New Executive Order Targets Federal Contractor DEI Discrimination, Ramps Up FCA Enforcement Directives

The White House on March 26 issued an executive order titled Addressing DEI Discrimination by Federal Contractors that continues the US administration’s focus on combating diversity, equity, and inclusion initiatives in the federal contractor space. The executive order is likely to impact all federal contractors and subcontractors, who should continue to partner with experienced counsel to understand and reduce their risks.

Accompanying the executive order (the Order), the White House issued a Fact Sheet summarizing the Order’s purpose and objectives and detailing the administration’s prior actions to “deliver on [the president’s] promise to end DEI across the Federal Government.”

Policy, Purpose & Scope

Significantly, the Order prioritizes False Claims Act (FCA) liability for federal contractors who engage in “racially discriminatory DEI activities,” which is broadly defined in the Order and is not tethered to existing federal anti-discrimination laws. The Order’s definition of “racially discriminatory DEI activities” broadens and clarifies the scope of activities the government views as unethical and unlawful. Notably, the Order does not reference sex or gender discrimination.

In establishing a series of new and potentially burdensome compliance obligations for federal contractors, the Order evinces a frustration with enforcement activities undertaken to date pursuant to other anti-DEI executive orders issued in the early days of President Trump’s current term.

For instance, the Order specifies new language to be included in all federal contracts; outlines the government’s intention to terminate contracts, seek debarment, and aggressively pursue damages for noncompliance under the FCA; institutes affirmative reporting obligations regarding subcontractor noncompliance; and attempts to streamline enforcement by giving the government the right to inspect a contractor’s documents at will.

Similar to earlier executive orders (read our prior LawFlash, DOJ Announces Establishment of Civil Rights Fraud Initiative), the Order highlights the importance of enforcing compliance via FCA whistleblower complaints and instructs the US Department of Justice (DOJ) to make intervention decisions in sealed qui tam cases within the 60-day statutory timeframe under 31 U.S.C. 3730(b)(2) “to the maximum extent practicable.”

The Order asserts that, despite the administration’s efforts to end discrimination allegedly operating under the label “DEI,” entities continue to engage in “racially discriminatory DEI activities,” which the Order defines as “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 Order further defines “program participation” to mean “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.” As noted above, the Order does not address activities related to sex or gender.

Unlike Executive Order 14173, which required contractors to certify that they did not “operate programs promoting DEI that violate any applicable Federal anti-discrimination law,” the Order bars contractors from taking any actions that meet its expansive definition of “racially discriminatory DEI activities.” This expanded definition exposes contractors to a new standard of liability—one more akin to those imposed on recipients of federal funds by Title VI rather than Title VII. For example, the Order’s definition of “program participation” arguably means that participating in, funding, or sponsoring any leadership, training, or mentoring program that treats people differently based on race or ethnicity violates the Order.

By expressly referring to disparate treatment in “vendor agreements,” the Order would also appear to prohibit supplier diversity measures that give preferences based on race or ethnicity, which until recently have been very common in state and federal contracting. The Order’s specification that racially discriminatory DEI activities include the “allocation or deployment of an entity’s resources”—though not further defined—may implicate a contractor’s charitable giving and grantmaking.  

Language Required to Be Included in Federal Contracts

The Order requires that certain provisions be included in federal contracts moving forward. In this, the Order goes beyond Executive Order 14173, which included certain certification requirements related to establishing FCA materiality (see DOJ Announces Establishment of Civil Rights Fraud Initiative). Now, pursuant to the Order, all executive departments and agencies—including independent establishments subject to the Federal Property and Administrative Services Act (FPASA) 40 U.S.C. 102(4)(A)—must ensure that contracts, subcontracts, and similar agreements include the following clause:

“In connection with the performance of work under this contract, [the contractor/appropriate party (contractor)] agrees as follows:

1. The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);
2. The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;
3. In the event of the contractor’s or a subcontractor’s noncompliance with this clause, this contract may be canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts;
4. The contractor will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting department or agency and take any appropriate remedial actions directed by the contracting department or agency;
5. The contractor will inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of this clause; and
6. The contractor recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).”

The Order requires the above-described clause to be included in federal contracts, subcontracts, and related agreements effective 30 days from the Order, or as of April 25, 2026—an exceptionally short deadline. This flow-down requirement alone is significant, because a host of contractors that did not do business with the US government directly can now likely expect to be subject to these requirements as higher-tier contractors incorporate this clause. That said, arguably the introductory language limits the obligations above to only those DEI programs that are legitimately “connected” to “performance of work under th[e] contract.”

Strengthening Putative FCA Claims Based on DEI Practices

The Order focuses on reducing costs, inefficiencies, and waste purportedly caused by contractors’ DEI activities. This is not entirely unexpected. As we have previously observed (DOJ Announces Establishment of Civil Rights Fraud Initiative), in a putative DEI-based FCA case, the government may struggle to demonstrate that a contractor’s implementation of DEI practices was material to their claims for payment or resulted in recoverable damages. Presumably to address this issue, the Order states, “DEI activities impose artificial costs in hiring, promotion, and operations by precluding implementation of merit-based principles; creating excessive workforce turnover by elevating immutable characteristics over job performance; and jeopardizing the sort of employee collaboration and problem-solving that is essential to fostering efficient and high-quality work.” In the same vein, the Order further states that DEI activities create unnecessary costs by reducing the pool of available labor by artificially limiting the pool of talent, supplies, or intermediaries based on race or ethnicity. “These costs are inevitably passed on to the Federal Government when it contracts with companies who engage in racially discriminatory DEI activities, or who use subcontractors who do so.”

Notably, earlier this year, Deputy Assistant Attorney General Brenna Jenny (Civil Division, Commercial Litigation Branch, DOJ) offered one route by which the government may try to show materiality: by arguing that, even if compliance with anti-discrimination law may appear ancillary to the purposes of a contract to, for example, provide machine parts to the Navy, they are such a fundamental part of the government’s value commitments that a contractor’s violation of them (at least in some cases) can be material for FCA purposes (read our prior LawFlash, Deputy Assistant Attorney General Brenna Jenny Offers Insight on DOJ Civil Rights Fraud Enforcement).

The argument in the Order regarding costs and inefficiency has a similar form: just because a contractor’s DEI practices are a general feature of how the entity does business—as opposed to being uniquely tied to performance under the particular contract at issue—that does not mean they are immaterial; to the contrary, such practices infect every undertaking by the contractor.

Enforcement & Penalties

The Order focuses on enforcement:

1. It requires federal contractors to “furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to [the Order], for purposes of ascertaining compliance.” For practical purposes, agencies and the DOJ may utilize this provision to avoid having to issue Civil Investigative Demands to investigatory subjects. Notably, this access‑to‑records provision treats DEI compliance as a contract performance issue, bringing it within the scope of audit and inspection mechanisms contractors already encounter in federal procurement. That said, it is unclear how failure to comply with a contracting agency’s requests (including objectionable requests) will be treated.
2. All federal contractors are now required to “report any subcontractor’s known or reasonably knowable conduct” violative of the Order and “inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of [the Order].” By imposing this reporting obligation, the Order makes all federal contractors participants in ensuring the Order is complied with. From a federal procurement standpoint, therefore, these provisions position prime contractors as supply‑chain compliance gatekeepers—reinforcing the government’s longstanding expectation that responsibility extends to subcontractor oversight. But that presents itself here in an unusual way: the Order does not address how a contractor is supposed to know about a subcontractor’s noncompliance.
3. The Order puts suspension and even debarment on the table for federal contractors who continue to engage in “racially discriminatory DEI activities.” Although suspension and debarment likely would exist for “illegal discrimination” independent of FCA liability, the Order expressly treats racially discriminatory DEI conduct as a matter of present responsibility—placing DEI compliance within the discretionary, forward‑looking framework agencies use to assess continued eligibility for future federal work.
4. The Order instructs the US Attorney General to consider FCA enforcement for violators and to “prompt[ly] review. . . civil actions brought by private persons under 31 U.S.C. 3730(b)(1) concerning Federal contracts or subcontracts, including by rendering a decision on whether to proceed with an action under 31 U.S.C. 3730(b)(4), to the maximum extent practicable, within the 60-day period described in 31 U.S.C. 3730(b)(2).”

In sum, the Order not only expands the scope of activities that could potentially create FCA liability, it focuses on procedural mechanisms to escalate that threat.

Key Takeaways

• The Order (1) requires the inclusion of a specific clause regarding racially discriminatory DEI activities in contracts, subcontracts, and similar agreements, and (2) contains several provisions apparently designed to ramp up FCA enforcement in this space—both by streamlining investigations and by escalating the risks for noncompliant actors.
• Federal contractors and subcontractors should continue to partner with legal counsel to understand and reduce their risk, including by reviewing any DEI-related policies and programs in a privileged audit to ensure compliance with civil rights and anti-discrimination laws. Contractors should carefully watch developments with respect to small business and related subcontracting goals as well.
• Contractors who conducted such privileged audits more than 6–12 months ago should strongly consider revisiting their assessments in light of intervening developments to evaluate whether their risk tolerance has changed and to assess any new programs that have been implemented.
• Organizations should review the process and controls in place to assure that new contract terms relating to compliance with DEI laws are reviewed, implemented, tracked, and supported by clear oversight, internal escalation procedures, and robust documentation sufficient to enable them to certify their good-faith compliance with the Order and to support any agency review of contractor responsibility or remediation.
• Organizations should evaluate their compliance systems to ensure they have mechanisms for identifying and addressing civil rights and discrimination concerns (including internal whistleblowers).
• Organizations should develop a plan to respond to potential criminal or civil investigations.

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