Artificial intelligence is already reshaping how businesses operate – especially in areas like hiring, evaluations, and employee management. But if you’re running a business in California, using AI in these areas comes with new and serious compliance obligations.

Over the past year, the state of California passed two major sets of regulations that directly impact how AI can be used in employment. These rules apply to all businesses, not just big tech. And if you’re a small business owner using automated systems to support HR decisions – even simple resume filters or chatbot interviews – these laws could already apply to you.

Let’s take a closer look at what’s changed, what it means, and how you can stay compliant.

The First Wave: California Civil Rights Department (CRD) Rules

As of October 1, 2025, California’s Civil Rights Department has made it clear: if AI or automation results in discriminatory outcomes, the employer is still responsible. These rules fall under the Fair Employment and Housing Act (FEHA), and they mark a significant shift in accountability.

Whether you’re using in-house software or a vendor tool, if the system ends up screening out certain applicants based on age, disability, race, or other protected categories, you can be held liable – even if you didn’t build the tool yourself.

Here’s what’s required:

• No discrimination – period. If an automated decision-making system (ADS) causes bias, you’re on the hook.
• Bias audits are strongly encouraged. While not mandatory, conducting audits helps demonstrate good faith if you’re ever challenged legally.
• Keep your records. You must retain all documentation related to ADS use for four years, including inputs and outputs.

The definition of AI under these rules is intentionally broad. Resume screeners, video interview scoring tools, and algorithm-driven performance reviews can all fall under the category of “automated decision systems.”