PEOS AS KEY PARTNERS IN AI COMPLIANCE AND RISK MANAGEMENT

AI is revolutionizing the way employers operate, providing powerful tools that enhance efficiency, drive automation, and deliver data-driven insights. Increasingly, HR professionals are turning to AI to streamline the preparation of employment-related documents and analyze vast amounts of data to uncover patterns and trends shaping the workplace. In fact, according to a survey conducted by SHRM, nearly 1 in 4 organizations now leverage AI to support HR functions.

However, while AI can significantly optimize processes, it also introduces substantial compliance risks, particularly when it comes to safeguarding employee privacy.

As trusted advisors, PEOs are uniquely positioned to guide their clients through the complexities of integrating AI into HR operations. The goal should be to improve efficiency, but also to ensure that legal and ethical responsibilities are met.

To truly unlock its potential, HR solutions must be built on a solid foundation of compliance, fostering trust and transparency within the workforce. In this article, we’ll explore key strategies that empower you to mitigate these risks effectively, ensuring your clients harness the transformative potential of AI while safeguarding their legal and ethical obligations.

ESTABLISH CLEAR AI POLICIES AND TRAINING

PEOs should advise client companies to include AI-specific guidelines in their workplace policies. These policies should outline:

• Approved AI tools and their specific uses
• Who can access AI-generated information
• What employee data AI systems can process
• How AI-generated information may be disclosed
• Applicable federal, state, and industry regulations

Employees interacting with AI systems must be trained in these policies to ensure compliance and proper data handling.

AVOID USING OPEN AI SYSTEMS FOR EMPLOYEE DATA

Open AI systems (such as ChatGPT’s free version) do not restrict how input data is stored or used. Entering sensitive employee information into these systems could result in unintended data exposure or violations of state and federal privacy laws. PEOs should guide clients toward closed, proprietary AI systems with robust security controls.

VET AI VENDORS THOROUGHLY

Employers should carefully evaluate AI vendors before implementation. You can advise clients to ask vendors:

• How is employee data secured and stored?
• Under what conditions is data shared with third parties?
• Does the AI tool comply with relevant data privacy laws?
• Are external validation studies available to verify system accuracy and bias mitigation?

MONITOR AI SYSTEMS FOR COMPLIANCE AND FAIRNESS

Many AI-driven HR tools function as “black boxes,” making it difficult to understand how decisions are reached. Advise clients to:

• Regularly audit AI-generated outputs for biases or inconsistencies
• Review AI decision-making processes to ensure compliance with anti-discrimination laws
• Maintain transparency with employees about AI’s role in HR processes

IMPLEMENT AND MAINTAIN STRONG DATA SECURITY PROTOCOLS

AI systems must align with an organization’s broader cybersecurity framework. PEOs can help clients ensure AI platforms comply with existing data security policies, conduct risk audits to identify potential data exposure risks, and regularly update software to address security vulnerabilities

USE AI FOR EMPLOYEE MONITORING WITH CAUTION

AI-powered employee monitoring—such as tracking productivity, GPS locations, or digital activities—raise legal and ethical concerns. Many states regulate workplace surveillance, restricting video recording, location tracking, and keystroke monitoring. PEOs should guide clients in understanding these regulations and obtaining employee consent where required.

COMPLY WITH STATE-SPECIFIC PRIVACY LAWS

State laws vary regarding employee data protections. Some require employee consent before data collection, notification about how personal information is stored and used, and secure disposal of employee records.

Additionally, consumer data privacy laws in states like California (CCPA) may apply to employment data, requiring businesses to adhere to strict security and privacy standards. Employers should stay informed about evolving regulations to maintain compliance.

ENSURE COMPLIANCE WITH BIOMETRIC PRIVACY LAWS

AI tools that process biometric data—such as facial recognition, fingerprint scans, and physiological monitoring—are increasingly regulated at the state level.

To mitigate risk and ensure compliance, advise clients to obtain explicit employee consent before collecting biometric data, verify AI vendors comply with biometric privacy laws, and implement strong security measures, including encryption and restricted access controls

BE MINDFUL OF AI USE DURING OPEN ENROLLMENT

AI-powered benefits platforms help employees navigate open enrollment, but they also collect sensitive health and financial data. Professional employer organizations (PEOs) should ensure clients:

• Comply with HIPAA and other relevant regulations to protect employee data
• Are transparent with employees about how AI tools collect, store, and use personal information
• Follow proper data retention and disposal policies that align with legal requirements

AI SHOULD COMPLEMENT, NOT REPLACE, HR AND LEGAL EXPERTISE

Given AI’s immense potential, it’s important for employers to acknowledge the risks and establish clear policies and safeguards to protect their workforce. While it can be an invaluable asset in HR, it should serve to enhance—not replace—human decision-making.

With a thoughtful strategy, you can help clients leverage AI to improve efficiency, strengthen compliance, and build employee trust.