May 19, 2026
By Luiza Manuelian
Artificial intelligence is rapidly becoming part of everyday business operations, including hiring, recruiting, employee evaluations, and workplace management. While these technologies may improve efficiency, California employers should understand that the use of AI in employment decisions can also create significant legal exposure if not carefully managed.
California has continued expanding regulations surrounding Automated Decision-Making Systems (“ADS”), making clear that employers remain responsible for the outcomes produced by AI-driven tools — even when those systems are developed or managed by third-party vendors.
California broadly defines ADS as systems that assist in or make employment-related decisions using artificial intelligence, machine learning, algorithms, or statistical modeling.
These systems may include:
If the technology influences hiring, promotion, discipline, compensation, or termination decisions, it may fall within California’s evolving regulatory framework.
One of the most important takeaways for employers is that liability does not shift to the software vendor simply because the technology was outsourced.
Under California’s Fair Employment and Housing Act (FEHA), employers may still face claims if an AI system creates discriminatory outcomes based on protected characteristics such as:
Importantly, liability may exist even if discrimination was unintended.
For example, if an AI screening tool disproportionately excludes older applicants or creates disparate impact against a protected group, the employer may still be held responsible unless the process can be justified as job-related and consistent with business necessity.
Recent litigation has already demonstrated how AI-related employment disputes are developing.
Courts are beginning to examine whether automated systems improperly influence hiring decisions, create discriminatory outcomes, or violate transparency and disclosure obligations. Employers relying heavily on automated systems without oversight may face increased scrutiny from both regulators and plaintiffs’ counsel.
As AI adoption expands, these cases are expected to become more common.
California employers using — or considering using — AI-driven systems should take a proactive and structured approach to compliance and risk management.
Employers should identify all tools currently used in hiring, evaluation, discipline, monitoring, and workplace management that rely on automation or algorithmic decision-making.
Once identified, employers should assess how these systems operate and what employment decisions they influence.
AI systems should be evaluated regularly to determine whether they create unintended disparities across protected groups.
Employers should document:
Automated systems should not fully replace individualized human judgment.
Human review should remain part of the decision-making process, particularly for employment actions involving discipline, termination, hiring, or criminal history evaluations.
Employers should carefully evaluate third-party vendors providing AI tools or automated decision-making systems.
Vendor agreements should address:
Employers should maintain clear documentation regarding how AI systems are used and how decisions are reviewed.
California employers should also be prepared to explain:
Strong documentation can become critical if claims later arise.
Employers should ensure that records related to automated decision-making systems, including underlying data and decision criteria, are properly retained in accordance with applicable legal requirements.
AI can improve efficiency, but it does not reduce employer responsibility under California employment law. In many cases, it may increase exposure if employers rely too heavily on automated systems without oversight, documentation, and compliance safeguards.
California’s regulatory environment continues to evolve, and employers who proactively evaluate, monitor, and document their use of AI tools will be in a stronger position to reduce risk and defend against future claims.
If you have questions about AI-related employment compliance, workplace policies, or risk management strategies, Grant | Shenon | Almaraz is available to assist.
