Automated-Decision Systems (“ADS”) are computational processes that make or assist in employment decisions even if final hiring decisions are made by or include a human component. Today, nine out of ten U.S. employers use these AI-powered tools to screen and rank job applicants — often before any form of human review. A new study analyzing over four million job applications across 150 U.S. employers found these third party AI screening tools used to evaluate candidates are demonstrating significant racial bias, particularly against Black and Asian applicants.¹ In total, researchers calculated that had the vendor’s algorithm recommended all racial groups at equal rates, approximately 40,000 additional and otherwise qualified Black and Asian applicants would have advanced in the process. 

Because most employers rely on the same few ADS vendors with the same embedded programming, the software is systematically rejecting applicants from all positions applied for. Consequently, for entry-level job seekers — who are already navigating one of the slowest hiring markets in recent years — AI is not only reducing job opportunities, but it is discreetly and systematically blacklisting applicants from the entire market. 

California lawmakers are on notice and are moving quickly to hold employers accountable for how these tools are used. This alert focuses on employer use of ADS tools as part of their direct application process. If you are one of the many companies incorporating automated tools into your hiring or employment decisions, this alert will provide you with the initial guidance needed to understand your obligations and stay ahead of what’s to come.

What California Employers Need to Know Now

As of October 2025, the California’s Civil Rights Department (“CRD”) has expressly clarified that already existing anti-discrimination and accommodation obligations that apply to any employer with five or more employees under the Fair Employment and Housing Act (“FEHA”) apply to those employers’ use of ADS in hiring decisions. ADS assessments can include computer-based tests, puzzle games, skills challenges, and video interview analysis tools. If an applicant’s disability affects how they may perform on an ADS assessment, employers must provide them with reasonable accommodation consistent with FEHA’s disability protections. Employers should therefore ensure their ADS vendors have built in accommodation request mechanisms or establish their own process for applicants to flag a need for accommodation.

The CRD regulations also increase the expectations of California employers to ensure they monitor ADS usage by retaining all ADS related employment records for a period of four (4) years. This includes inputs, outputs, and any data used to design or customize the system.

California’s Fair Chance Act further prohibits employers from inquiring into an applicant’s criminal history before a conditional offer of employment is made. This obligation extends to ADS. This alert reminds California employees of their existing obligation under the Fair Chance Act to not use this criteria in making initial employment decisions. They should audit their ADS tools to confirm that criminal history data is not being accessed, factored into, or influencing screening recommendations at any stage prior to a conditional offer. Employers therefore should not expect they will be able to point to the use of an ADS as a reasonable defense to a violation of the Fair Chance Act.

What Is Coming Next

California’s Legislature is actively accelerating regulation in this space, and the following bills could be signed into law before the end of 2026. Employers who begin preparing now will be far better positioned when these bills are enacted.

The Automated Decisions Safety Act (AB 1018): This bill would require employers and AI developers to: (1) regularly test their tools for bias; (2) notify applicants when an AI system is being used; and (3) explain the basis for a decision upon request. This bill would largely codify and strengthen already existing employer expectations while breaking new ground by imposing independent obligations directly on AI developers and vendors.

AB 1898: This bill would similarly require employers to provide employees and applicants with advance written notice any time an ADS is used in a decision affecting them and obtain a signed acknowledgment from the employees or applicants confirming they received that notice. Employers would also be required to maintain an annual inventory of all AI tools in use. Operationally, employers would need a consistent system for delivering notices and collecting acknowledgments. 

Consequences For Noncompliance

The penalties for getting this wrong are not abstract. Employers that use AI tools producing discriminatory outcomes may face complaints, investigations, and remedies under the FEHA through the CRD. Because discriminatory AI screening can affect thousands of applicants at once, these cases are natural candidates for class action litigation — significantly raising the stakes beyond an individual complaint. Beyond legal liability, practical business risk is also implicated. When ADS are left unchecked, qualified candidates are filtered out at scale — cutting employers off from new and valuable talent.

Recommended Employer Next Steps

California employers do not need to wait for the next wave of legislation to pass to begin preparing. Employers already have an active obligation to complete a formal risk assessment for any automated decision-making tools used in employment decisions.² Additionally, employers should:

• Conduct an audit of every AI tool used in hiring, promotion, performance evaluation, or termination decisions that are likely to qualify as an ADS.
• Review vendors’ bias-testing practices, contractual representations, and ask for documentation before entering contracts. 
• Develop and implement internal AI use policies that comply with current CRD regulations and are structured to adapt to new legislation phases.
• Provide targeted training to HR and management teams on their obligations under FEHA, the Fair Chance Act, and the new CRD regulations. 
• Complete a formal risk assessment for any ADS used in employment decisions before January 1, 2027.
• Update record retention practices to ensure all AI related employment data is being preserved for at least four years.
• Monitor pending legislation and obtain advice on compliance timelines as bills move towards passage.

Looking Ahead

Artificial intelligence is reshaping the ways employers find and evaluate talent — and for good reason. Used thoughtfully, these tools can process applications faster, reduce time-to-hire, and help companies identify strong candidates. However, left unchecked, the perils on certain categories of applicants are also palpable. California’s evolving legislation does not seek to remove AI from the workplace. Rather, it recognizes that these tools are powerful enough to require careful oversight. Employers that use AI fairly, transparently, and responsibly will be best positioned to benefit from its potential by building trust with applicants and employees, while mitigating risks of litigation.

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¹ Stanford’s Study re: “AI Hiring Tools Can Yield Racial Bias and Systemic Rejection”

² California’s Consumer Privacy Act regulations require employers to conduct a formal risk assessment report before using automated tools to make significant hiring decisions — a requirement that takes effect January 1, 2027. By April 1, 2028, employers must also submit a summary report to the state, including the number of assessments conducted and a signed certification from a member of executive management confirming completion.

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Melitza Ortega of Hanson Bridgett’s 2026 2L Summer Associate program, contributed to this article.