The landscape of artificial intelligence regulation in employment has taken a turn. The recent Senate vote striking down the proposed 10-year moratorium on state AI regulation by an overwhelming 99-1 margin signals a clear message: states will continue to lead the charge in governing how AI is used in hiring and employment decisions. For employers operating across multiple states, this development creates both challenges and opportunities that demand immediate attention and legal advice to comply.

The New Reality: A Patchwork of State Regulations Emerges

Without federal preemption, employers now face an increasingly complex web of state-specific AI regulations. This means that a company with offices in New York, California, Colorado, and Illinois must navigate four different sets of rules, compliance requirements, and penalties related to AI–each with unique provisions and timelines.

The implications extend far beyond simple compliance checklists. Multi-state employers must be prepared to develop sophisticated systems to ensure their AI-enabled recruitment and hiring tools meet the most stringent requirements across all states in which they operate. This often means adopting the highest standard as a company-wide policy, as managing different AI practices for different locations can be operationally complex and impose additional legal risks.

Current State AI Regulations

Laws Already in Effect

New York City Local Law 144 has been operational since 2023, requiring bias audits for automated employment decision tools (AEDTs) used in hiring and promotion decisions within NYC. Employers must provide candidates with prior notice of AEDT usage and allow them to request alternative evaluation methods, with penalties ranging from $500 for first violations to $1,500 for subsequent violations.

Laws Taking Effect in 2025

California has finalized comprehensive AI employment discrimination regulations that are set to go into effect on October 1, 2025. These rules, approved by the California Civil Rights Council in March 2025, send a clear message that while AI tools can be valuable in recruitment, hiring, and workforce management, they must not be used in ways that discriminate against applicants or employees.

Laws Coming in 2026

Illinois passed House Bill 3773 (HB 3773), with an effective date of January 1, 2026, amending the Illinois Human Rights Act (IHRA), which prohibits employers from using AI that, “has the effect of subjecting employees to discrimination on the basis of protected classes.” HB 3773 sets clear expectations for transparency: employers must inform both applicants and employees whenever AI is used in employment-related decisions.

Illinois passed House Bill 3773 (HB 3773), with an effective date of January 1, 2026, amending the Illinois Human Rights Act (IHRA). Under the amended law, employers may not use AI in ways that lead to unlawful discrimination in hiring, recruitment, or other employment decisions. It also bars practices that result in discriminatory outcomes, including the use of geographic indicators, such as zip codes, that could serve as stand-ins for protected characteristics under the Act.

Colorado passed the Colorado Artificial Intelligence Act (CAIA), a comprehensive AI legislation, in May 2024 with an effective date of February 1, 2026. The law identifies hiring, compensation, promotion, performance management, and termination as high-risk areas when using AI technology, applying to employers in Colorado with more than 50 employees.

States with AI Legislation in Process

With the federal moratorium lifted, employers can expect to see the momentum of state-centric AI regulations continue to build across the nation. Over 30 states have formed AI committees or taskforces that have begun issuing reports and recommendations, many of which will turn into proposed legislation, with California and New York expected to be among the states on the forefront in 2025.

• Connecticut is actively developing AI legislation similar to New York’s approach, with lawmakers focusing on transparency and accountability measures.
• Maryland has enacted HB 956 that establishes a working group tasked with studying the private sector use of AI, indicating potential future regulatory action.
• Kentucky has taken preliminary steps by enacting SB 4, which directs the Commonwealth Office of Technology to create policy standards governing the use of AI

In addition, several states are also in various stages of committee review and public comment periods, with proposed legislation expected to emerge throughout late 2025 and 2026.

Key Compliance Considerations for Multi-State Employers

Risk Assessment and Audit Requirements: Most state laws require regular bias audits and impact assessments of AI systems used in employment decisions. It’s imperative that employers create AI risk management policies and programs, complete impact assessments for all AI systems, both annually, as well as within 90 days after any modifications are made.

Transparency and Notification: Certain jurisdictions require notification when a job applicant directly interacts with an automated system, including states such as California, Colorado, and Illinois.

Vendor Relationships: Some proposed rules treat vendors as agents of employers by virtue of providing AI systems, creating additional compliance obligations and potential liability for the performance of third-party AI tools.

Documentation and Record-Keeping: Multi-state employers need robust documentation systems to demonstrate compliance across different jurisdictions, each with varying requirements for data retention and reporting.

Looking Ahead

The rejection of the federal moratorium means we can expect continued expansion of state AI regulations. Smart employers are taking proactive steps now:

• Conducting comprehensive audits of current AI use in all employment processes
• Establishing cross-functional teams that include HR, legal, IT, and compliance professionals
• Investing in AI governance platforms that can manage multi-jurisdictional requirements
• Building relationships with AI vendors who understand the regulatory landscape

As these regulations continue to evolve, DirectEmployers remains committed to providing the resources, education, and support our Members need to navigate this complex landscape successfully. Our support extends beyond traditional VEVRAA and Section 503 requirements to address the evolving compliance challenges employers face. Why? Organizations proactively addressing evolving regulatory changes, like multi-state AI or even pay transparency regulations, will be better positioned to maintain their commitment to fair and equal hiring practices.

Register today for the webinar on August 13th at 2:00 pm hosted by the attorneys at Roffman Horvitz to learn more about the the changing landscape for AI regulation, and the impact it will have on employers, the tools they use for hiring, and how to ensure that these tools appropriately meet compliance with the oncoming state regulation of AI.