State Lawmakers Seek to Regulate Employer Use of AI for Wage Decisions
As employers continue to explore new avenues for utilizing artificial intelligence (AI) tools and software to enhance business operations, state legislators have begun to take significant notice. Lawmakers are increasingly scrutinizing the use of AI and automated decision tools in setting or influencing employee compensation. The primary objective is to curb potential discriminatory impacts that may arise from algorithmic wage-setting practices while enhancing transparency for employees and applicants regarding the application of such technologies.
Recent State Legislative Activity
Several states, including California, Colorado, Georgia, and Illinois, introduced bills in 2025 that aim to establish parameters on AI-driven compensation decisions. In January 2026, New York and Maryland lawmakers followed suit with similar legislative proposals.
While the proposed laws are not identical, they share several common features. Notably, they define “automated decision systems” as systems, software, or processes—often employing machine learning or AI techniques—designed to assist or replace human decision-making. In the employment context, these definitions encompass automated human resources tools and software systems that utilize predefined rules to process data through algorithms and facilitate HR functions. This can range from basic rule-based systems to more sophisticated technologies powered by generative AI.
Moreover, the majority of these proposed state laws outline guidelines for conduct that would not be considered unlawful use of algorithmic wage-setting. Examples of these exclusions include:
- Offering individualized wages based on data related to the services performed by workers.
- Providing clear disclosures to employees and applicants about the use of automated decision systems, including the data considered and the methodology employed.
- Establishing procedures to ensure the accuracy of data utilized by automated decision systems in wage determination.
Legal Risks Associated With AI-Driven Compensation Decisions
Lawmakers advocating for these proposed regulations emphasize that the unregulated application of AI in compensation decisions may lead to discriminatory outcomes. Employers’ AI-driven compensation decisions could be actionable under various employment laws, including:
- Title VII of the Civil Rights Act
- The Americans with Disabilities Act
- The Age Discrimination in Employment Act
- The Equal Pay Act
- Applicable state and local laws
The inherent nature of automated decision systems poses unique legal risks for employers, particularly in the realm of employee compensation. A significant challenge arises from the lack of transparency regarding how these tools arrive at their conclusions or recommendations. While human decision-makers can typically articulate the rationale behind compensation decisions, it may be difficult—or even impossible—to discern the reasoning of certain AI systems. This lack of clarity makes employers vulnerable to legal challenges concerning compensation outcomes determined by AI tools or software. The potential liability may increase if these systems are used to influence the compensation of a large number of employees or applicants.
Takeaways for Employers
For the time being, employers should ensure compliance with applicable federal and state laws set to take effect in 2026. This includes, at a minimum, identifying each AI tool currently utilized in employment decision-making and evaluating whether those tools fall under any state or local regulations.
Employers are also advised to develop and implement a comprehensive AI policy that outlines internal procedures for employing AI, provides necessary notifications to employees and applicants about AI usage, and mandates human oversight for AI-driven recommendations.
Looking ahead, employers should actively monitor developments in federal, state, and local legislation and agency regulations that govern AI’s role in employee compensation and other employment terms. As states rapidly work to establish boundaries for AI in workplace decision-making, employers who proactively assess their AI-related practices and prioritize transparent human involvement in decision-making processes—including compensation decisions—will be better positioned to mitigate legal risks and adapt to evolving regulatory requirements.
