President Donald Trump signed an Executive Order (EO) on March 26, “Addressing DEI Discrimination by Federal Contractors,” reinforcing the Trump Administration’s stance on DEI programs and escalating the related restrictions on what the Administration considers “racially discriminatory DEI activities.”
The Executive Order, which took effect immediately, mandates that all federal government prime contracts, “contract-like” instruments and subcontracts, including lower-tier subcontracts, include a specific contract clause, requiring contractors to comply with the clause or risk potential False Claims Act (FCA) liability. Contractors should prepare for possible contract modifications and amend their subcontracts to comply with the Executive Order by the April 25 deadline.
Covered Activities
The Executive Order defines “racially discriminatory DEI activities” as disparate treatment based on race or ethnicity in recruitment, employment (including hiring and promotions), contracting (including vendor agreements), program participation or the allocation or deployment of an entity’s resources. “Program participation” encompasses “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 scope of the Executive Order is simultaneously limiting and far-reaching. On one hand, the definitions limit the Order’s reach to disparate treatment based on race and ethnicity, a notable departure from previous Executive Orders that also addressed sex and gender. On the other hand, the Order significantly expands the universe of applicable activities to include a contractor’s business relationships, internal resource allocation and internal development and training programs.
New Compliance Requirements for Federal Contractors
The Order directs federal agencies and departments to include, by April 25, 2026, a mandatory clause in all contracts, “contract-like instruments,” “subcontracts” and “lower-tier subcontracts” stating that:
- Contractors must agree not to engage in any “racially discriminatory DEI activities”
- Contractors must furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency for purposes of ascertaining compliance with the Order
- In the event of a contractor’s or subcontractor’s non-compliance, the applicable contract may be canceled, terminated, or suspended, and the contractor or subcontractor may be declared ineligible for further government contracts
- Contractors must report any subcontractor’s “known or reasonably knowable conduct” that may violate the clause to the contracting agency and take any remedial actions directed by the agency
- Contractors must inform the contracting agency if a subcontractor files a lawsuit that puts at issue the validity of the clause
Notably, this new mandatory language will also require contractors to acknowledge that compliance is material to the government’s payment decisions for purposes of the FCA –effectively converting a violation of the Order’s requirements into potential FCA liability, leading to treble damages and per-claim penalties. Whether the Order’s materiality language is sufficient to trigger FCA liability is something a court would need to consider. Regardless, contractors should take note of the potential FCA liability.
Enforcement and Penalties
The Executive Order establishes a multi-layered enforcement regime under which the Office of Management and Budget (OMB) is directed to issue compliance guidance to contracting agencies. The OMB, in coordination with the attorney general, the assistant to the president for domestic policy, and the chairman of the Equal Employment Opportunity Commission, is to identify economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities and to issue targeted compliance guidance for those sectors.
Additionally, the attorney general is directed to consider whether to bring FCA actions against contractors or subcontractors that violate the contractual clause. The order also calls for prompt review of qui tam actions – whistleblower lawsuits filed by private persons on behalf of the government under the FCA – concerning federal contracts or subcontracts, with decisions on whether to intervene to be rendered within the 60-day statutory period to the maximum extent practicable. Each agency head is also required to review its implementation of the new contractual requirements within 120 days and report to the assistant to the president for domestic policy on compliance.
The Federal Acquisition Regulatory (FAR) Council is directed to amend the FAR to incorporate the new contractual clause into federal procurement, solicitations and contracts and to remove any existing FAR provisions that conflict with or are inconsistent with the Order. The FAR Council is also directed to issue, within 60 days, deviation and interim guidance under FAR Subpart 1.4, regarding agency implementation of the mandatory contractual language before completion of the FAR amendments.
Key Takeaways for Federal Contractors
This Executive Order is the latest in a series of executive actions targeting DEI practices, following Executive Order 14151 (Ending Radical and Wasteful Government DEI Programs and Preferencing) and Executive Order 14173 (Ending Illegal Discrimination and Restoring Merit-Based Opportunity), both issued in January 2025. Taken together, these actions reflect a continued pattern of escalating new requirements and enforcement mechanisms in this space.
Contractors should undertake a thorough review of their current DEI-related programs, policies, and practices – including recruitment initiatives, mentoring and leadership development programs, vendor selection processes, resource allocation decisions and internal training programs – to identify any activities that could be characterized as involving disparate treatment based on race or ethnicity.
Contractors should pay particular attention to the breadth of the Order’s definitions as they extend beyond traditional employment decisions and the current federal anti-discrimination framework to encompass contracting relationships, business partnerships, program participation and resource deployment. Contractors also should confirm their compliance representations are accurate, well documented, and supported by robust internal controls in light of the potential FCA liability.
Finally, contractors should monitor forthcoming guidance from OMB, the FAR Council and relevant contracting agencies because additional details on compliance expectations, sector-specific requirements, and enforcement priorities are expected in the coming weeks and months. Contractors operating in sectors later identified as posing a particular risk of DEI-related activity should be prepared for enhanced scrutiny.
Miles & Stockbridge’s government contracts and labor and employment lawyers will continue to monitor developments related to the Executive Order and its implementation. They can provide counsel about how these requirements may affect contractors’ operations as well as ensure contractors are positioned for compliance.
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