Can AI Increase Your Company's Risk of Employment Lawsuits?

 Posted on May 30, 2026 in AI Governance and Data Privacy

Using AI in your hiring and employment processes can increase your company's legal risk if the technology is not set up and used very carefully. AI tools are used by more companies every year to screen resumes, schedule interviews, monitor employee performance, and make pay decisions. When those tools produce results that unfairly affect certain groups of people, the company using them can face discrimination claims just as if a human manager had made the same biased decision.

If your business is using or thinking about using AI tools that affect employment decisions in 2026, the New York City AI governance lawyers at CO Health Advisory will help you address legal concerns so you can leverage new technologies with fewer risks.

How Can AI Create Employment Discrimination Liability for Employers?

AI tools learn from data. When that data reflects old hiring or usage patterns that unintentionally favored certain groups over others, the AI can repeat those same patterns at a much larger scale. For example, an algorithm trained on data from a company that mostly hired men may keep screening out women applicants, not because anyone told it to, but because that is what the old data showed produced favorable results.

Under the Civil Rights Act of 1964, 42 U.S.C. §2000e-2, it is illegal for employers to discriminate based on race, color, religion, sex, or national origin. The law does not distinguish between whether the discrimination was intentional or done by an algorithm. If an AI tool produces results that hurt a protected group more than others, the company using it can be held responsible.

The Equal Employment Opportunity Commission has made clear that employers cannot avoid liability for discrimination by pointing to software. The responsibility for preventing discrimination stays with the employer.

What New York City Laws Apply to AI in Hiring Decisions?

New York City is one of the first places in the country to regulate the use of AI in employment decisions. Local Law 144 requires employers and staffing agencies that use automated hiring or promotion tools to have those tools audited for bias every year by an independent third party. The results of that audit have to be made public.

Employers also have to tell candidates and employees when an AI tool is being used to evaluate them. Failing to follow these rules can mean significant fines. If your company uses these tools in New York City, we can help you understand and meet these requirements.

What Types of AI Hiring Tools Carry the Most Legal Risk for Employment Discrimination?

Not all AI tools create the same level of risk. The biggest risk comes from tools that directly affect who gets hired, promoted, disciplined, or let go.

High-risk tools include:

• Resume screening software that filters out candidates before a human ever sees the application

• Video interview tools that score candidates based on facial expressions or speech patterns

• Performance monitoring software that tracks employees and creates scores that affect pay or advancement

• Pay or scheduling algorithms that produce different outcomes for different groups of people

Each of these tools touches a decision that is protected under employment law. If the tool produces worse outcomes for a protected class, the employer is exposed to a discrimination claim, even if a human made the final decision.

Can Employers Be Sued for AI Discrimination Even When Using a Vendor's Tool?

Many companies do not build their own AI tools. They buy or license them from third-party vendors. This leads many business owners to assume the vendor bears all the legal responsibility if the tool discriminates, but that assumption is wrong. Under federal law, the employer using the tool is responsible for its outcomes, even if a vendor promised the tool was bias-free or legally compliant.

This makes vendor contracts and due diligence more important. Before adopting any AI tool for employment use, companies should understand how it works, what data it was trained on, whether it has been independently audited for bias, and what protections exist if it causes discriminatory results.

What Steps Can Companies Take to Reduce Their AI Legal Risk?

Using AI in employment does not have to mean accepting high legal risk. There are concrete steps companies can take to reduce their exposure while still benefiting from these tools. These include:

• Running regular audits of any AI tool that touches employment decisions to check for unequal impact on protected groups

• Reviewing the data AI tools are trained on to catch and fix historical bias before it gets built into the system

• Making sure a human reviews any AI recommendation before a final employment decision is made

• Keeping records of the criteria and processes used by AI tools so you can show compliance if challenged

• Telling applicants and employees clearly when AI is being used to evaluate them

• Working with legal counsel to review vendor contracts and understand who is responsible if an AI tool produces biased results

• Monitoring hiring outcomes to potentially biased results 

Taking these steps proactively is much less expensive than defending a discrimination lawsuit later.

Contact Our New York City AI Governance Attorneys Today

The legal landscape around AI and employment is moving fast. Companies that do not stay ahead of it are taking on real legal risk. Whether you are an early-stage startup just beginning to explore AI tools or a growing company looking for ongoing legal guidance, our New York City AI regulation and business lawyers are ready to help.

At CO Health Advisory, we work with companies at every stage, including those on a budget. We also offer outside general counsel services so you get solid legal support without the cost of a full in-house team. Our transparent flat-rate billing means you always know what legal guidance will cost before you commit. Contact us at 212-739-0611 to talk through your legal needs today.