On March 26, 2026, President Trump signed an Executive Order (“Addressing DEI Discrimination by Federal Contractors”) establishing a framework for regulating diversity, equity, and inclusion (DEI) practices among federal contractors. The order requires executive departments and agencies to incorporate clauses addressing DEI-related disparate treatment based on race or ethnicity into their federal contracts and subcontracts and builds on earlier executive actions focused on eliminating DEI programs within the federal government and private sector.
Scope and Definitions
The order targets what it characterizes as “racially discriminatory DEI activities,” defined as “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or the allocation or deployment of an entity’s resources.” Notably, it focuses exclusively on race- and ethnicity-based disparate treatment rather than sex-based discrimination or other protected characteristics.
The order further defines “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.”
Mandatory Contract Clauses and Flow-Down Requirements
The order’s central directive is for executive departments and agencies to ensure that a contract clause prohibiting racially discriminatory DEI activities is incorporated into all contracts and contract-like instruments, subcontracts, as well as lower-tier subcontracts, within 30 days.
Key provisions of the clause include: (1) a prohibition on racially discriminatory DEI activities; (2) a commitment to furnish all information, records, and accounts for compliance verification; (3) acknowledgment that noncompliance may result in contract cancellation, suspension, or debarment; (4) a duty to report any subcontractor’s known or reasonably knowable conduct that violates the clause to the contracting agency and to take remedial action; (5) a requirement to notify the contracting agency if a subcontractor initiates litigation challenging the validity of the clause; and (6) an express acknowledgment that compliance is “material to the Government’s payment decisions” for purposes of the False Claims Act (31 U.S.C. § 3729(b)(4)).
Enforcement and Penalties
The order instructs the Office of Management and Budget (OMB) to issue guidance to contracting agencies to ensure compliance. Consistent with that guidance, noncompliance may result in cancellation, termination, or suspension of a contract, as well as suspension and debarment, or False Claims Act actions.
The order also instructs the OMB, Equal Employment Opportunity Commission, Assistant to the President for Domestic Policy, and Attorney General to identify economic sectors presenting a heightened risk of engaging in racially discriminatory DEI activities and to work with agencies to ensure contractor compliance.
Critically, the order directs the Attorney General to consider bringing False Claims Act claims against noncompliant contractors and to prioritize review of qui tam (whistleblower) actions. A contractor’s certification of compliance may serve as a liability trigger, potentially exposing contractors to treble damages and penalties.
Regulatory Implementation Timeline
The Order requires each agency head to conduct formal implementation reviews within 120 days. It also directs the Federal Acquisition Regulatory (FAR) Council to issue deviation and interim guidance within 60 days and to amend the Federal Acquisition Regulation to incorporate the new clause and remove conflicting provisions.
Recommended Steps for Federal Contractors
Federal contractors should consider the following steps:
- Audit Existing Programs. Review DEI-related programs, policies, and practices to assess whether any could be characterized as involving disparate race- or ethnicity-based treatment.
- Assess Subcontractors. Review subcontractor agreements and oversight mechanisms to identify and address potential noncompliance.
- Prepare for Contract Terminations. Anticipate potential terminations and cancellations of contracts by contracting agencies, including preparation to pursue claims for breach of contract.
- Prepare for False Claims Act Scrutiny. Build defensible records of employment, contracting, and resource allocation decisions.
- Monitor Regulatory Developments. Track forthcoming FAR Council and OMB guidance, as well as sector-specific directives.
If you have any questions, or would like additional information, please contact one of the attorneys on our Labor & Employment team or one of the attorneys on our Construction team.
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