Avoiding Common Employer Pitfalls: Employer Risks in Using AI in Employment Decisions and in Drafting Employment Documents

As artificial intelligence (AI) tools become increasingly integrated into workplace decision-making, many employers are relying on automated systems to streamline hiring and promotional processes. In addition, employers are increasingly turning to AI tools to draft employment-related documents and for advice in general on employment issues. While these tools offer efficiency and cost-saving benefits and can streamline workflows, they also present significant legal and compliance risks when not used carefully.

Key Legal Issues in Using AI in Making Employment Decisions

1. Potential for Discrimination
   • Many AI systems are trained on historical data, which may unintentionally replicate or amplify existing biases. If an AI tool disproportionately screens out candidates based on race, gender, age, disability, or other protected characteristics, employers may face liability under federal, state, or local anti-discrimination laws.
   • In promotional decisions, reliance on biased data sets or opaque algorithms may hinder advancement opportunities for certain groups, triggering disparate impact claims.
   • While the current federal administration has indicated that it will not seek to enforce discrimination laws under a disparate impact theory, courts are bound by precedent, and state and local laws preventing disparate impact remain in place and are enforceable by both state and local human rights agencies as well as courts.
   • Employers should carefully review agreements with AI tool vendors to determine whether they offer indemnification for claims resulting from their tools.
2. Transparency and Explainability
   • Employers using AI tools must be prepared to explain how decisions are made. A lack of transparency or an inability to explain how a tool arrived at a decision may not only create employee distrust but also presents legal risks in the event of litigation or regulatory scrutiny.
3. Notice and Consent Requirements
   • Some jurisdictions, such as New York City and Illinois, have enacted laws requiring employers to provide notice and obtain consent before using AI or automated decision-making tools in employment decisions. Failure to comply with these requirements can lead to penalties or enforcement actions. AI is broadly defined under those laws.
4. Inaccurate or Incomplete Data
   • AI systems are only as reliable as the data they process. Decisions based on flawed, outdated, or incomplete data can result in unfair or unlawful outcomes for job applicants or employees and may expose employers to legal claims.
5. Recordkeeping and Audit Obligations
   • Employers may be required to maintain records of the AI tools used, including validation studies, audit trails, and assessments of potential bias. Regular auditing of AI systems is a best practice—and under some laws, a legal requirement.

Best Practices for Employers

• Conduct a bias audit of all AI tools used in making employment decisions.
• Engage legal counsel to review AI-related policies and vendor agreements.
• Provide clear notices to applicants and employees where required by law.
• Train HR and hiring personnel on how AI tools work and their limitations.
• Document decision-making processes and maintain detailed records.

Key Risks and Issues for Employers in Using AI to Generate Employment Documents and for Advice Inquiries

1. Lack of Legal Specificity
   • AI tools may produce general or boilerplate language that lacks the specificity required for enforceable employment-related agreements. Restrictive covenant agreements (non-competes, non-solicitations, non-disclosure), arbitration clauses, termination/severance language, or compensation terms must be drafted with careful attention to state law, industry standards, and evolving legal requirements. A one-size-fits-all AI-generated clause may leave employers exposed to legal challenges—or unenforceable agreements.
2. Jurisdictional Compliance Gaps
   • Many AI tools do not take into account state-specific employment laws (e.g., wage transparency requirements, limitations on non-compete agreements, required disclosures). Relying on AI-generated language without legal review can result in documents that violate federal, state or local law—or fail to include required notices or protections.
3. Inaccurate or Outdated Information
   • Some AI-generated content may be based on outdated legal principles or unofficial sources. Employers risk incorporating language that no longer reflects current best practices, recent court rulings, or regulatory changes—especially in fast-moving areas like restrictive covenants, wage laws, remote work, or employee classification.
4. Over-Reliance on “Smart” Tools
   • AI tools are powerful and useful—but their use should be supplemented with legal oversight in order to tailor documents to unique business needs, anticipate litigation risk, and ensure compliance with employment law requirements in specific jurisdictions.
5. Dialogue with AI Tools is Likely Not Protected by the Attorney-Client Privilege
   • Employers must be careful with the inquiries they submit to AI tools. Unlike conversations with an attorney, dialogue with AI tools is likely not protected by the attorney-client privilege and could be discoverable in litigation. This includes legal inquiries, contract interpretation or drafting, and messages where employers ask AI tools to revise a communication or document based on employer prompts.
   • In addition, if an employer discloses an attorney-client communication to an AI tool, it is possible the employer has waived privilege related to that conversation or the topic as a whole.
   • These issues are novel and the law is undeveloped in this area – so employers should be cautious.

 Best Practices for Employers

• Review all AI-generated documents with experienced employment counsel.
• Tailor contracts to applicable state/local laws and your specific industry.
• Use AI as a starting point—not a substitute—for legal review.
• Be cautious with what information you input so as not to jeopardize attorney-client privilege.

Final Thoughts

The use of AI in hiring and promotion is no longer a futuristic concept—it’s happening now. Employers that embrace these tools must also recognize their responsibilities under existing and emerging laws related to the use of AI in making employment decisions. A failure to do so can lead to legal exposure, reputational harm, and employee mistrust.

In addition, AI offers exciting opportunities to streamline HR functions—but when it comes to legal documents, employers must be vigilant. A poorly drafted or noncompliant agreement can lead to disputes, unenforceable terms, and significant liability. Employers who use AI in this space must do so with eyes wide open—and with legal oversight in place.

Finally, employers must be cautious with regard to the non-confidential nature of dialogue with many AI tools and make sure that they are not jeopardizing attorney-client privileged communications by using those tools.

Whether you’re assessing your current use of AI or planning to integrate AI into your HR processes, we can help you navigate the legal landscape.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

Tara Humma is a Litigation attorney who focuses her practice on labor and employment matters. Tara has over a decade of experience representing public and private employers of all sizes in states across the country. Tara represents clients in all phases of employment litigation, from initial pleadings, discovery, and motion practice to trial preparation and appeals. Her experience includes a broad range of litigation matters including, but not limited to, claims brought under Title VII of the Civil Rights Act, the Americans with Disabilities Act (ADA) (including accessibility cases), the Family and Medical Leave Act (FMLA), the Fair Labor Standards Act (FLSA), breach of contract cases related to employment contracts and restrictive covenants and various other state and federal employment laws. Read more here.