Layoff Two-Step Underscores AI’s Limitations

For companies that moved fast and are now backtracking, the consequences may extend well beyond embarrassment. The most immediate legal concern is also among the most straightforward: When a company lays off workers citing AI and then turns around and rehires for the same roles, it invites scrutiny of whether the original rationale was genuine.

“When you tell folks initially, ‘We’re doing layoffs and that means we’re eliminating your positions,’ but then shortly thereafter you fill the positions again … that always creates a little bit of ‘Wait a minute, did my employer tell me the truth?’” said Marissa Mastroianni, a member at Cole Schotz. “‘Because I looked, and now two months later, they’re hiring my position back. Does that mean that the reason for termination was pretextual, and instead I was actually fired due to [being in] a protected category?’”

The process itself — how the layoffs were done and how the rehiring is being done — could also draw scrutiny, Mastroianni warned, especially in scenarios where those who were let go or those asked back (or not asked back) are members of a protected group.

“If you terminated everyone in a classification but only rehired people who were under 40 years old, that’s going to create some age discrimination claims, potentially,” Mastroianni said. The important lesson: The selection criteria that governed the layoff and the selection criteria that govern the rehire require equal scrutiny.

Federal and state law regarding WARN act notifications add more complexity. The federal WARN Act requires 60 days’ advance notice before a qualifying mass layoff, though exceptions exist for unforeseeable business circumstances. If a company invoked one of those exceptions to shorten or eliminate the notice period — and then rehires within months — the reversal could call the exception into question. Mastroianni also noted that properly drafted severance agreements, while they come at a cost, remain one of the more effective tools for limiting exposure from future claims.

The state landscape is shifting rapidly. Colorado’s AI Act, currently expected to take effect June 30, requires employers to guard against algorithmic discrimination and imposes civil liability for violations. Illinois’ law, in effect since January, prohibits AI-driven discrimination in personnel decisions and requires notification when AI is used in hiring or firing, though it’s noteworthy that the state is still deciding on the rules. In New York City, a measure in effect since 2023 requires employers to conduct bias audits of automated employment decision tools used in hiring and promotion. A pending California bill would extend the state’s WARN Act specifically to AI-driven layoffs, requiring 90 days’ notice and lowering the workforce threshold that triggers the requirement. That’s to say nothing of the EU’s new risk-based framework under the AI Act, which may apply to companies in the US. 

Mastroianni noted that while the legislative activity has been significant, seminal court decisions haven’t come down — yet. 

“A lot of times … there is a lag between when the events actually happen and when they get litigated through the court system,” she said. “We’re still on the precipice of that. But between now and a year from now, I think we’re going to see a lot more litigation getting filed.”

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