New Trump Executive Order Targets DEI Practices for Federal Contractors

The new EO entitled “Addressing DEI Discrimination by Federal Contractors” imposes significant new restrictions on DEI activities by federal contractors and subcontractors. 

Executive orders are directives from the president and have the force of law. Because they are not legislation, they do not require approval from US Congress, and Congress cannot directly overturn them, though it does have ways to affect their implementation. Affected parties can, however, challenge EOs in court.

The EO directs federal agencies to include a mandatory anti-DEI clause in all federal contracts and report alleged noncompliance by subcontractors. The order also exposes noncompliant contractors to severe penalties. Employers with federal contracts or those that serve as subcontractors on federal contracts should take immediate steps to evaluate their compliance.

An Overview of the EO

The EO’s stated goal is to promote efficient and economical federal contracting by preventing certain DEI activities that it contends are “unethical and often illegal,” asserting that these activities inflate government costs by undermining merit-based principles and shrinking the labor pool through race- or ethnicity-based restrictions on hiring, promotion, and supplier selection. 

Following its rationale, the EO defines what constitutes participation in prohibited “racially discriminatory DEI activities,” focusing specifically on race- and ethnicity-based disparate treatment in employment and recruiting activities. It does not, however, address DEI activities related to other protected characteristics. The EO provides two key definitions:

• “Racially discriminatory DEI activities” includes “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.” 

• “Program participation” includes “training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.”

The EO mandates that by April 25, all federal contracts, including subcontracts at all tiers, be amended to include a mandatory clause. The clause requires the following:

• The contractor agrees not to engage in any racially discriminatory DEI activities.

• The contractor 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.

• In the event of noncompliance, the 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.

• The contractor must report any subcontractor’s known or reasonably knowable conduct that may violate the clause to the contracting agency and take any appropriate remedial actions directed by the agency.

• The contractor must inform the contracting agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of the clause.

• The contractor acknowledges that compliance with the clause is “material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).” This allows the government or private whistleblowers to seek up to three times the actual damages, plus additional financial penalties, under the False Claims Act (FCA) if a contractor fails to comply.

The EO establishes an enforcement and penalty framework with several components:

• Contracting agencies are directed to cancel, terminate, or suspend any contract for failure to comply with the mandatory clause. Agencies must also take appropriate action to suspend and debar noncompliant contractors and subcontractors.

• The Attorney General is directed to consider bringing FCA actions against noncompliant contractors or subcontractors and to ensure prompt review of whistleblower lawsuits under 31 U.S.C. § 3730(b)(1), deciding whether to proceed within the statute’s 60-day period “to the maximum extent practicable.”

• The director of the Office of Management and Budget (OMB), coordinating with other governmental parties, is directed to identify economic sectors posing a “particular risk” of racially discriminatory DEI activities and to issue additional compliance guidance to contracting agencies for those sectors.

• Within 120 days of the EO, each agency head must review its implementation of the mandatory clause and report to the assistant to the president for domestic policy regarding compliance.

Government contractors should note the following key compliance dates:

• April 25: Agencies must begin incorporating the mandatory clause into federal contracts and contract-like instruments, including subcontracts.

• May 25: Federal Acquisition Regulatory (FAR) Council must issue interim guidance.

• July 24: Agency heads must complete a compliance review and report on implementation.

What Should Federal Contractors and Subcontractors Do Now?

The EO raises significant compliance questions for federal contractors and subcontractors. Although it does not define all activities that could constitute “racially discriminatory DEI activities,” its broad language means a wide range of workplace programs could face scrutiny. As with the Administration’s earlier EO on DEI (Ending Illegal Discrimination and Restoring Merit-Based Opportunity, January 2025), employers will need to balance compliance obligations against their organizational values. Those in economic sectors ultimately identified by OMB as posing “particular risk” should be especially attentive.

These are steps that employers should consider taking now.

• Evaluate existing DEI programs for whether any current initiatives could be seen as involving “disparate treatment based on race or ethnicity” under the EO. Notably, the EO defines racially discriminatory DEI activities to include “recruitment,” but does not specify the types of recruitment activities that fall within the scope. As such, it is not clear whether the Trump Administration would interpret the EO to prohibit efforts to seek diverse candidate pools, or if its reference to recruitment would bar only disparate treatment between applicants based on race or ethnicity. Federal employment laws do not prohibit seeking a diverse candidate pool so long as final decisions are based on qualifications and do not involve disparate treatment.

• Review subcontractor management processes and update flow-down provisions and monitoring protocols as needed. The mandatory clause requires contractors to report subcontractor conduct that may violate it.

• Work with counsel to assess FCA exposure, including the risk of whistleblower lawsuits by employees or competitors. 

• Maintain thorough documentation of employment, contracting, and program participation practices. The mandatory clause requires contractors to provide access to books, records, and accounts.

• Track upcoming guidance, including OMB sector-specific guidance, the FAR Council’s interim guidance and formal rulemaking, and any agency-level directives that may impose additional compliance obligations.

Attorneys in ArentFox Schiff’s Labor, Employment & OSHA and Government Relations practices are closely monitoring the Trump Administration’s EOs. For additional guidance on navigating the change in Administration, please contact your AFS attorney or either author of this alert.