Only months after completing a $500,000,000 funding round, employee benefits software startup Zenefits (the assumed name for YourPeople, Inc.) announced the surprise resignation of founder and CEO, Parker Conrad. Zenefits is a San Francisco-based startup technology company breaking new ground in providing HR software to small employers. Due to its limited success in developing software license revenues, Zenefits shifted its focus to licensing its HR software at no cost in exchange for the client signing an agent of record letter appointing Zenefits as the corporate broker on the client’s medical and other insurance.
The claimed advantage of Zenefits’ basic business process is that its HR software offerings eliminate the need for intermediaries between insurance companies and small businesses. Zenefits’ software aims to centralize human resources into a single dashboard, so that a company’s administration of its health insurance, 401(k)s, and payroll can be managed conjointly. Businesses may download and utilize Zenefits’ software without direct cost (but with an agent of record letter), thus allowing Zenefits to generate revenues from commissions as broker.
The company’s business model has justifiably invited regulatory scrutiny since its inception, especially and primarily in the areas of commission rebating and the sale of insurance products by unlicensed individuals. Utah initially banned Zenefits outright, then revised its laws to permit Zenefits to provide free software without running afoul of anti-inducement regulations.Additionally, as reported by BuzzFeed News last November, the Washington Insurance Commissioner is investigating Zenefits for selling health insurance through unlicensed brokers.
According to an email circulated among Zenefits’ employees posted on the company’s website, Conrad resigned due to his failure to operate the company in accordance with state insurance laws, which the company violated repeatedly by employing unlicensed brokers to sell its products. New CEO David Sacks acknowledged in the email that Zenefits’ internal compliance procedures have been both inadequate and “plain wrong,” and has vowed to reform the company’s regulatory processes. Among Mr. Sacks’ first moves to address Zenefits’ compliance failures was the appointment of attorney Josh Stein as chief compliance officer. Mr. Sacks, who served as Zenefits’ COO until his recent promotion, has an extensive background in the operation of technology start-ups, including Paypal and his own company, Yammer, which was purchased by Microsoft. According to his LinkedIn page, Mr. Sacks earned a law degree from the University of Chicago.
Currently Conrad remains the only active licensed agent designated to act on Zenefits’ behalf in Kentucky, though the Kentucky Department of Insurance lists one other Zenefits designee as having “pending” designation status. This individual has not been given final authorization by the Department of Insurance to act for Zenefits within Kentucky, but does have an active license in Kentucky as of March 10, 2015.
While Zenefits’ leadership changes confirm its early failures to comply with state law, they also signal that Zenefits is prepared to address the regulatory challenges which have to date impeded proper legal operation. Wallingford Law is monitoring the company’s compliance efforts with Kentucky insurance law and the effects of Zenefits’ operations on business in the Commonwealth, and will provide updates as available.