the Watchtower requires Jehovah's Witnesses in terms of violating confidentiality to the elders of the religion.
I don't think this is correct. Isn't it a "conscience matter"?
The effect is the same. That's the important thing
Given that this technique is used by certain religions as a loophole to get around laws that other Americans are forced to follow, it should be illegal
I don't agree. Small businesses have a lot of leeway as to who they hire, and I think there are compelling arguments why it should be that way. First of all, it's not used by the religions themselves as a loophole; it's used by members of the religions. As far as I know, there is no WT direction that if a JW owns a business, they should only hire other JWs. Some just choose to do that, and I have known of JWs who employed non-JWs.
Let's say John Doe wants to follow the American Dream and start a business. Maybe a restuaurant. To start off with, he hires his wife, his sons, his sister, and his cousins. It's a family business. Being from the same family, they are all Catholic. Imagine that the business does well, and John decides to hire a couple of his son's friends from school as waiters. Since the sons went to Catholic high school, the friends happen to be Catholic also. He may not want to place a newspaper or internet ad but hire his family and family friends that he thinks he can trust. Are you telling me that you would force a business owner like this to hire someone that he doesn't know just so he has a religiously diversified staff? I am sure this kind of thing happens all over the US in small businesses. People like to hire their friends and family, and religious people often have most of their friends and family in the same religions as them.
It's a dangerous road you want to go down. The effect being the same is not a good reason. That is not what laws are based on. Lots of jobs in small businesses are off limits to lots of people. Go to any family owned dry cleaners or gas station or barber shop or law firm or convenience store and see if you can get a job there. Now if someone got fired because they got DF'd, like someone else mentioned, that would be a problem and they should make a stink about it. Asking how active somebody is in the ministry in a job interview is probably over the line too and could be a problem if the person wanted to pursue it.