New EO Targets Federal Contractor DEI Practices, Signals Increased Enforcement Activity

Takeaways

• A new EO targets “racially discriminatory DEI activities” by federal contractors and subcontractors.
• The EO will require new contract certifications and FAR amendments, impose flow down obligations to subcontractors, and reporting of potential violations by subcontractors. 
• Contractors should review their employment, contracting, program participation, and related practices for potential exposure.

Related links

• “Addressing DEI Discrimination by Federal Contractors” (EO)
• “Fact Sheet: President Donald J. Trump Addresses DEI Discrimination by Federal Contractors”

Article

On March 26, 2026, President Donald J. Trump issued the “Addressing DEI Discrimination by Federal Contractors” executive order (EO) and a White House fact sheet.

The EO continues the Trump Administration’s efforts to eliminate unlawful diversity, equity, and inclusion (DEI) practices and signals heightened enforcement risk, including under the False Claims Act (FCA).

Key Takeaways

• New terminology: The EO prohibits federal contractors and subcontractors from engaging in “racially discriminatory DEI activities,” which it defines broadly to include “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.” 
   
• Certification and contract risk: Contractors should expect an amendment to the Federal Acquisition Regulations (FAR) and a new, standardized contract clause requiring contractor agreement not to undertake racially discriminatory DEI activities and to comply with agency compliance audits.
   
• Flow-down obligations: Requirements will extend to subcontractors, increasing oversight and compliance burdens for prime contractors.
   
• Increased FCA exposure: Noncompliance — particularly with contract certifications — may raise contractor compliance risks, including the potential for more whistleblower actions, Department of Justice (DOJ) investigations, and potential cancellation, termination, suspension, or debarment.
   
• Immediate action recommended: Federal contractors and subcontractors should ensure they are aware of the recruitment, hiring, training, employment, and supplier diversity practices being used enterprise-wide and confirm compliance with antidiscrimination laws.

Key Provisions of New EO

The EO directs federal agencies to eliminate what it characterizes as unlawful DEI practices in federal contracting. It defines “racially discriminatory DEI activities” to mean “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.”

The EO goes on to define “program participation” as “membership or participation in, or access or admission to: training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.”

The EO also directs agencies to ensure, within 30 days (by Saturday, April 25), that “contracts and contract-like instruments, including” subcontracts and “lower-tier subcontracts,” contain a new clause requiring contractor’s (or subcontractor’s) agreement not to engage in racially discriminatory DEI practices, as defined.

This new certification requirement builds on EO 14173 (Jan. 21, 2025), which also requires federal agencies to include antidiscrimination law compliance certifications more generally. The new EO is different in that it requires specific language for federal contracts (and subcontracts) under which contractors must agree not to engage in racially discriminatory DEI practices, with specific consequences for violations.

The contract clause will require contractors to allow contracting agencies access to “books, records, and accounts” so agencies may ascertain compliance with the clause. In addition, contractors must “report any subcontractor’s known or reasonably knowable conduct” that may violate the clause and to inform the agency if a subcontractor sues the contractor and the suit “puts at issue, in any way, the validity” of the clause.

Finally, the clause requires the contractor to agree that the term is “material” for FCA purposes and states that noncompliance with the clause may result in the cancelation, termination, suspension, or debarment.  

The EO directs the FAR Council to amend the FAR and issue guidance within 60 days.

Additionally, the EO directs the Office of Management and Budget, Equal Employment Opportunity Commission, and the attorney general to identify economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities and then to work with agencies in those sectors to ensure contractor compliance. It is unclear how this report may relate to similar “bad actor” reports previously required from federal agencies under EO 14173. Those reports were not required to be made public, and there is no indication the new report will be publicized either.

Flow-Down Obligations for Subcontractors

The EO requires contractors to include the new certification clause in subcontracts and report known violations by subcontractors to their contracting agencies. This raises questions over the extent to which contractors may be held responsible for subcontractor and vendor actions and compliance, including whether contractors may be scrutinized for their choices in selecting subcontractors. It also raises practical concerns regarding whether and what steps contractors should take to obtain information from existing and future subcontractors.

FCA Risk, Enforcement Considerations

The EO underscores the Administration’s intent to use existing enforcement tools, including the FCA.

Where contractors are required to certify compliance with federal antidiscrimination laws and executive orders, the EO indicates contractor certifications will be treated as material to payment for FCA purposes. If the government later challenges the accuracy of a certification, the contractor could face FCA investigations, including qui tam (whistleblower) actions.

Given the possibility of treble damages, penalties, and reputational harm, this represents a significant area of potential exposure.

Recommended Actions

Federal contractors and subcontractors should consider the following steps:

• Conduct a comprehensive, enterprise-wide review and evaluation of employment, contracting, program participation, and related practices;
   
• Ensure consistency across business units and locations;
   
• Review subcontractor relationships and be prepared to update agreements and processes to address compliance obligations and risk allocation;
   
• Monitor communications from agency business partners and carefully review new contract opportunities; and
   
• Assess certification readiness, ensuring that any representations to the federal government are accurate, supportable, and aligned with actual practices.

* * *

This EO represents another DEI-related development for federal contractors and their subcontractors. It signals increased scrutiny of workplace practices and expanded enforcement risk. At the same time, uncertainty remains — particularly regarding how agencies will interpret key terms and how this EO will operate alongside prior directives.

Given the potential for DOJ enforcement and FCA liability, employers should act promptly to assess their practices and ensure compliance across all operations, business units, and contracting relationships. Please contact Jackson Lewis attorney if you have any questions.