In today’s job market, artificial intelligence (AI) and automation are integral to hiring processes across various sectors. In the United States, over 95% of employers carry out pre-employment background checks, with an increasing number turning to automated systems to handle this data efficiently.
A recent lawsuit filed in California against the AI recruiting platform Eightfold raises significant concerns for employers: when software utilizes consumer report-related information to score, rank, or filter candidates, it may invoke federal consumer protection laws.
Central to this concern is the Fair Credit Reporting Act (FCRA). When AI systems analyze and score candidate data to impact hiring decisions, they could be considered consumer reporting agencies under the law. This designation brings forth disclosure, accuracy, and adverse action requirements that many employers may not have previously considered.
Many employers do not view their hiring processes as legal risks; instead, they focus on filling positions quickly. Tools are utilized to expedite the workflow: resumes are automatically parsed, background checks flagged, and candidates scored, ranked, or eliminated without human interaction. This has become routine for most teams.
This convenience is precisely what heightens the potential legal risk. When decisions are made rapidly and at scale with minimal human oversight, compliance mistakes can shift from being isolated incidents to systemic failures. Such systemic risks are often the foundation of class-action lawsuits.
The legal framework remains unchanged. Regardless of whether hiring decisions are made by humans or AI, they carry legal ramifications. The Fair Credit Reporting Act underscores a critical principle: if consumer report data influences employment decisions, FCRA obligations apply, irrespective of whether a recruiter, a rule engine, or a machine learning model was involved. In the Eightfold case, plaintiffs are effectively examining this principle concerning AI-generated scoring and profiling used in hiring processes.
Kistler et al. v. Eightfold AI Inc. alleges that Eightfold collected personal data on over a billion workers, assigned scores to each applicant, and filtered out those with lower rankings before any human review occurred—all without the necessary disclosures mandated by the FCRA. Eightfold disputes these allegations, and the legal proceedings are ongoing.
From a risk assessment standpoint, the concern is not whether to implement AI; instead, it’s whether your tool processes consumer report-related information to determine employment eligibility. If it does, you may quickly find yourself navigating FCRA compliance issues without realizing it.
When AI hiring tools resemble consumer reporting workflows. Many AI platforms do more than just organize applicants; they ingest and combine various data types, including employment history, educational background, online profiles, identity attributes, public records, and other third-party information. This data can then be transformed into outputs such as match scores, rankings, flags, recommendations, or predicted suitability. This functional change matters, as, under the FCRA, it’s not just the labels that dictate the regulation; it’s the actual operations of the system. The Eightfold lawsuit frames candidate scoring and assessment outputs as “consumer reports” used for hiring, resulting in rights that applicants were not aware of.
Even if you don’t accept every claim, there’s a critical lesson: plaintiffs’ attorneys are now adapting well-known FCRA theories to the modern hiring landscape, and courts will soon be asked to determine if these outputs truly function as regulated consumer reporting.
Accuracy issues arise first, and scale exacerbates them. The FCRA mandates that employers and their vendors take reasonable steps to ensure the highest possible accuracy of consumer reports. Automation does not simplify this requirement; in fact, it often complicates it at scale.
FCRA risks are frequently framed as mere paperwork issues, yet the reality is that they hinge more on accuracy and process integrity.
As processes scale, common mistakes can intensify: mixed files (where someone else’s information is misattributed), outdated data that should not be included, incomplete context, or overly aggressive matching. AI can amplify these issues by generating outputs that seem authoritative, such as a score or ranking. The cleaner the data output appears, the less likely employers are to notice potential errors upstream.
Speeding up this process complicates resolution further. If a tool eliminates a candidate in an instant, it may inadvertently cause harm by making adverse decisions based on information that the individual has never seen or had the opportunity to correct.
The key takeaway for employers is clear: AI hiring tools are not exempt from legal scrutiny. The framework governing consumer reporting is specifically designed for situations where personal data is aggregated and used to inform decisions about individuals.
Before implementing any tool that scores, ranks, or filters candidates based on third-party data, employers should evaluate whether the tool produces outputs that could be considered consumer reports under the FCRA. If so, or even if there’s uncertainty, standard FCRA obligations become applicable. This includes providing written disclosures to applicants, obtaining their authorization, and establishing a transparent adverse action process that allows candidates to review and challenge the information used against them.
Vendor contracts should explicitly address accuracy obligations, and compliance teams need to scrutinize what happens when errors occur and the speed at which they can be rectified. The Eightfold lawsuit is an early indicator of broader trends; organizations that proactively address this as an operational issue rather than a legal challenge will be better equipped to avoid future litigation.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Daniel Cohen is the founding partner of Consumer Attorneys PLLC, representing consumers in cases related to background check inaccuracies, identity theft, and other consumer reporting disputes.
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