New Executive Order Targets DEI Practices of Federal Contractors: What Employers Need to Know

On March 26, 2026, President Donald J. Trump signed a sweeping new Executive Order (“EO”) entitled “Addressing DEI Discrimination by Federal Contractors.” The EO represents the next step in the Trump Administration’s efforts to curtail unlawful diversity, equity, and inclusion (“DEI”) practices, in part by inserting requirements directly into federal contracts and subcontracts, with serious enforcement consequences for noncompliance, including contract termination, debarment, and potential False Claims Act liability.

For employers that do business with the federal government, this EO requires immediate attention and proactive compliance planning.

Overview of the Executive Order

The EO focuses on preventing what the Trump Administration defines as “racially discriminatory DEI activities.” The Administration expressly characterizes certain DEI initiatives as imposing inefficiencies and increased costs that are ultimately borne by taxpayers.

Unlike earlier EOs, such as EO 14173 that focused on certifications or internal policy mandates, this EO creates enforceable contractual obligations that apply to both prime contractors and subcontractors.

What Conduct Is Prohibited?

The EO defines “racially discriminatory DEI activities” broadly as disparate treatment based on race or ethnicity in any of the following areas:

• Recruitment
• Employment (including hiring, promotion, and advancement)
• Contracting relationships (such as vendor or supplier agreements)
• Program participation, including training, mentoring, or leadership programs
• Allocation or deployment of corporate resources

“Program participation” is specifically defined to include access to training, educational opportunities, affinity groups, clubs, or similar programs sponsored by the contractor or subcontractor.

Notably, the EO does not prohibit all DEI efforts. Race‑neutral initiatives focused on equal opportunity, broad outreach, and compliance with existing federal anti‑discrimination laws may still be permissible. However, the scope of what constitutes “disparate treatment” will likely be subject to close scrutiny.  

Additionally, the EO focuses only on unlawful race/ethnicity-based DEI efforts, not gender-based ones. This does not mean that federal contractors should dust off any formerly used (unlawful) gender-based DEI strategies, as those may still be the focus of other federal agencies, like the Equal Employment Opportunity Commission.

New Contractual Requirements

The EO requires federal agencies, within 30 days of the EO (which has now passed), to incorporate a mandatory clause into covered contracts and subcontracts that:

• Prohibits contractors and subcontractors from engaging in racially discriminatory DEI activities
• Requires the contractor to provide information, reports, and access to books and records as requested to assess compliance
• Acknowledges that noncompliance may result in contract termination, suspension, or debarment
• Requires flow‑down obligations to all lower‑tier subcontractors

The Federal Acquisition Regulatory Council has taken steps to implement the EO, issuing a new Federal Acquisition Regulation (“FAR”) deviation to include in new contracts beginning April 24, 2026, and instructing agencies to “make every effort” to have the clause added to existing contracts by July 24, 2026.

Enforcement and False Claims Act Exposure

The EO also elevates enforcement risk by directing the Attorney General to prioritize potential False Claims Act (“FCA”) actions where a contractor or subcontractor falsely certifies compliance with the new contractual clause. Noncompliance is expressly described as material to the government’s decision to pay contractors, increasing exposure to treble damages and whistleblower (qui tam) lawsuits.

Individual contracting agencies retain authority to investigate compliance and impose contractual remedies, including suspension and debarment.  

Practical Next Steps for Federal Contractors

Given the accelerated timeline and heightened enforcement risk, federal contractors should act promptly. Recommended steps include:

1. Conduct a DEI Program Audit

Review all employment, recruiting, training, mentoring, leadership development, and supplier diversity initiatives to identify any race‑based eligibility criteria or preferences that could be challenged under the EO. While most employers did this following the issuance of EO 14173, diligent contractors should do so again to ensure compliance.

2. Evaluate Recruitment and Outreach Practices

Reassess targeted recruiting efforts, sponsorships, job fairs, and partnerships to ensure they are race‑neutral and grounded in objective, merit‑based criteria.

3. Review Contract and Subcontract Language

Prepare for the mandatory FAR clause by updating contract templates and ensuring flow‑down compliance mechanisms are in place for subcontractors. Prime contractors should also establish monitoring and reporting protocols.

4. Strengthen Documentation and Recordkeeping

Assume agency audits will increase. Maintain clear documentation showing that employment and program decisions are based on objective, non‑discriminatory factors.

5. Train HR, Legal, and Compliance Teams

Ensure internal stakeholders understand the new requirements, the definition of prohibited conduct, and the potential FCA implications of noncompliance or inaccurate certifications.

Recent Developments

Just a few weeks ago, a complaint was filed in the U.S. District Court of Maryland (National Association of Diversity Officers in Higher Education v. Trump, No. 8:26-cv-01532) alleging that the new EO violates First Amendment free speech and freedom of association rights of federal contractors and exceeds the President’s authority under the Procurement Act.  We are closely monitoring this case and any further EO developments.

Looking Ahead

This EO marks a significant change to federal contractor DEI compliance, shifting enforcement from policy guidance to direct contractual liability. Additional guidance from the Office of Management and Budget and FAR amendments are expected soon, but contractors should not wait to begin compliance efforts. We are available to assist with attorney-client privileged DEI audits, policy revisions, and contractor compliance strategies.