Three Lessons to Learn from the Zenefits Scandal…

During the past week, Zenefits’ founder and CEO, Conrad Parker, resigned over a breaking scandal that Zenefits had hired benefits brokers who were not licensed to sell Zenefits’ services in Washington State and other jurisdictions. And worse, that Zenefits had developed a secret software program to make it appear that brokers had completed a 52-hour online training course legally required in California, when, in fact, they had not done so[i]. Thursday, it was reported that the VP of Sales, Sam Bond, had also left the company.[ii]

What went wrong with this San Francisco-based unicorn?

Let’s start with the over-the-top marketing.

Zenefits introduces itself as an innovative benefits broker for small employers. Its pitch is that for the price of employee benefits services alone, Zenefits will also provide HR software, payroll and a high-tech dashboard for HR metrics.

Zenefits makes the claim that they are transforming human resources. That’s hardly the truth! They do have cloud software, a new business model for payroll and benefits, and a slick but basic HR metrics dashboard. But, human resources is much more than payroll and benefits, even in the small employer market, where companies have an HR staff of one or two people. Human resources is also about employer branding, recruiting, performance management, creating a great employee experience, and compliance.

Many human resources managers I’ve spoken with from small firms have told me that, after meeting with Zenefits’ sales representatives and seeing a demonstration, they had serious questions about Zenefits’ ability to deliver on its promises. As one manager pointed out to me, despite their marketing, Zenefits doesn’t provide payroll. Instead, they provide a link to your payroll provider and the promise to go paperless.  Last summer, blogs appeared by Zenefits’ users complaining of poor quality, software and data entry errors.[iii] Despite these types of concerns, Zenefits has gained over 10,000 customers and a market cap of $4.5 billion[iv]

Don’t ignore laws and regulations—it will cost your company much more than fines!

Zenefits’ troubles grew when the largest payroll provider, ADP, blocked Zenefits from its RUN payroll system due to security concerns over protecting personal identifying information, such as social security numbers. After both sides filed lawsuits, the issue was resolved.[v]

Last summer, curious headlines emerged: Zenefits admitted that it couldn’t keep track of the personal paid time off of its own workers. Many former employees filed claims for unpaid wages. Conrad Parker paid $5,000 each to many former employees, just to keep a lid on the story. Some estimates of the liability went as high as $1 million.[vi]  Really? In addition, Zenefits may have misclassified non-exempt employees as exempt employees to avoid paying overtime and providing required breaks. Issues arose over what was or wasn’t covered in its employee handbook. Zenefits began to reclassify its workforce, and as you might expect, is reportedly having issues with costly turnover.[vii]

The irony is too rich: A brash, high-tech start-up in the highly regulated payroll and benefits industry – which claims that it is transforming human resources – can’t properly classify its employees, write an accurate employee handbook, follow regulations for licensing some of its brokers, or keep track of its employees paid time off benefits!

Finally, and perhaps most importantly, in business ethics, integrity and following through on promises matter.

Even when being innovative, a company has to do what has been true for every generation: focus on relationships, keep your promises and maintain trust. Over-the-top marketing strategies may get you in the door, but if you fail to deliver on your promises, they will also get you thrown out.

Zenefits, like many startups, has the mantra, “ready-fire-aim.” These companies love to test the limits of technology, human capacity, organizational design and regulation. Cloud based software, analytics and communications apps have the potential to enable human resources to streamline payroll and benefits processes. They can also enhance performance management, learning and development, and succession planning systems. These innovations can drive tremendous value for organizations and create a powerful, purposeful and exciting work experience for employees.  I love the spirit. Go for it!

But, there are realities in business, particularly in democracies with the rule of law. Laws and regulations need to be understood and followed, and human decency has to be respected. In business, you are only as good as your reputation.

At the end of the day, ethics and integrity matter – on Main Street, Wall Street, and Silicon Valley.

Is there another lesson to be learned from Zenefits? I would love to hear from you!

Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and is a Managing Partner of InnovationOne.US. He works with key decision makers and human resources leaders on talent management, leadership development and coaching, innovation, and other strategic initiatives. Please e-mail Victor at victorassad6@gmail.com or visitwww.victorhrconsultant.com. For innovation visit www.InnovationOne.US.

[i] William Alden, (Feb. 11, 2016, 1:37 PM) “Zenefits Software Helped Brokers Cheat on Licensing Process,” BuzzFeed News. Found at http://www.buzzfeed.com/williamalden/zenefits-program-let-insurance-brokers-fake-training#.gbAA468Kj.

[ii] Chris Dauber, (Feb. 11, 2016, 11:44am PST) “Top sales executive is replaced at troubled Zenefits,” The San Francisco Business Journal. Found at http://www.bizjournals.com/sanfrancisco/blog/2016/02/top-sales-executive-zenefits.html?ana=e_sfbt_bn_exclusive&u=aCleh%2Bf%2F0YnVshzZqewAKg0d7ae000&t=1455225501.

[iii] Scott Yates (June 11, 2015, 10:28 AM PT), “Zenefits: Why the Conventional Wisdom is Wrong,” BlogMutt. Found at www.blogmutt.com/blog.

[iv] Erin Griffith (Feb. 9, 2016, 1:33 PM EST) “When Software Tries to Eat Regulation,” Fortune. Found at http://fortune.com/2016/02/09/zenefits-regulation-meltdown/.

[v] Cat Zakrsewski (Oct. 27, 2015) “ADP Drops Lawsuit against Human Resources Startup Zenefits,” Techcrunch. Found at http://techcrunch.com/2015/10/27/adp-drops-lawsuit-against-human-resources-startup-zenefits/.

[vi] Rolf Winkler (Dec. 3, 2015 7:43 PM ET) “Zenefits Tries to Stem Fallout Over Pay Claims. Starup offers payments of roughly $5,000 to many former employees if they sign waiver.” The Wall Street Journal. Found at http://www.wsj.com/articles/zenefits-tries-to-stem-fallout-over-pay-claims-1449189830.

[vii] Ibid.

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