Rob Enderle, principal analyst at the Enderle Group.

They should have ensured oversight, compliance, and strong experienced governance, he told the E-Commerce Times, but “all three appear to have been missing here.”

The VCs may have been blinded by the potential earnings, suggested Michael Jude, a program manager at Stratecast/Frost & Sullivan.

“Esurance, the online insurance startup that was purchased by Allstate, were fabulously successful, and that was the takeaway everyone considered,” he told the E-Commerce Times.

“They were fabulously profitable because they bypassed the overhead, which is the major cost for anything CRM-oriented, and I think the assumption was Zenefits could repeat this,” Jude said. “People forget that to do anything benefits-oriented right, you have to dot all the i’s and cross all the t’s.”

Companies approaching VCs for money usually have to explain the rules and regulations they must conform to, as well as their cost structure and their governance, Jude pointed out. “A lot of that went away because the assumption was, ‘How hard can this be? We don’t need to do a lot of due diligence here because this model works.'”

The Takeaway for Startups

Startups always should play by the rules, said Laura DiDio, a research director at 451 Research.

They always should tell the truth as well, she told the E-Commerce Times, “because, in this day and age, people are going to find out anyway. It’s too easy. Everything lives in perpetuity on the Internet.”

Startups should build a foundation from the ground up to be accountable, audible and reportable, Frost’s Jude remarked. “You may be cutting corners in terms of infrastructure, but you’d better conform to the rules of the road.”

New Leaf?

Zenefits this fall launched Z2, the latest version of its platform, as it strove to resolve its past improprieties and move forward with its business plan.

The app, which targets SMBs, streamlines the administrative work associated with HR, benefits and payroll. It is integrated with software from 17 partners, and its developer platform has been opened up to third parties.

“While the rest of the market is still trying to catch up to Zenefits 1.0, we are redefining the all-in-one category to include any app connected to employee data,” declared company CEO David Sacks. “This is the future of the industry.”

Sacks took over in February, replacing former CEO Parker Conrad after a government investigation was launched into reports he had built tools that helped the company get around compliance issues.

Z2, which is available for iOS and Android, includes an online shopping experience for benefits. It introduces a new HR advisor app and service, with a paid model.

“Compliance as a Service is the elephant in the room — not tackled by vendors — but Zenefits comes close to that for an SMB,” said Holger Mueller, a principal analyst at Constellation Research.

With Z2, “someone becomes the in- and out-box for all statutory and compliance issues for an enterprise, like your tax advisor,” he told the E-Commerce Times.

App Integration

Z2 integrates with third-party apps to cover key functions including expenses, performance management, employee engagement and productivity. Among them are Google’s G Suite, Office 365, Salesforce, Stack, Intuit QuickBooks, Xero, Expensify, eShares, Lattice, Greenhouse and Officevibe.

Z2’s online shopping experience lets SMBs directly find, evaluate and select from thousands of plans provided by more than 250 carriers; do side-by-side comparisons; and see a map view of the in-network provider facilities in relation to where employees live.

Advice and guidance from Zenefits’ more than 250 licensed benefits brokers is available.

The company also rolled out Zenefits Payroll, which integrates with every app on its platform. Launched in limited release last year to more than 500 companies, it will be available generally in California first. Other states will follow. Pricing is $35 per month plus $5 per employee.

“With Z2, Zenefits is playing a smart long game to maintain parity with competitors,” observed Brent Skinner, principal analyst at Nucleus Research.

SMB Boon

Z2’s flexibility will be a help to SMBs, Skinner told the E-Commerce Times.

For one thing, it eliminates SMBs’ need for specialty vendors.

Further, Z2 is “very easy to use,” commented Mueller, who saw the product demoed at the company’s user conference.

There’s nothing new in Z2, he pointed out — “what’s news is that this comes to SMBs.”

Still, Z2 is “progressive in its embrace of the notion that HCM systems should play nice with existing, typically entrenched, business applications,” Nucleus Research’s Skinner pointed out. With those kinds of applications feeding information into the HCM ecosystem, “SMBs stand a better chance of running their organizations holistically.”

“Buyers have a tendency to equate the soundness of a vendor’s product with the soundness with which it conducts business, he observed.

“Zenefits’ infractions have been egregious,” Skinner remarked, which is “especially worrisome, given that this is the HCM industry.”

However, the company’s rollout of Zenefits Payroll for California shows that it is “down with the struggle to comply with employment law,” he said, which eventually will “help Zenefits leave its troubled recent history in the past.”

Richard Adhikari

Richard Adhikari has written about high-tech for leading industry publications since the 1990s and wonders where it's all leading to. Will implanted RFID chips in humans be the Mark of the Beast? Will nanotech solve our coming food crisis? Does Sturgeon's Law still hold true? You can connect with Richard on Google+.

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