Author: Karine Prophete
We've seen how rapidly AI systems are reshaping how employers deliver and manage employee benefits, whether it's smart wellness platforms, automated claims triage or predictive leave modeling and personalized health tools.
However, with innovation comes regulation. The EU Artificial Intelligence Act (EU AI Act)1 introduces a new level of accountability for organizations using AI systems. This regulation is designed to ensure transparency, fairness and compliance in the use of AI technologies. The Act applies to providers, such as developers and vendors, and to deployers, such as employers, HR teams and benefits leaders.
For companies operating in Europe or offering benefits to employees based in the EU, compliance with this regulation isn't optional but a fundamental operational requirement.
Key enforcement milestones
The implementation of the EU AI Act will occur in phases, with all provisions set to take full effect by August 2027.
- February 2025: Prohibited practices are banned.
- August 2025: Initial obligations for general-purpose AI (GPAI) apply.
- Through 2026: Additional requirements will be publicized.
- August 2, 2027: Full high-risk regime are in force.
The legal framework: Understanding the four risk categories
To whom does the EU Artificial Intelligence Act apply?
- Benefit leaders
- Legal and compliance teams
- Head of reward and HR leaders
- Multinational employers with EU-based employees
- Vendors and partners in the benefits technology space
The EU AI Act establishes a four-tier risk levels classification for AI systems.
Unacceptable Risk (prohibited): AI that manipulates behavior or exploits vulnerabilities. For example, subliminal techniques influencing employee choices.
High Risk: Annex III2 explicitly includes AI used in employment and worker management. For example:
- Automated benefit eligibility decisions
- Performance monitoring tools that affect pay or promotion
- Wellness scoring or absence predictions models that materially influence outcomes
These systems must comply with strict obligations for data governance, human oversight, transparency, logging, bias monitoring and post-market surveillance.
Limited Risk (specific transparency obligations): Systems such as chatbots for benefits FAQs must clearly disclose that they're AI.
Minimal Risk: General-purpose systems with negligible impact.
Platforms likely in scope of the AI Act
Even if headquartered outside the EU, a US-based or global employer must comply if AI tools are used for EU-based employees or have EU market impact. The Act categorizes AI system based on their risk levels and imposes specific requirements to ensure transparency, fairness and accountability.
Below is an overview of various AI use cases, their associated risk tiers under the Act and the required employers' actions to ensure compliance. The two impact assessments required for some uses are:
- Fundamental Rights Impact Assessment (FRIA), which is required for public organizations and specific high-risk use cases such as insurance pricing
- General Data Protection Regulation (GDPR) Data Protection Impact Assessment, which is required for private employers whenever processing may create high risks, such as employee monitoring or profiling
| Use case | EU AI Act Risk tier | Employer action |
| Automated benefit eligibility decisions | High Risk (Annex III: employment/worker management)2 | Require human oversight, conduct GDPR DPIA, audit vendor compliance. |
| Performance monitoring affecting pay/promotion | High Risk (Annex III: employment/worker management) | Implement bias monitoring, human review and contestation rights. |
| Absence/leave prediction tools | High Risk if outputs influence employment outcomes; otherwise, Limited Risk (transparency only) | Assess outcome significance; document risk classification. |
| Wellness scoring with employment impact | High Risk if influencing eligibility or outcomes; otherwise, Limited Risk (transparency only) | Audit impact pathways; disclose use; review compliance. |
| Wellness nudges (advisory only) | Limited Risk (AI disclosure required) | Provide AI disclosure notice; monitor for scope creep into high-risk. |
| Chatbots answering benefits FAQs | Limited Risk (AI disclosure required) | Provide AI disclosure notice. |
| Claims triage platforms | High Risk if outcomes affect claims eligibility; otherwise, transparency only | Check if outcomes materially affect eligibility; apply oversight accordingly. |
| Fraud detection in insurance | High Risk (insurance sector obligations) | Ensure bias/fraud monitoring safeguards; verify compliance. |
| Life/health insurance risk assessment and pricing | High Risk (explicitly listed in Annex III2) | Conduct FRIA/DPIA as required; audit data quality and fairness. |
| General-purpose productivity tools | Minimal Risk | No additional compliance burden; document minimal risk status. |
AI Act compliance requirements for employers
For companies with EU-based staff, navigating the compliance landscape under the EU AI ACT isn't just a legal necessity but critical business priority. The regulation sets forth stringent requirements to ensure AI systems are transparent, fair and ethically deployed.
The consequences of failing to comply are significant, with penalties ranging from millions of euros to a percentage of global turnover, depending on the severity of the violation.
Beyond financial risks, non-compliance can undermine employee trust, disrupt organizational reputation and create operational disruptions. Companies must proactively address these requirements to ensure their use of AI aligns with legal mandates and upholds ethical standards.
Key requirements
- Transparency (Article 503): Employees must be informed when interacting with AI or when AI shapes decisions.
- Interpretability and human oversight: High-risk systems must generate outputs that humans can interpret, review and override.
- Bias monitoring: Systems must not discriminate by gender, age, nationality, disability, or other protected traits.
Use the EU AI Act Compliance Checker to conduct a thorough assessment of your AI system and ascertain its applicability under the provisions of the Act.
What to do now: Analyze your technology ecosystem
Employers must act now to adopt a proactive strategy for managing AI within their organizations.
Map your benefits technology ecosystem
Create an inventory of all AI-enabled systems, such as wellness apps, claims triage platforms and other tools. Assess whether these AI tools might pose a significant level of risk by asking "Does this tool materially influence employment outcomes?"
Classify and assess risk
Evaluate potential risks associated with AI systems and establish robust governance frameworks to ensure their responsible and effective use. HR leaders and benefits leaders should thoroughly evaluate tools that may fall into the high-risk tier. They should pay particular attention to systems that impact benefits eligibility, personalized employee experiences or interventions that influence employee decisions and outcomes.
Reassess vendor relationships
As AI becomes more integrated into employee benefits and HR systems, it's essential for organizations to take a closer look at their vendor relationships. Vendors play a critical role in providing platforms and tools that drive decision-making, personalization and employee engagement.
It's important to ask vendors the right questions to evaluate the risks, understand the safeguards in place and ensure alignment with your organization's values and compliance requirements. Here are some example questions to help steer these discussions:
- Does your platform use AI? If so, for what?
- Can you provide risk documentation or impact assessments?
- How are fairness and bias monitored?
- Is your platform fully compliant with GDPR and other EU data protection laws?
Establish governance and training
While many companies are eager to adopt AI, already integrated it into their operations, or are working with vendors that use AI systems, they often lack the necessary governance frameworks to manage its associated risks. The gap between rapid adoption and insufficient preparedness presents a pressing challenge that organizations must address.
To close this gap, fostering cross-functional collaboration among HR, Legal, Compliance and IT teams, as well as creating a governance playbook, is crucial. Organizations need to design a comprehensive framework to evaluate AI systems, identify and mitigate risks and address employee concerns. This governance playbook should include well-defined policies, such as:
- Require human review and final decision-making for critical AI system recommendations, especially those impacting employees.
- Mandate regular audits of AI systems to identify and mitigate potential biases in data, algorithms, or outcomes.
- Implement strict data governance policies to ensure compliance with data privacy regulations, such as GDPR.
- Provide training programs to educate employees on the responsible use of AI systems and their potential risks.
- Clearly disclose to employees when and how AI influences decisions.
Building trust and credibility
The EU AI Act is more than just avoiding penalties. It's about fostering trust in the use of technology within the workplace. The EU AI Act challenges employers to think more critically about how AI is integrated into the employee experience. For benefits leaders, it's an opportunity to lead not just to compliance, but to ethics, transparency and trust.
As employees become increasingly aware of how their data is collected and used, ensuring transparency and fairness in AI-driven decisions — particularly those impacting health, compensation and wellbeing — is critical for maintaining employee engagement and organizational credibility.
Additionally, this regulation is shaping the foundation for future global AI standards. Even if your company isn't based in the EU, similar regulations are likely to emerge in other jurisdictions, making proactive compliance a strategic advantage.
How can we help?
At Gallagher, we understand the complexities and challenges organizations face in navigating the evolving landscape of AI-driven workforce management and compliance. Contact us today to get your journey started.
