Artificial Intelligence has quickly evolved. However, use of AI tools in the workplace can have profound consequences. Use in the workplace is not risk-free. In addition to potential copyright infringement and other privacy concerns, “hallucinating” AI where the tool makes up nonexistent information is a major issue. There are several instances where lawyers in both Canada and the U.S. were reprimanded for use of AI. In Canada, a lawyer submitted court documents containing fake legal cases generated by an AI tool. This happened again in September of 2025. In both cases, legal documents were created using AI tools and included made-up citations to non-existent cases.

Misuse of AI in the workplace could set a dangerous precedent.

The message for employers is clear: when AI is deployed in the workplace, there are potentially serious trust and legal issues – particularly if there are no guidelines in place. In Ontario, even though there is no single “AI law” at this time, employers must still think about privacy and employment law implications.

The Legal and Regulatory Landscape in Ontario & Canada

At the federal level, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) governs how private-sector organizations collect, use, and disclose personal information in the course of commercial activities. PIPEDA also applies to the personal information of employees of federally regulated businesses.

The federal government has also introduced the Artificial Intelligence and Data Act, which is expected to impose obligations on certain high-impact AI systems.

BC, Alberta, and Quebec have stand-alone private-sector privacy laws. However, Ontario does not, which means Ontario employers rely on PIPEDA and common law concerning privacy.

Regarding AI in the workplace, starting January 1, 2026, employers in Ontario must disclose the use of AI in their public job postings, in accordance with the Employment Standards Act, 2000. However, that is the extent of the current regulations related to the use of AI.

For the public sector (government institutions) in Ontario, the Freedom of Information and Protection of Privacy Act applies, and the government has also issued an AI “Responsible Use” directive for ministries/agencies.

Key Risks for Employers to Consider

Despite not having standalone regulations related to privacy and a lack of regulations related to AI, employers should consider stringent policies within the workplace. AI is no longer a “novelty” in many industries. It has become a necessity. As such, the legal landscape is shifting. For employers, this means significant liability if it should be misused. Properly drafted policies related to use of AI, while ahead of their time, will ensure employers avoid potential risks and costly litigation related to misuse of AI.

Here are the primary risks employers should be aware of:

The hallucination trap: Accuracy and reliability

The biggest risk with workplace AI is content accuracy. AI models are designed to be fluid and persuasive, not necessarily factual. AI “hallucinations” – instances where the tool generates plausible but entirely fabricated information – can lead to dangerous safety oversights or catastrophic professional errors. In addition to the cases mentioned above, there are documented instances where AI provides incorrect information that is, in some cases, dangerous to users. The reality is, “AI wrote it” will not stand up as a defense in court.

Collection, use, and disclosure of personal information

AI tools collect vast amounts of data (inputs) and draw inferences (outputs) about individuals. Consider that every prompt entered by an employee could be training a third-party model, leading to accidental leaks. The collection, use, and disclosure of personal information via AI tools often bypasses traditional privacy safeguards. Employers should ensure the deployment of AI in compliance with the applicable privacy legislation.

Algorithmic bias in recruitment, selection and performance

In addition to the job posting disclosure requirement mentioned above, employers should also consider the potential risk of human rights claims. Consider that AI is learns from human behaviour – including bias. Therefore, it wouldn’t necessarily eliminate bias but amplify it. Training an AI tool based on historical data that reflects past prejudices will likely systematically disadvantage protected classes under the Ontario Human Rights Code. Bias is a liability for employers. AI-driven decisions still require human oversight to avoid the risk of costly human rights claims.

Employee monitoring & surveillance

Monitoring that is overly intrusive, lacks transparency, or creeps into private spaces can trigger privacy complaints and lower employee morale. If an employer uses AI to monitor employee behaviour (for example: keystroke tracking, sentiment analysis of internal chats, location tracking), ensure the monitoring is reasonable, proportionate and transparently communicated.

Recommendations For AI Use in the Workplace

To mitigate liability and protect the organization’s reputation, move beyond “best guesses” and implement these core recommendations:

1. Human verification: Never treat AI output as a finished product. If employees rely on generative tools, human oversight is mandatory. Implement a strict review process to verify facts, eliminate “hallucinations,” and ensure technical accuracy before any output is finalized or shared.
2. Algorithmic transparency: Employers must be able to explain how an AI-assisted decision was reached. Build a clear pathway for challenge and correction so employees or candidates can contest automated outcomes. Transparency is the best defense against claims of systemic bias or discrimination.
3. Data minimization & hygiene: Treat data as a liability, not just an asset. Use AI only for defined, legitimate business objectives. Prohibit the entry of sensitive personal information or proprietary “trade secret” data into public AI feeds. Lastly, restrict data access to only those who require it for their specific roles.
4. Policy evolution: Engage legal counsel to draft or revise current policies on privacy and monitoring, remote work agreements, and acceptable use of AI.