The Ethics of Training: a Zenefits Case Study

Daily planner with the entry Further trainingThis Zenefits story begins and ends with software.

Software is at the heart of the company’s business model: it provides HR software for free (as is often the case in an SaaS – “software as a service” – business model) and makes its profits from insurance commissions resulting from use of the software. But Zenefits’ use of software led to compliance investigations in several states. And its alleged misuse of software has led to scandal.

The ongoing Zenefits story has provided employers with a wide array of potential learning opportunities and food for thought regarding:

  • Handling unplanned business growth;
  • Communicating with the press and public during compliance investigations;
  • Addressing workplace alcohol use and abuse (including encouraging widespread drinking at the worksite);
  • Fostering a productive and respectful workplace culture; and
  • Disciplining employees for unprofessional behavior in a casual workplace atmosphere.

While these are important lessons to be gleaned from Zenefits’ experiences during the last year or so, the intersection of ethics and training (and software) is an important subject to study. Yes, training on ethics is important. But what about the ethics of training? An employer’s approach to and regard for learning, training and development – both external and internal – can affect an employer’s reputation, culture and liability risks.

Initial Successes and Massive Growth

Zenefits’ founders saw an opportunity at the dawn of health care reform: a market opening resulting from many insurers dropping smaller clients. By offering its HR software for free, the startup tapped into a willing market. The company’s image – one of innovation, disruption and massive growth – made it one to watch in the crowded Silicon Valley space.

And many were watching.

Streamlining ineffective processes is an important management priority. Strategizing on how to take back hours spent on administrative tasks from a business day is crucial to achieving strategic objectives. Not only did Zenefits sell its services to companies by promising to take on tedious HR paperwork, but it also applied this streamlining to its own operations.

Zenefits did this well – perhaps too well. The innovation may have been ahead of legislation. The streamlining may have been accomplished at the expense of ethics.

Efficiency or Incompetence?

Utah regulators questioned the nature of Zenefits’ “free services.” The state temporarily banned the company’s services until Governor Gary Herbert signed a law regulating insurance-related inducements, which allowed Zenefits to operate in the state. Zenefits celebrated the victory and moved on.

Then Washington State began investigating whether Zenefits salespeople sold health insurance without the proper licenses. The state questioned whether new hires were pressured into making sales without being properly licensed.

And then came California.

California law requires 52 hours of training in a prelicensing course, followed by an insurance broker exam. New hires at Zenefits allegedly used a “macro,” or specialized software, that was provided by their supervisors in conjunction with the course. The software prevented a person from being logged out of the course due to inactivity. This allegedly enabled employees to appear “logged in” and active, therefore allowing them to spend less than the 52 hours of active time on the required courses.

California’s bare minimum legal requirements may have been too inefficient for Zenefits’ managers. But did these inefficiencies lead to incompetent, unworthy brokers?

California Insurance Commissioner Dave Jones explained how new business models may intersect with compliance concerns:

New technologies and new business models can bring value and convenience to California consumers, but businesses deploying new technologies and new business models must comply with California’s strong consumer protection laws, including the laws governing the licensing and training of insurance agents and brokers, which are designed to make sure that only individuals and firms with the expertise and integrity to transact insurance are allowed to do so.

Zenefits’ rapid growth, and its unchecked hiring of hundreds of new salespeople training to be brokers, raised eyebrows. In the face of looming compliance penalties, former CEO Parker Conrad resigned in February.

Wagging the Dog

But the mere fact that a CEO resigns does not resolve outstanding compliance issues. While a public sacrifice of an executive is often necessary in these types of cases, Commissioner Jones said that the CEO’s resignation “does not resolve our ongoing investigation of Zenefits’ business practices and their compliance with California law and regulations.”

Businesses can’t wag the dog in this scenario. An executive’s resignation will not settle compliance investigations, nor will it resolve ethical concerns.

Ethics Basics

The basics are important to training programs. First, an employer needs to analyze what they need to achieve (What are the legal requirements? What is the licensing process?). Next, an employer needs to assess which subjects should be offered in order to minimize liability (Should we supplement compliance training with additional job-specific safety training?). Finally, the employer should assess available training budgets to achieve the highest possible competencies at all levels.

A supervisor’s attitude that belittles state training requirements, or an executive order to find ways to skirt even the most minimal licensing regulations, will trickle down to the rank-and-file. This lax attitude will permeate the organization’s culture. It can develop into unethical, overriding corporate values: sales wins at all costs; growth over sustainability; shortcuts over competencies.

Growth or Contraction?

Growth isn’t measured simply from numbers on a spreadsheet. The human capital at an organization has to exhibit development in order for the business to be able to sustain its growth. Otherwise, any reported gains will be checked by market or regulatory forces.

Zenefits’ growth has now been corrected by layoffs and loss of reputation.

Current CEO David Sacks, in addressing staff reductions, admitted that “It is no secret that Zenefits grew too fast, stretching both our culture and our controls.” The startup will “refocus our strategy, rebuild in line with our new company values, and grow in a controlled way that will be strategic for our business and beneficial for our customers.”

The “macro” training software has been shut down. But will the ethics of training lesson be learned?

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