Artificial Intelligence (AI) is significantly transforming organizational systems, workforce competencies and employee experiences across industries. In this context, employee upskilling has emerged as a strategic organizational approach for improving workforce adaptability, technological readiness and employee engagement in digital work environments. The present study examines the influence of employee upskilling on employee engagement, with psychological empowerment functioning as a mediating mechanism in AI-enabled workplaces. The study adopted a quantitative research design using primary data collected from 320 employees working in sectors including information technology, banking, telecommunications, manufacturing and digital services. Data were analyzed using reliability analysis, Confirmatory Factor Analysis (CFA), regression analysis and Structural Equation Modeling (SEM). The findings revealed that employee upskilling significantly influences psychological empowerment and employee engagement. Psychological empowerment also demonstrated a significant positive effect on employee engagement and partially mediated the relationship between employee upskilling and employee engagement. The study concludes that organizations emphasizing workforce development, empowerment-oriented leadership and psychologically supportive work cultures are more likely to strengthen employee adaptability, behavioural engagement and organizational resilience during technological transformation. The findings contribute to emerging literature in Organizational Behaviour and Human Resource Management by integrating Human Capital Theory, Psychological Empowerment Theory and the Job Demands–Resources (JD-R) Model within the context of AI-driven organizational transformation.