AI in Recruitment: Who Is Liable for AI Mistakes in Recruitment? What Employers Need to Know

As artificial intelligence transforms recruitment across engineering and manufacturing sectors, a critical question emerges: when AI-powered tools make mistakes in your hiring process, who carries the legal and financial risk?

With the EU AI Act becoming enforceable on 2 August 2026 and the UK's evolving regulatory framework, understanding liability in AI-powered recruitment has never been more important. For organisations using Recruitment Outsourcing or agency partners, the answer is more complex than you might think.

The AI Recruitment Landscape in 2026

Research indicates that between 42% and 72% of organisations now use AI systems in recruitment for CV screening, candidate ranking, and predictive analytics. However, these tools introduce significant legal and compliance risks.

The EU AI Act classifies recruitment AI as "high-risk," imposing strict requirements on transparency, human oversight, bias testing, and documentation. Although the UK has adopted a lighter-touch approach, AI recruitment tools must still comply with the Equality Act 2010, UK GDPR, and emerging ICO guidance.

Real Discrimination Risks

The risks aren't theoretical. Recent research highlighted concerning discrimination patterns in AI recruitment tools, finding bias against candidates wearing headscarves, those with names perceived as Black, applicants requesting disability adjustments, and non-native English speakers.

In November 2024, the ICO discovered that AI recruitment software was filtering candidates based on protected characteristics, including gender, race, and sexual orientation, inferring these characteristics without candidates' knowledge or consent.

The consequences are serious: discrimination claims, data protection violations, and reputational damage can result from AI decisions made during your recruitment process, whether by your internal team or external recruitment partners.

Where Does Responsibility Lie?

If your recruitment agency or Recruitment Outsourcing provider uses AI tools, liability doesn't automatically rest with them. The legal position depends on several factors.

Direct Employer Liability: Under UK employment law, the ultimate hiring decision maker carries primary responsibility for discrimination, even when recruitment is outsourced. If an AI tool used by your provider discriminates, you could face tribunal claims.

Data Protection Responsibilities: Under UK GDPR, you typically remain the "data controller" with ultimate responsibility for lawful processing, even when agencies act as "data processors." This means if an AI tool processes candidate data inappropriately, you may be held accountable.

Contractual Risk Allocation: Many agencies seek to cap liability or exclude responsibility for AI tool performance. However, these protections don't prevent candidates from bringing direct claims against you, and may not hold up in court if considered unreasonable.

Shared Responsibility in Recruitment Outsourcing Models: In Recruitment Outsourcing partnerships, where providers operate as an extension of your business under your brand, the embedded nature means you share accountability for recruitment decisions and processes, including AI tool selection and oversight.

Key Regulatory Deadlines

EU AI Act (from 2 August 2026):
Organisations recruiting in the EU or handling EU candidates must ensure high-risk recruitment AI meets strict rules on bias testing, human oversight, transparency, documentation, and registration. Fines can reach up to 7% of global annual turnover. 
Even UK-only employers should pay attention, as the Act signals tougher expectations around automated decision-making that UK regulators are likely to follow.

UK Developments:
The Data (Use and Access) Act 2025 relaxes some restrictions but still requires safeguards and human oversight when using AI. The ICO is developing a statutory code on AI and automated decision-making, with a focus on transparency, oversight, and spotting unfair outcomes in recruitment. 
Together, these changes mean increased scrutiny of AI use in recruitment across the UK, not just for employers with EU operations.

What This Means for Your Organisation

If you use recruitment agencies or Recruitment Outsourcing providers who deploy AI tools, you need to act now to understand and manage your liability exposure.

Essential Questions to Ask Your Recruitment Partners

• Which AI tools are used in our recruitment process?
• Has the AI undergone bias testing?
• How do you ensure meaningful human oversight?
• What data protection measures are in place?
• How will you comply with the EU AI Act (if applicable)?
• Who carries liability for AI failures?
• What insurance coverage do you have for AI-related claims?
• Inability to answer these questions satisfactorily is a significant red flag.

Contractual Protections to Negotiate

• Warranties that AI tools comply with:
  • UK GDPR
  • Equality Act 2010
  • EU AI Act (where relevant)
• Transparency obligations regarding AI tools and their use
• Requirements for regular bias audits and human oversight
• Adequate insurance coverage for AI-related risks
• Clear allocation of liability
• Rights to approve or veto specific AI tools

Internal Governance

• Establish approval frameworks for AI tools used in recruitment
• Regularly review recruitment data for bias patterns
• Maintain documentation of oversight and due diligence
• Train hiring managers on AI-related risks
• Implement clear escalation procedures for concerns

At Owen Daniels, we specialise in engineering and manufacturing recruitment with deep understanding of both technical skills and the complex regulatory environment. Our Recruitment Outsourcing solutions are built on transparency, compliance, and human expertise.

We stay ahead of regulatory developments, build compliance into every process, maintain clear accountability, and never compromise on fair, lawful hiring practices. Whether you're concerned about AI liability in your current arrangements or looking to build a more transparent recruitment function, we can help.

AI is transforming recruitment, but when supported by the right governance, oversight and recruitment partner, organisations can adopt AI confidently without exposing themselves to unnecessary risk.