Executive Summary: On March 26, 2026, President Trump issued an executive order addressing diversity, equity, and inclusion (DEI) practices among federal contractors (“the EO”). The EO follows Executive Order 14173 issued on January 21, 2025 which eliminated race- and gender-based affirmative action obligations imposed on federal contractors by Executive Order 11246, which was signed by President Lyndon B. Johnson in 1965 and had been the law for 60 years. The EO does not eliminate federal contractors’ obligations to comply with existing anti-discrimination laws, but rather refocuses attention to eliminating “racially discriminatory DEI practices,” which it 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 aim is to ensure a focus on merit-based employment opportunities, including “training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.” Importantly, unlike prior executive orders, the new EO does not include restrictions on DEI policies related to anything other than “race” and “ethnicity.”
The DEI Clause
The EO creates, for the first time, an enforceable contract clause (the “Clause”) that federal agencies and departments must include in all contracts subject to the Federal Property and Administrative Services Act within 30 days, and which must be flowed down to subcontractors. The Clause serves as a certification that the contractor/subcontractor will adhere to the EO and contains 6 requirements. Contractors/subcontractors must certify they: (1) will not engage in “racially discriminatory DEI practices”; (2) will provide access to all records related to compliance with the EO to the contracting agency; (3) are subject to contract cancelation, termination, and suspension and debarment for noncompliance; (4) will report any subcontractor “known or reasonably knowable” noncompliance with the EO and take remedial action; (5) will provide notice to the contracting agency for a subcontractor’s lawsuit against the contractor that places the validity of the EO at issue; and (6) are subject to liability under the False Claims Act, including qui tam (whistleblower) suits, for noncompliance. Adherence to these requirements is now made a condition of doing business with the federal government and payment for their services.
Compliance Procedures
Critically important is the obligation placed on contractors for the oversight of their subcontractors. Under the EO, contractors must ensure that all subcontractors also certify that they will comply with these obligations, and report any “known or reasonably knowable” violations. The EO does not, however, indicate whether or to what extent a contractor must affirmatively monitor compliance, or whether noncompliance by a subcontractor may result in contract cancellation or debarment for the contractor itself.
Moreover, the new DEI clause requires contractors and subcontractors to furnish information and reports, including providing access to books, records, and accounts at the contracting agency’s discretion.
Guidance, Regulations and Penalties
The Office of Management and Budget is tasked with issuing guidance to contracting federal agencies to ensure compliance with the EO. Likewise, the Director of the Office of Management and Budget, in coordination with the Attorney General, the Assistant to the President for Domestic Policy, and the Chairman of the Equal Employment Opportunity Commission, are mandated to identify “economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities based on current or past conduct and issue additional guidance to contracting agencies regarding best practices to ensure compliance with this order within such sectors.” In addition, the Federal Acquisition Regulatory Council is directed to amend the FAR to incorporate the Clause and “remove any provisions that are inconsistent with” the Clause, as well as issue deviations and interim guidance regarding agency implementation of the Clause while the amendments are being finalized.
Federal agencies are authorized to terminate, suspend, or cancel contracts for noncompliance, and contractors and subcontractors may face suspension or debarment from future federal work if found to have violated the EO. The EO also directs the Department of Justice to review potential violations and prioritize civil rights complaints. As noted, enforcement may extend to the use of the False Claims Act, particularly where contractors certify compliance but are alleged to have maintained prohibited practices, thereby creating exposure to significant financial penalties both from the government and potential whistleblowers.
Key Actions for Federal Contractors
Contractors should act promptly to ensure compliance with the EO to avoid risking loss of existing federal contracts, debarment from future federal contracts, and potential penalties, including liability under the False Claims Act, for noncompliance. This includes the following:
- Review all employment policies, including hiring and recruitment initiatives, apprenticeship programs, training materials, employee resource groups, leadership programs, promotional practices, and educational opportunities, to ensure that practices that could be considered “racially discriminatory DEI practices” are not used in any part of the business;
- Monitor whether/when new or existing federal contracts are updated to include the six-part certification;
- Update forms and templates to flow down the mandatory Clause in covered subcontracts;
- Plan for subcontractor oversight and/or coordination to ensure their compliance with the EO;
- Review subcontracting/purchasing policies for eligibility standards related to race or ethnicity;
- Update record retention policies to ensure they are current and effective in the event a contracting agency requests access to “books, records, and accounts” in connection with a potential violation of the Clause; and
- Maintain proper documentation and records of compliance with the EO.