Blog-Image---TechnologyAfter a series of compliance failures leading to the resignation of company’s CEO, the privately-held health care brokerage company Zenefits was just hit with a $7 million dollar settlement by the California Department of Insurance (DIR). The terms of the settlement may reflect a new trend in compliance enforcement, namely that regulators are trading monetary penalties for oversight over privately-held companies.

Founded in 2013 and once valued at $4.5 billion, Zenefits provides Human Resources and health care brokerage support to small businesses across the country. A few months ago we highlighted the San Francisco-based tech company’s efforts to develop an app to ensure the company’s compliance with state insurance brokerage laws, after a November 2015 report revealed that Zenefits failed to ensure that those of its employees acting as health insurance brokers were licensed to do so. Because Zenefits operated in all 50 states, it routinely had brokers assigned to projects for clients in states in which those brokers weren’t licensed to sell health insurance. Further reporting revealed that the company even created a special software program that let employees in California skip the mandatory 52 hour training sessions required for state certification.

The $7 million settlement with the California DIR is the largest in the country. The penalty consists of $3 million for licensing violations like allowing unlicensed employees to sell insurance products, $4 million in penalties for evading licensing education requirements, and $160,000 in reimbursement to the DIR for resources spent on its investigation.

However, in recognition of Zenefits’ extensive post-scandal efforts to reform the company’s culture and compliance regime, the DIR has agreed to suspend the payment of $3.5 million of the penalty if a 2018 audit of the company shows continued compliance with state regulations. This “carrot or stick” may reflect a new approach from compliance enforcers, namely that regulators are willing to accept smaller monetary awards in exchange for greater oversight over privately-held companies. When facing compliance-related enforcement actions, in the future privately-held companies should consider the degree of oversight they’re willing to trade for financial reward.

Zenefits has also settled claims for operating without a license in Arizona, Delaware, Massachusetts, Minnesota, New Jersey, South Carolina, Tennessee, Texas, and Washington, as the internal investigation launched in response to the scandal revealed nationwide problems.