AI hiring tools may be filtering out the best job applicants
Rimu@piefed.social to 
bbc.com
an AI resume screener had been trained on CVs of employees already at the firm, giving people extra marks if they listed "baseball" or "basketball" – hobbies that were linked to more successful staff, often men. Those who mentioned "softball" – typically women – were downgraded.
Marginalised groups often "fall through the cracks, because they have different hobbies, they went to different schools"
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Legal?
I get that some people would decline, sure. But what do you think is illegal about it?
I dunno what country you're in, but in my country you are required by law to have a valid reason to reject a job candidate. That reason can be pretty simple, such as "your application was not as strong as other candidates" but you need to be able to back that claim up if you're challenged (and you can be challenged on it).
The recommended approach is to have a list of selection criteria, and carefully consider each one then write it down and keep a record of the decision for a while, incase you end up on the wrong end of a discrimination lawsuit. Candidates have the right to ask why they were unsuccessful (and they should ask - to find out what they can do better to improve their chances next time. As a hiring manager I would note down anyone who asks and consider offering them a job in the future, bypassing the normal recruitment process).
I rank each criteria from one to ten, then disregard the worst scoring candidates until I have a short list that I can compare directly (at that point, I wouldn't worry too much about numbers. You are allowed to say "you were a great candidate, but we had multiple great candidates and had to pick one. Sorry".
If your selection criteria includes "they need to wear nice clothes" then you're treading on very dangerous territory and could be breaking the law. The damages here are commonly six months pay at the salary of the position they applied for, and can also include a court order for you not to be involved in the hiring process going forward.
It's perfectly reasonable to require someone to dress well if they have a customer facing role... but that requirement should be implemented at work and not during the job interview. I'm well aware that a lot of hiring managers rely heavily on these things to make their decision but they should not be doing that. It's not as bad as picking someone because they're a straight white male candidate (which is also very common), but it's still a bad policy.
What legal reason(s) do you have for needing to see their appearance when making a decision on whether to hire them? You may have some, such as requiring a professional appearance. These need to be spelled out in the job requirements. It also opens the doors to claims of illegal discrimination, since this will be on full display. In the US, that includes race, age, and gender. Having a required video can also reveal protected classes like familial status and religion, depending on what's in the background.
Whether an action is "Legal" is almost always dependent on context, and the lawyers/courts involved. A common tactic by racist nightclubs is to set a dress code, particularly on shoes. The argument is they aren't refusing entry based on race, but on clothing. But the unauthorized shoes are the ones commonly worn by people of the race they're discriminating against. Different courts have made different rulings on whether this (and similar actions) constitute racial discrimination.