As companies increasingly incorporate artificial intelligence (AI) tools to enhance their operations, state legislators are closely examining their implications. In particular, state lawmakers are scrutinizing the implementation of AI and automated decision-making systems concerning employee compensation. Their goal is to address potential discriminatory effects arising from algorithmic wage setting and to promote transparency for both employees and job applicants concerning these technologies.
Recent State Legislative Activity
In 2025, several states—including California, Colorado, Georgia, and Illinois—proposed bills aimed at regulating AI-driven compensation practices. This trend continued into January 2026 when lawmakers in New York and Maryland introduced similar legislation.
Though not all proposed laws are identical, they have shared characteristics. For example, they collectively define “automated decision systems” to include any systems, software, or methodologies that assist or replace human decision-making, particularly those utilizing machine learning or AI. In the context of employment, this definition includes tools that aid in human resources functions by processing data through algorithms based on predetermined rules. These tools can range from basic rule-based applications to advanced technologies powered by generative AI.
Furthermore, most of these proposed regulations offer guidance on what would not be considered unlawful use of algorithmic wage setting. Notable exclusions include situations where employers: (1) provide individualized wages based on specific performance data; (2) clearly communicate their use of automated systems to employees and applicants, detailing the data considered and the methods employed; and (3) establish procedures to ensure the accuracy of the information used by these automated decision systems in determining compensation.
Legal Risks Associated With AI-Driven Compensation Decisions
Proponents of these legislative measures stress that unregulated AI use in compensation decisions can lead to discriminatory outcomes. Employers’ AI-driven wage determinations may fall 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, and relevant state and local regulations.
The inherent nature of automated decision systems poses distinct legal risks for employers, particularly when implementing these tools for compensation determination. A significant obstacle employers face is the lack of transparency regarding how AI tools arrive at their conclusions. While human decision-makers can provide reasoning for their compensation decisions, it can be challenging—if not impossible—to understand the rationale behind decisions made by certain AI tools. This obscurity exposes employers to potential legal challenges concerning compensation decisions made by these systems. The risk of liability may increase significantly when these processes influence the compensation of a large number of employees or candidates.
Takeaways for Employers
For the time being, employers should ensure compliance with federal and state laws set to take effect in 2026. This includes identifying all AI tools currently employed in decision-making processes and determining whether they fall under regulatory scrutiny. Employers should also develop a comprehensive AI policy that outlines internal procedures for AI usage, provides necessary notifications to employees and applicants about these tools, and ensures human oversight over recommendations made by AI.
Looking ahead, employers must actively keep abreast of changes in federal, state, and local legislation regarding the use of AI in decisions related to employee compensation and other employment terms. As states rapidly seek to define the boundaries for AI in workplace decision-making, employers who proactively audit their AI practices and prioritize transparent human involvement in decision-making—especially concerning compensation—will be better equipped to reduce legal risks and comply with evolving regulations.
