Zenefits has fired execs who may have encouraged employees to skirt the law

Parker ConradFlickr/JD LasicaZenefits cofounder Parker Conrad

Zenefits is being investigated by the California Department of Insurance, the agency announced in a press release today.

“The recent resignation of Zenefits’ CEO Parker Conrad is an important development, but it does not resolve our ongoing investigation of Zenefits’ business practices and their compliance with California law and regulations,” said Insurance Commissioner Dave Jones in the press release.

Zenefits is an HR software provider that gives much of its software away for free, making most of its money on selling insurance. Earlier this week, its CEO and founder Parker Conrad suddenly resigned following accusations that Zenefits was not properly licensed to sell insurance in multiple states, as first reported by Buzzfeed.

Zenefits’ new CEO David Sacks is tackling the situation head-on. Sacks was Zenefits’ COO under Conrad, as well as an angel investor in the company. (Sacks has been a hugely successful tech entrepreneur and Valley angel for decades.)

When he took over as CEO on Monday upon Conrad’s departure, Sacks wrote a scathing email to employees that promised that under his leadership Zenefits would be turning over a new leaf, and its new No. 1 value was to “operate with integrity.”

In another email about this investigation obtained by Business Insider, he said that Zenefits not only welcomes the investigation, but the company actually helped cause it, by bringing the results of its own internal investigation to the agency.

One of the things Zenefits found when it looked into its own procedures was a secret app called “Macro” that allowed employees to complete a mandatory training course in less than the legally required 52 hours, Sacks said in the email. The program kept employees logged into the online training program, without logging them out for inactivity, Sacks explained. So if they whipped through the actual training course more quickly than the mandated time, it made it look like they didn’t.

Shortly after the internal investigation discovered “Macro,” Conrad was out, Zenefits shut down the program, and the company voluntarily turned the information over to the agency, it said.

Sacks also fired the “leaders who created, propagated and encouraged the use of the Macro, and we will take additional disciplinary steps as necessary to address the issue,” he promised. He didn’t name the people who were fired.

Zenefits COO David SacksZenefitsZenefits COO David Sacks

Now Zenefits is in an ugly mess. It says its working with the agency with the goal to figure out a way to retrain any employees who used Macro on their way to obtaining insurance licenses.

A Zenefits spokesperson told us, “We are communicating and cooperating fully with regulators with regards to this issue that we discovered and self-reported to them.”

The California Department of Insurance is all over it, too, saying, “businesses deploying new technologies and new business models must comply with California’s strong consumer protection laws, including the laws and regulations governing the licensing and training of insurance agents and brokers.”

Zenefits was a rising star in Silicon Valley that liked to boast that it was on track to be one of the fastest growing startups to hit $100 million in revenue of all time.

The Valley’s major VCs agreed. They poured $582 million of investment into the company, at a $4.5 billion valuation, when it was a mere two years old.

Within months after its $450 million round in May, Zenefits started to unravel, from missing that $100 million revenue target to this brouhaha over compliance. Now Sacks is tasked with cleaning it up and getting it back on track.

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