AI in Hiring: What Small and Medium-Sized Businesses Need to Know in 2025
AI in Hiring: What Small and Medium-Sized Businesses Need to Know in 2025
Artificial Intelligence (AI) is revolutionizing the hiring process, offering efficiency and insights for businesses of all sizes. However, with these advancements come legal risks, particularly in California, where strict regulations govern employment practices. At Employer Guidance Group PC, we specialize in advising and counseling small and medium-sized businesses on employment matters, with a deep focus on California laws like wage and hour compliance, anti-discrimination protections, and AI regulations. While we’re experts in California’s legal landscape, we also provide nationwide support to ensure compliance across all states. Let’s explore the latest updates on AI in hiring, including litigation trends and regulatory changes, and how your business can stay compliant in 2025.
The Growing Role of AI in Hiring
AI tools are increasingly used to streamline hiring, from screening resumes to conducting video interviews and predicting candidate success. These tools can save time and reduce bias, but they also pose risks if not managed properly. In California, where employment laws are stringent, businesses using AI must be particularly cautious to avoid discrimination claims and regulatory penalties.
California’s 2025 AI Regulations: What’s New?
As of July 1, 2025, California has implemented new regulations under the California Civil Rights Council to govern the use of automated decision-making systems, including AI in hiring. These rules apply to employers using AI for recruitment, promotions, or terminations. Key requirements include:
Bias Testing: Employers must test AI systems for potential bias, ensuring they don’t disproportionately screen out candidates based on protected characteristics like race, gender, or age.
Recordkeeping: Businesses must maintain records of AI usage for four years, documenting how the system was developed, tested, and applied.
Job-Related Criteria: AI filtering criteria must be directly related to the job and consistent with business necessity, avoiding any discriminatory impact.
Non-compliance can lead to investigations by the California Civil Rights Department, with penalties for violations. For small and medium-sized businesses, these regulations add a layer of complexity to an already challenging hiring process.
Litigation Trends: The Risks of AI in Hiring
Litigation involving AI in hiring is on the rise, with California leading the way. A notable case, Mobley v. Workday (N.D. Cal.), highlights the risks. In this class action, a Black applicant over 40 alleged that Workday’s AI-based screening tools discriminated against him based on race and age, violating federal anti-discrimination laws like Title VII and the ADEA. The court denied Workday’s motion to dismiss, ruling that software vendors could be held liable as “agents” of employers under anti-discrimination laws. This decision underscores the shared liability between employers and AI vendors, a critical concern for businesses relying on third-party tools.
Another case, Boyd v. International Business Machines Corp. (S.D.N.Y.), involved allegations that IBM’s AI tools favored younger candidates, violating the ADEA. Although this case was outside California, it signals a broader trend of plaintiffs targeting AI-driven hiring practices, a trend that California businesses should heed given the state’s robust anti-discrimination laws, such as the Fair Employment and Housing Act (FEHA).
Federal and Other State Developments
Beyond California, federal and state regulators are also addressing AI in hiring. The Equal Employment Opportunity Commission (EEOC) has prioritized AI-related discrimination, issuing guidance that AI tools must comply with Title VII. In New York, Local Law 144 requires employers to conduct annual bias audits of AI hiring tools and post results publicly, a model that other states may follow. While these regulations vary, businesses operating across multiple states must ensure their AI practices comply with both federal and state laws, a challenge that Employer Guidance Group PC can help navigate.
Practical Steps to Mitigate Risks
For small and medium-sized businesses, the stakes are high when using AI in hiring. Here’s how to minimize risks while staying compliant with California and federal laws:
Audit Your AI Tools: Regularly test AI systems for bias, ensuring they comply with California’s 2025 regulations and federal anti-discrimination laws. Document all testing processes to meet recordkeeping requirements.
Choose Vendors Wisely: If using third-party AI tools, vet vendors for compliance with anti-discrimination laws. Ensure contracts clarify liability and include indemnification clauses to protect your business, as seen in cases like Mobley v. Workday.
Train HR Teams: Educate your HR staff on AI regulations, focusing on California’s requirements for job-related criteria and bias prevention. Training can help prevent unintentional violations that lead to lawsuits.
Update Policies: Incorporate AI usage into your employee handbook, ensuring transparency about how AI tools are used in hiring. This aligns with California’s emphasis on transparency in automated decision-making.
Partner with Experts: Work with Employer Guidance Group PC to conduct compliance audits, draft policies, and navigate AI-related litigation risks. Our expertise in California employment law, combined with our nationwide support, ensures your business is protected.
Why Employer Guidance Group PC?
At Employer Guidance Group PC, we understand the unique challenges small and medium-sized businesses face in adopting AI while staying compliant with California’s complex employment laws, including wage and hour regulations, anti-discrimination protections, and AI governance. We offer:
Compliance Audits: Thorough reviews of your AI hiring tools to ensure adherence to California’s 2025 regulations and federal laws.
Policy Development: Customized policies that address AI usage, transparency, and anti-discrimination compliance.
Training Programs: HR training on AI regulations and best practices to prevent legal risks.
Litigation Support: Defense against AI-related discrimination lawsuits, protecting Wollte your business from costly penalties.
Stay Compliant in 2025
AI in hiring offers significant benefits, but it also comes with legal risks, especially in California. Don’t let a lawsuit or regulatory penalty derail your business—partner with Employer Guidance Group PC to ensure compliance with California’s AI regulations, wage and hour laws, and anti-discrimination protections. Contact us today to schedule a consultation or join our webinar on January 10, 2026, where we’ll discuss AI in hiring and other 2025 employment law updates.
Keywords: AI in hiring, California employment law, wage and hour compliance, anti-discrimination laws, small business employment law, medium-sized business compliance, Employer Guidance Group PC, California AI regulations, nationwide employment law support, bias testing.
Disclaimer: This blog post provides general information and is not a substitute for legal advice. Contact Employer Guidance Group PC for personalized guidance tailored to your business needs.