By Courtney Peters, Vice President, Management Liability, Munich Re Specialty — North America

Challenging economic conditions that lead to layoffs often result in more employment practices liability (EPL) claims. January 2026 was the worst month for layoffs since 2009, with US employers shedding more than 108,000 jobs.¹ Economic pressures and uncertainty, along with widespread adoption of artificial intelligence (AI) in the workplace and the varying state laws regarding AI, are likely to increase EPL litigation during 2026. Now is a good time for private employers and their risk advisors to review compliance requirements and take steps to mitigate their employment practices liability exposure. 

An area where AI in the workplace is drawing more scrutiny is human resources processes. AI tools intended to aid HR departments in recruiting job candidates, managing employee performance, and optimizing workforces are attracting attention from regulators — and plaintiffs’ attorneys.

Local and state laws in several jurisdictions, including California, Colorado, Illinois, New York, and Texas, now require audits of AI systems to detect bias. New York City Local Law 144, for example, requires employers and employment agencies that use automated employment decision tools (AEDTs) to conduct independent audits that include bias testing for disparate impact on protected employment categories, such as race, gender, and ethnicity.⁵ The New York law also requires employers to disclose use of AEDTs to job applicants and employees. Financial penalties apply to each instance of violation.

EPL claims arising from automated HR tools are growing. Claims of bias and disparate impact from AI are pending in California and elsewhere.⁶ The result of these trends is employers face heightened expectations for transparency and consistency in employment practices, especially where AI is utilized. Laws are changing constantly, which means employers should consult qualified legal professionals to stay up to date.

Historically, EPL claims are more frequent during periods of stagnant wage growth, reduced household savings, and rising consumer debt, but AI is turbocharging the claims environment.

Financial instability makes workers more sensitive to perceived unfairness in the workplace. This perception often leads to claims, including:

• Retaliation
• Harassment
• Constructive discharge
• Wrongful termination

These categories of claims are particularly acute during restructurings and layoffs, and pending lawsuits cite AI bias as grounds for litigation. A January 2026 class-action lawsuit in California, for example, focuses on AI hiring processes and lack of transparency rather than adverse outcomes, a theory that could extend broadly to employers.⁷

Private companies can take action to mitigate their EPL exposures. Among the steps that employers should consider are:

• Assess employment practices for inconsistencies and compliance issues, especially when using AI tools. Humans should always be involved in conducting audits of employment practices.
• Improve governance and transparency with regard to HR policies and AI-informed decision making.
• Engage qualified legal counsel to understand applicable employment laws and ensure compliance.
• Consult with risk and insurance partners to build and implement appropriate private management liability insurance.

Munich Re Specialty combines underwriter expertise with innovative, value-added solutions and loss prevention resources for businesses. The Management Liability team provides our clients free access to AI checklists and other workplace resources. 

Sources:

¹ Stunson, M. (2026, February 5). January Layoffs Surge Across US, Jobs Report Says. Forbes. https://www.forbes.com/sites/mikestunson/2026/02/05/us-jobs-disappear-at-fastest-january-pace-since-great-recession/

² Unemployment Rate, Federal Reserve Bank of St. Louis, December 2025; https://fred.stlouisfed.org/series/UNRATE

³ Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Federal Reserve Bank of St. Louis, December 2025; https://fred.stlouisfed.org/series/CPIAUCSL

⁴ Robinson, B. (2025, January 24). The Wage Crisis Of 2025: 73% Of Workers Struggling. Forbes. https://www.forbes.com/sites/bryanrobinson/2025/01/24/the-wage-crisis-of-2025-73-of-workers-struggling/

⁵ Automated Employment Decision Tools (AEDT) | DCWP. (n.d.). www.nyc.gov. https://www.nyc.gov/site/dca/about/automated-employment-decision-tools.page

⁶ New HR Guide: Legal Considerations for AI in the Workplace. (2025, January 9). HRMorning. https://www.hrmorning.com/articles/legal-considerations-for-ai-in-hr/

⁷ California’s AI Hiring Rules Are Now in Effect—and New Lawsuits Expand Employer Risk | JD Supra. (2026). JD Supra. https://www.jdsupra.com/legalnews/california-s-ai-hiring-rules-are-now-in-8978131/