We Get Contracting: Episode 3 — EO 14398 and Federal Contractor DEI Discrimination

Transcript

Scott Pechaitis
Principal, Denver

Welcome back to We get Contracting, the podcast that covers workplace law issues for federal contractors and subcontractors. I’m Scott Pechaitis, and I'm a co-leader of Jackson Lewis' Government Contracting and Compliance group.

Today we're diving into one of the biggest developments affecting federal contractors and subcontractors in a while: Executive Order 14398 addressing DEI discrimination by federal contractors. This is a big executive order. It creates a lot of new obligations, not just for workplace and vendor activities, but also for contract administration with new requirements for subcontracts.

To help us unpack all of this, I'm joined today by my partner and friend Matt Camardella. Matt is deeply invested in federal contract and compliance. He's been involved for a very long time and has been tracking both the executive order itself and the FAR Council's implementation. Matt, thank you so much for joining us.

Matthew Camardella
Principal, Long Island

Great to be here and glad we have a chance to discuss this important topic. As you know, there's quite a bit of confusion in the contracting community about what this executive order actually requires when it applies and what they're supposed to be doing with it right now. So, let's get going.

Pechaitis

Great. Let's start right at the top, then. For listeners who may have only had a general awareness of this new executive order, why don't we start with what it is, why it has generated so much interest, and why people are talking about it?

Camardella

Absolutely. This executive order represents the latest effort by the Trump administration to eliminate diversity, equity, and inclusion across government, higher education, and the private sector. Look at the title of this executive order: ‘Addressing DEI Discrimination by Federal Contractors.’ Clearly, the administration is operating from a place that assumes federal contractors are engaged in race discrimination through their DEI programs. Earlier efforts to address this concern, namely through the rollout of Executive Order 14173 and the certification process thereunder, and they've taken a number of steps; as we'll discuss, they have a clearly defined contract provision now, prohibiting certain DEI activities, instructing the FAR Council on how to roll out that new provision into existing and new contracts, and creating an auditing and enforcement mechanism to ensure compliance.

Let's look at the specifics. The executive order directs the FAR Council to incorporate a new provision into all new and existing contracts that explicitly requires the contractor to agree not to engage in racially discriminatory DEI activities. That provision also requires the contractor to flow down the provision to subcontractors and report any violations of the provision by subcontractors, report any legal challenges to the contract provision by subcontractors, provide records and information related to compliance with the contract provision to the contracting agency, and acknowledge the provision is material to the government's decision to enter into the contract. Each of these provisions is meaningful and creates an explicit obligation for the contractor. Moreover, the violation of any of these terms creates significant risk of contract termination and debarment, as well as False Claims Act liability.

Now, curiously, Executive Order 14398 is limited to race-based discrimination. Unlike Executive Order 14173's unlawful DEI prohibition, this executive order actually defines racially discriminatory DEI as “disparate treatment based upon race or ethnicity in the recruitment, employment, contracting, program participation, or allocation or deployment of an entity's resources.” Importantly, this definition contemplates activities beyond just the workplace and is not limited to a practice that may violate Title VII, the federal law prohibiting race discrimination. It also includes contracting activities; think supplier diversity programs, as well as allocation or deployment of a contractor's resources. Think of your organization's financial support of conferences and events, which implicate perhaps other federal civil rights laws, like Section 1981 of the Civil Rights Act of 1866. Moreover, because the executive order does not define race discrimination as being limited to what rises to the level of unlawful under Title VII, but uses the term disparate treatment, one can read this executive order as prohibiting conduct that is not technically unlawful under federal law, but still involves some form of different treatment.

That is a pretty sweeping interpretation, Scott. Until we see further guidance from the federal government or the courts, contractors need to be cautious with any activities that involve race.

Pechaitis

I agree. We'll see how that plays out. Thank you, Matt. That was a great overview of this important executive order. I want to get into some of the details now to help contractors and subcontractors understand how to implement the requirements. Let's start with the FAR Council. Can you explain what role the FAR Council plays in all of this and what steps have they taken so far to implement this new executive order?

Camardella

My pleasure, Scott. The FAR Council is one of those federal agency-type organizations that no one's ever heard of, except for government contracting professionals, who know its outsized influence on many aspects of this country's private sector businesses through the way it shapes the rules associated with government contracting. The single largest purchaser of goods and services in this country is our federal government, so they have a lot of influence. What's the council? Well, it's made up of a bunch of senior officials from several different agencies, and they oversee a large portion of the federal government's contracting activity.

The council establishes the rules for government purchases through the Federal Acquisition Regulations (FAR). The FAR contains instructions to federal contracting officers on which provisions should be included in federal government contracts for the purchases of goods and services, and therefore sets the rules by which government contractors need to adhere.

Now, section five of Executive Order 14398 instructed the FAR Council to amend the FAR to include this new contract provision we've been discussing. However, the process for normally amending the FAR involves several steps and takes time. This administration wasn't interested in taking too much time. They wanted things moving as quickly as possible. The executive order instructed the FAR Council to issue a deviation, meaning interim guidance, within 60 days, allowing for the inclusion of this new provision in both new and existing contracts until the FAR is formally amended.

Pechaitis

Thank you, Matt. That July 24 deadline- what does that mean for existing contractors?

Camardella

Well, it means contractors need to be on the lookout for communications from their contracting agencies, the officers at those agencies, that will include a written agreement to add the new clause to an existing contract that they're going to expect the contractor to sign and return, known as a bilateral modification.

That's an interesting distinction. In federal contracting, there's often this gray period between a presidential directive and formal regulatory implementation. During that period, agencies can issue guidance, class deviations, procurement memoranda, or solicitation-specific language. From a practical perspective, contractors need to understand that even before the new FAR clause becomes final, contracting agencies can still create obligations for them through contract terms and solicitation requirements, as authorized by the April 17 deviation. In fact, we have seen plenty of contractors receive bilateral modifications to existing contracts since that deviation was issued. For government contractors, don't assume that not yet means not yet applicable.

Pechaitis

Right; that applies for contractors, particularly for prime contractors. Let's keep talking about them for a moment. What are the biggest issues that prime contractors or direct contractors who have a direct contract with the federal government should be focusing on right now?

Camardella

There are several key areas contractors should be focusing on. First, understanding where and when this new contract provision applies. Important to understand: a prime contractor is not subject to this executive order in the new FAR provision until such time as it enters into a contract that contains the clause. Accordingly, prime contractors should be conducting an inventory of where their existing federal contracts live so that they can determine where they are likely to see modifications and alert their government contracts folks to be on the lookout for such modifications. In addition, prime contractors should be cataloging all new contracts from the federal government that come in to flag where the new FAR clause applies.

The second thing to focus on is supplier management. As I mentioned earlier, prime contractors must include the new FAR provision in subcontracts. As a starting point, prime contractors need to create an amended version of their standard purchasing agreements that includes the new FAR provision. The challenge is determining which vendors in their supply chain are directly supporting the federal contract so they can receive the amended contracts. More on that in a bit, Scott.

The third Area of focus is a risk assessment. While many contractors reviewed their DEI programs last year when President Trump issued Executive Order 14173, they did so with a very limited understanding of what the administration would consider illegal DEI. Since that time, we've seen a number of federal agencies offer some guidance on this issue. As mentioned before, Executive Order 14398 itself defines racially discriminatory DEI activities. As I mentioned earlier, this executive order prohibits activities beyond just those affecting employment. There may be aspects to a contractor's practices that it didn't look at before because it seemed beyond the scope of what the administration was focused on. 

Long and short of it, Scott, this is a great time for contractors to brush off their prior assessments of DEI programs, revisit their risks in light of growing guidance in this space, and decide if they want to be doing something different than they're doing.

Pechaitis

That sounds like a great idea, Matt. The risks are changing and evolving, so contractors need to go back and look at what was done in the past and make sure they are still comfortable with all of that. That's great advice.

One of the things you mentioned was the supplier management component. I want to dig deeper into that, if we could, particularly with respect to subcontractors, because that's where many organizations are struggling with this new executive order and there may be some confusion out there. What should companies understand about the subcontractor requirements under Executive Order 14398?

Camardella

Honestly, Scott, this is one of the most consequential aspects of this entire effort by the administration. To zoom out for a moment, the federal government often looks to shape policy through its procurement activities. A great example of this is something you and I are very familiar with, as are most federal contractors, and that's old Executive Order 11246, which President Trump rescinded last year. How did that work in this context? For decades, presidents of both parties believed it critically important that employers do not discriminate against individuals on the basis of their race and sex, and that employers affirmatively work to remove historic systemic barriers to equal employment opportunity. The way they attempted to accomplish this goal was to tie the receipt of taxpayer dollars to ensuring non-discrimination. With Executive Order 11246, the federal government created a host of requirements applicable only to federal contractors designed to ensure that women and minorities had an equal opportunity to compete for employment. This would trickle down to subcontractors, a much broader universe of private sector employers because of the requirements of Executive Order 11246.

With that framework in mind, we frequently see the FAR require not only that prime contractors agree to certain obligations, but that they flow down certain provisions to subcontractors to ensure the broadest possible applicability.

Now, what makes this Executive Order 14398 so unusual is that it not only requires the prime contractor to flow down the FAR provision, but it also requires the prime to monitor subcontractor compliance and report instances of known or reasonably knowable violations, or if the subcontractor sues the prime contractor over the validity of this contract provision. This creates real-world challenges for contractors.

First, the prime contractor has to determine which vendors and suppliers are subcontractors. Subcontractor is not defined in the executive order or the FAR deviation memo. Some situations are straightforward. Take a Department of Defense contractor who has a contract to supply the Air Force with fighter jets. Let's say that contractor doesn't make airplane tires, so it enters into an agreement with a tire manufacturer to supply the tires needed for the jets. Seems pretty clear-cut that the tire supplier in that example is a subcontractor. But what if that company contracts with another business to provide janitorial services? It could be argued that the prime contractor needs a clean environment in which to manufacture these jets, but is that really a subcontract, or are these janitorial services adjacent to the performance of the prime contract? We don't know the answer to that for sure. We hope the FAR Council will provide additional guidance, but in the meantime, we're left fending for ourselves.

The second thing I would point out is exactly what the contract clause has to say. The clause required by the FAR Council's deviation says the contractor must include the substance of this clause in subcontracts. This language is unclear. To report known or reasonably knowable conduct that violates the contract provision. What exactly is the standard here that the prime contractor is being held to? Do prime contractors have to audit their subcontractors and their practices or obtain a certification or a representation? Well, the executive order or the FAR provision doesn't say that they have to do that. Moreover, prime contractors are not the arbiters of what is lawful and what is unlawful, or frankly, what does or doesn't violate this contract clause. That's what either the contracting agency or, frankly, the courts are for.

In practice, I'm just not sure what the government can reasonably expect from contractors here. It will certainly be interesting to see that first case alleging a prime contractor violated the clause because of the actions of its subcontractor. Because of this uncertainty, prime contractors should consider indemnification clauses broad enough to capture instances of prime contractor damages resulting from the subcontractor's breach of the FAR provision.

Now, finally, on a very practical level, prime contractors will be put in a difficult position if their subcontractors refuse to sign a contract modification. In those circumstances, it's hard to envision a situation where the prime would be in a position to cancel an existing subcontract without risking a breach of contract claim because that clause was not in the original bargain struck, so this is going to be a real practical challenge.

Now, to some degree, the FAR Council recognized this challenge when it advised contracting officers to consider several factors, including whether the goods or services to be provided under a prime contract can be easily replaced before canceling a contract in response to a contractor's refusal to sign a bilateral.

Pechaitis

It sounds like this could be an evolving space for a little while as all of this gets sorted out. Those are great tips, particularly the idea about the indemnification clause.

Let's pivot to enforcement. You mentioned enforcement, the False Claims Act, and what could happen for violations with termination and suspensions. Where do you see the biggest legal and enforcement risks developing under this executive order?

Camardella

That's a good question, Scott. The executive order and the new FAR provision lay out two avenues for enforcement. The first is through traditional contract enforcement. Under the FAR clause, a contractor must provide the contracting agency with information and reports necessary to ascertain compliance with this clause. In fact, the FAR Council sought emergency authorization from the Office of Management and Budget for the collection of such information from approximately 6,000 or so contractors. It's unclear whether contracting agencies will use this authority, and if they do, exactly what contractors will be asked to provide. The intent here is to create a mini auditing function within each of the contracting agencies that will assess contractor compliance with this clause. Under this avenue, the contracting agency, if it finds some violation of the clause, can suspend or cancel an existing contract and recover any applicable damages as a result of the breach of the contract. The contracting agency can go even further and debar a contractor, preventing that company from entering into new contracts with the federal government for a period of time. For a company that relies significantly on federal business, the possibility of debarment is an existential threat. They are going to be really conservative when it comes to complying with this executive order.

The other enforcement avenue is the False Claims Act. The False Claims Act allows the government to recover significant damages from contractors who have been found to have defrauded the federal government. There's a mechanism under the FCA that allows private citizens to report allegations of such fraud and share in the damages recovered. Think about this for a minute: there are millions of potential whistleblowers out there who are now deputized to report alleged fraud because they think a contractor has an illegal DEI program. The key here to a claim being actionable under the False Claims Act is that the fraud has to relate to a material provision of the federal contract. This is exactly why the new clause contains a section whereby the contractor acknowledges that the clause is material to the contracting agency's decision to enter into the contract. It is a part of the heart of the bargain being struck. Now, it remains to be seen whether simply having a contractor acknowledge the provision as material actually makes it so under the False Claims Act. I'm sure we're going to see litigation about this very issue before too.

Pechaitis

Wow, thank you, Matt. There's a lot there. As we're wrapping up here, I want to go back to the original premise of wanting to give contractors and subcontractors a practical roadmap. If there is one, I know it's a tall order, but if you could summarize and give us a practical roadmap for contractors and subcontractors, what do you think they should be doing right now?

Camardella

Sure. In case you couldn't tell, I could probably talk about this for another hour, but then our audience wouldn't make it through. I would focus on four things initially.

First, contractors have to be on the lookout for the new FAR provision. I said it before; I'll say it again. It does not apply until it shows up in one of your contracts, but it can arrive in different ways: bilateral modifications, new contracts, even your own customers' agreements that are not the federal government. As I mentioned before, a raft of these bilateral modifications have been sent to contractors in the past couple of weeks. That will continue to be the case. In fact, it might speed up while the contracting agencies work toward the July 24 deadline for modifying existing contracts. Contractors will also need to be on the lookout for the FAR clause in new contracts. 

As a practical step, it's critically important that contractors notify and make aware the person or function who likely will receive the modifications that those provisions are going to start showing up so the contractor knows when it applies and for how long. One additional thing I mentioned briefly before: contractors and non-contractors need to pay attention to this, because they could receive a request for a modification from their existing non-government clients, customers, or they might see this provision show up in a new contract from a non-government entity. Remember, Scott, one of the requirements for prime contractors here is to flow down this new FAR provision. You may not realize that you're doing business with a federal government contractor, but they do. Then, all of a sudden, you might receive a contract modification or a new contract that includes this clause, and you never had any idea that you were somehow in the federal government supply chain.

Second, get with the procurement team to ensure that the new clause is ready to insert in existing and new purchasing agreements when the time comes. Contractors should decide now how they want to handle that issue I mentioned before, which is whether to reproduce the FAR provision word for word, or simply incorporate it by reference so there's no mad scramble when the time comes to include it in their agreements.

Third, contractors should dust off those old assessments of DEI programs. With this additional guidance over the last couple of months and a seeming expansion of what may constitute illegal DEI, conclusions that were reached last year may be outdated. Moreover, there's an additional risk associated with this new executive order that may lead businesses to take a more conservative approach than they did before.

Lastly, monitor developments in this area. Much of what has happened to implement Executive Order 14398 to date has been done on an interim basis. We are guaranteed to see further regulations and further guidance in this area that could help clarify some of the issues that we've been discussing.

Pechaitis

Great, Matt. I know one way for companies to monitor developments in this space and all spaces related to government contracting and subcontracting is through our blog, the GovCon Employment Exchange. Feel free to subscribe to that if you haven't already. It's a great way to stay on top of breaking news alerts.

Also feel free to reach out to any of your Jackson Lewis attorneys, or reach out to Matt if you have questions. Matt, this has been extremely helpful. Thank you so much for sharing your insights with me today.

Thank you, everyone, for listening. We'll continue tracking developments relating to Executive Order 14398, the FAR Council's implementation activities, how enforcement plays out, and other emerging subcontractor and compliance requirements. Tune in next time, and thank you again for listening.