Software startup Zenefits changes course under new CEO

SAN FRANCISCO (Reuters) - Zenefits, a startup that has faced hefty regulatory penalties on its insurance brokerage, said on Thursday that it will exit that business and instead provide software to brokers.

This marks the latest attempt by Zenefits to regain its footing after it was found to have flouted state insurance laws and lacked proper controls.

In a change of course, San Francisco-based Zenefits said it will no longer aim to displace traditional brokers with technology, but rather will provide software to those same brokerages, which sell benefits to companies.

It will get a slice of revenue from the deals those brokerage firms make. Its first customer is Atlanta-based broker OneDigital, said Jay Fulcher, chief executive of Zenefits.

Fulcher, who in February became Zenefits' third chief executive officer (CEO) in a year, said Zenefits' expertise is in software, not in the insurance brokerage business, and the startup suffered from not having brokers in local markets to meet with businesses and explain insurance options face to face.

"Brokerage kind of requires a really personal approach," Fulcher said.

Zenefits was founded in 2013 and originally provided free software for small- and medium-sized businesses to automate their human resources services, such as hiring and payroll, and made money acting as a broker, selling companies health insurance plans.

In early 2016, Zenefits co-founder and CEO Parker Conrad resigned amid revelations that employees had been selling health insurance without the proper licensing. Regulators opened investigations into the company and a number of states levied fines against Zenefits. The company was forced to slash its own valuation from $4.5 billion to $2 billion to avoid litigation from its investors.

In March, Conrad launched Rippling, a software startup that helps companies automate human resources processes and in some respects competes with Zenefits.

In its new iteration, Zenefits will keep and even expand its human resources software but will no longer give it away for free. It had already begun charging for some of its services.

Zenefits still has some 8,700 customers for which it was acting as a broker, Fulcher said, and it will transfer those customers over to OneDigital.

Fulcher said the company was moving beyond the controversies of the last year and a half.

"Despite the turbulence, there's a really smart team here," he said. "The company's just got incredibly good bones and the ingredients are all there for the company to be an industry leader."

Zenefits has about 500 employees, following hundreds of layoffs last year.

(Reporting by Heather Somerville. Editing by Jane Merriman and Marcy Nicholson)