EPL Market Update 2026: Wage & Hour and AI-Driven Employment Risks

Employment-related liability tied to payroll, worker classification, scheduling, and hiring technologies is receiving heightened scrutiny from both regulators and plaintiffs’ counsel. As wage and hour claims remain highly active and AI-assisted hiring tools become more prevalent, employers are confronted with evolving and increasingly complex sources of liability exposure.

Wage and hour litigation trends

Wage and hour disputes continue to represent one of the most active areas of employment litigation in the U.S. These cases frequently involve allegations relating to employee classification, overtime eligibility, off-the-clock work, compliance with meal and rest break requirements, and reimbursement of work-related expenses.

Regulatory developments continue to evolve

The legal framework governing wage and hour compliance is highly fragmented, varying not only by state but often at the local level.  Employers must remain attentive to these shifting requirements, as they materially affect potential liability exposure. Minimum wage levels continue to rise across jurisdictions. In 2026, 88 jurisdictions, including 22 states and 66 cities and counties, are expected to raise their minimum wage^[1] rates by year-end.

Regulatory developments at the federal level further underscore this evolving landscape. In February 2026, the U.S. Department of Labor announced a proposed rule^[2] revising the standard for determining whether a worker qualifies as an employee or independent contractor under the Fair Labor Standards Act (FLSA). This proposal would replace the 2025 framework with an updated analysis focusing on factors such as the degree of control exercised over the worker and the individual’s opportunity for profit or loss. The intent is to provide greater clarity while ensuring that workers who meet the definition of employee receive protections such as minimum wage and overtime. Worker classification remains a primary driver of wage and hour litigation. Misclassification of employees as independent contractors can result in significant financial exposure, including liability for unpaid overtime, minimum wage violations, and other statutory damages under both federal and state laws.

Class actions continue to drive significant exposure

Unlike many employment-related disputes that involve individual claimants, wage and hour cases are frequently brought as class or collective actions, which significantly increases potential exposure. Recent enforcement activity highlights the scale of this risk. In 2025, following a multi-year investigation, Starbucks reached a $38M settlement with the New York City Department of Consumer and Worker Protection to resolve allegations related to noncompliance with fair scheduling requirements affecting thousands of employees. In addition to private litigation, regulatory enforcement remains a critical component of the risk landscape. The U.S. Department of Labor reported^[3] that 2025 was its highest year of back wage recovery since 2019, with $25M recovered through its Wage and Hour Division.

Coverage limitations remain important

While wage and hour claims are generally excluded from Employment Practices Liability (EPL) policies, some insurers offer sublimits for defense costs associated with such claims. Organizations seeking broader protection should evaluate standalone wage and hour policies, which provide coverage for wages, statutory damages, and other exposures that are not typically addressed under a traditional EPL policy.

AI and automated hiring decision tools

AI is creating a new category of employment risk, particularly where employers use automated tools to screen applicants, rank candidates, or assist in hiring and promotion decisions. Regulators are increasingly focused on the potential for AI systems to produce discriminatory outcomes, particularly where algorithms rely on historical data or proxy variables that may disadvantage protected groups.

Several jurisdictions have recently enacted laws regulating the use of AI in employment decision-making. Illinois’ Artificial Intelligence law (HB 3773) effective January 1, 2026, requires employers to provide notice when AI is used in recruitment, hiring, promotion, discipline, or termination decisions. The law explicitly prohibits^[4] the use of AI systems that produce discriminatory outcomes against protected classes. Similarly, California has expanded its employment discrimination laws to apply to automated decisions systems (ADS), extending protections under the California Fair Employment and Housing Act (FEHA) to AI-driven hiring tools and requiring meaningful human oversight of such systems. The amended regulations^[5] explicitly prohibit algorithmic discrimination against applicants or employees based on any characteristics protected by FEHA.

Litigation involving AI hiring tools is beginning to emerge

Recent litigation highlights the growing liability risks associated with the use of AI technologies in employment decisions. In Kistler v. Eightfold AI Inc., filed in California in January 2026, plaintiffs allege that the AI hiring platform covertly compiled detailed applicant profiles using online data and generated an algorithmic “match score” to rank candidates for employment opportunities. The lawsuit^[6] claims that these automated evaluations violated the Fair Credit Reporting Act (FRCA) because applicants were not notified that their data was being collected, were not provided copies of the reports, and were not given an opportunity to dispute inaccuracies.

In another ongoing case, Mobley v. Workday, Inc., applicants alleged that Workday’s AI hiring platform discriminated against candidates aged forty and above by automatically screening and ranking individuals. In May 2025, the U.S. District Court in Northern California granted conditional certification of a nationwide class, underscoring the potential for significant and systemic liability exposure^[7] arising from the use of AI-driven employment tools.

Governance and oversight considerations

These developments are likely to increase employer exposure to claims involving hiring discrimination, failure-to-hire allegations, or systemic bias linked to automated AI decision-making tools. As employers continue to adopt AI technologies, organizations should implement robust governance frameworks, conduct vendor oversight diligence, and ensure appropriate human oversight is maintained. Companies should also evaluate whether their insurance programs adequately address these emerging risks.

Preparing for emerging employment risks

Wage and hour litigation and AI-driven hiring practices demonstrate how routine employment processes can create significant and far-reaching liability exposure. Payroll practices, worker classification decisions, scheduling policies, and automated hiring tools may affect large groups of employees or applicants, thereby increasing the risk for class actions, regulatory investigations, and substantial defense costs. As these risks evolve, employers should not assume traditional EPL coverage will respond consistently to emerging exposures. Companies are encouraged to conduct a thorough review of their policies to understand how coverage may apply and determine whether additional or standalone coverage solutions are warranted.