Zenefits could be in big trouble for allegedly letting its salespeople sell insurance without a license

Zenefits, the embattled HR startup said to be valued at $4.5 billion, is under investigation in Washington state for allowing salespeople to sell health insurance without the proper licenses, reports BuzzFeed News.

In Washington, where the official inquiry was opened by state agencies earlier this year, selling insurance without a license is a Class B felony, which means a prison sentence of up to 10 years and a civil penalty of of up to $25,000 per violation.

Worse, the report indicates that the practice may have been widespread, with salespeople "in at least seven states" engaging in similar practices since the summer of 2014. Zenefits promises in that report that its salespeople take the proper steps to get licensed, and it's unknown if this practice has continued to the current day.

Zenefits itself is fully licensed as an insurance broker, since its flagship software acts as a middleman between its customers and health insurance companies. But regulators asked the company to have each individual employee licensed on their own terms.

According to former Zenefits employees surveyed by BuzzFeed, though, salespeople knew of the requirement to get licensed, but managers took a hands-off approach, focusing instead on making sure that they just kept selling. In fact, some employees reportedly failed their licensing exams, but were still allowed to work the phones.

It's apparently a tricky violation for regulators to catch: There's no system of record to see who sold what insurance to whom, so the government is forced to rely on whistleblowers and tipsters - mainly customers who check public-facing databases to see if their insurance agent is officially licensed.

"We have taken corrective action, including terminating the employee, when we have learned of violations, either because individuals failed to pass the brokerage exam or have otherwise violated our licensing policies," Zenefits said in a statement to BuzzFeed.

All of this comes at a bad time for Zenefits, which has had to deny public allegations that its business was in big trouble. Indeed, a recent report indicated that Fidelity had written down its investment in Zenefits by half after learning that salespeople were regularly missing their goals.

Zenefits did not respond to a request for comment at the time of publication.