DEI in the Crosshairs: New Executive Order Targets Federal Contractors

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Quick Hits

• On March 26, 2026, President Trump issued an executive order (EO) with broad applicability to federal contractors and subcontractors, but certain agreements would not likely be covered by the EO, including Other Transaction Agreements (OTAs), cooperative agreements, and grants.
• The EO defines “racially discriminatory DEI activities” as disparate treatment based on race or ethnicity across hiring, promotions, vendor agreements, training, and program participation—a notable departure from earlier EOs that used the phrase “unlawful DEI” without defining it.
• Enforcement authority appears to rest with individual contracting agencies, which may terminate or suspend contracts and initiate debarment, while the attorney general is directed to “consider” or, per the White House fact sheet, “prioritize” False Claims Act actions against violators.
• Agencies must include the mandatory clause in contracts within thirty days ahead of the FAR Council’s sixty-day deadline for interim deviation guidance raising practical considerations around DEI program audits, subcontractor oversight, recordkeeping, and False Claims Act exposure.

The EO applies to contracts that are subject to the Federal Property and Administrative Services Act of 1949 (FPASA), which is a core statutory authority for the federal procurement system. The EO requires a mandatory clause in every federal contract prohibiting “racially discriminatory DEI activities,” with noncompliance carrying contract termination, debarment, and False Claims Act liability including treble damages and whistleblower qui tam suits.

What’s Prohibited

The EO introduces direct contractual consequences, including contract termination, debarment, and False Claims Act liability, for private-sector contractors and subcontractors that engage in what it defines as racially discriminatory DEI activities.

The administration characterizes DEI activities as practices in which “employees, applicants, or contracting parties are treated differently, separated, or singled out based on their race or ethnicity, rather than treated equally and objectively based on their merit,” contending that such activities impose artificial costs that are ultimately passed on to the federal government through its contractors. The EO does not prohibit all DEI activities. Its prohibitions are limited on their face to “racially discriminatory DEI activities,” which it defines as disparate treatment based on race or ethnicity in recruitment, employment (including hiring and promotions), contracting (including vendor agreements), program participation, and resource allocation. This represents a departure from earlier EOs that introduced the phrase “unlawful DEI” without providing any specific definition of the term. By contrast, this EO offers an express definition tied to disparate treatment based on race or ethnicity, giving contractors a more concrete though still broad framework for assessing compliance.

“Program participation” is broadly defined to include training, mentoring, leadership development programs, educational opportunities, clubs, associations, and similar opportunities sponsored by the contractor or subcontractor. As such, the term potentially encompasses employee resource groups, affinity networks, and mentorship programs. The breadth of the definition and the severity of the enforcement mechanisms may effectively discourage a broader range of programs and activities that have been associated with diversity initiatives.

The Clause

Within thirty days, all executive departments and federal agencies must include a specific clause in their contracts, contract-like instruments, and subcontracts at all tiers. The clause prohibits contractors from engaging in racially discriminatory DEI activities; requires them to provide the contracting agency with access to books, records, and accounts for compliance verification; and obligates them to report subcontractor conduct that may violate the clause and take remedial actions as directed. Noncompliance can result in contract termination or suspension, as well as debarment from future government contracts.

Critically, the clause requires the contractor to acknowledge that compliance is “material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act),” establishing the factual predicate for False Claims Act enforcement and potentially exposing noncompliant contractors to significant financial penalties.

Who Enforces It

The EO does not appear to create a centralized enforcement body. Primary authority rests with the individual contracting agencies, which may cancel, terminate, or suspend contracts and initiate suspension or debarment proceedings. The Office of Management and Budget (OMB) is directed to issue compliance guidance to those agencies and, with the attorney general, the assistant to the president for domestic policy, and the “EEOC Chairman,” to identify high-risk economic sectors and issue sector-specific guidance. Agency heads must review implementation within 120 days, with regular reviews thereafter. On the litigation front, the EO directs the attorney general to “consider” bringing False Claims Act actions against violators, while the accompanying White House fact sheet uses notably stronger language, stating that the attorney general is directed to “prioritize” such claims. The EO also directs the attorney general to ensure prompt review of qui tam actions, including rendering an intervention decision within the sixty-day statutory period “to the maximum extent practicable.”

FAR Amendments and Timing

The Federal Acquisition Regulatory (FAR) Council is directed to amend the Federal Acquisition Regulation (FAR) to include the mandatory clause and remove conflicting provisions. As an interim measure, the FAR Council must issue deviation guidance within sixty days to facilitate implementation pending formal rulemaking. Notably, there is a potential timing tension as the EO’s thirty-day mandate for agencies to include the clause in contracts precedes the FAR Council’s sixty-day deadline to issue interim deviation guidance. This may leave agencies resolving implementation questions before a formal regulatory framework is in place. More broadly, this EO arrives as the administration is simultaneously working to implement the FAR overhaul executive order, signaling a broader effort to reshape the federal procurement landscape.

What’s Next

The EO raises a number of practical considerations for federal contractors and subcontractors. Key areas of focus include auditing existing DEI programs, policies, training initiatives, employee resource groups, and vendor diversity requirements to identify any disparate treatment based on race or ethnicity that could fall within the EO’s prohibition. Subcontractor oversight is another consideration, as contractors are obligated to monitor subcontractor compliance, report known or reasonably knowable violations, and take directed remedial action. Recordkeeping systems that are adequate to furnish the “books, records, and accounts” required for compliance verification will also be relevant.

Forthcoming OMB guidance identifying high-risk sectors and any additional compliance requirements applicable to specific industries may further shape the compliance landscape.

The EO includes a severability clause and does not create any enforceable private right of action, though the False Claims Act’s existing qui tam provisions provide an independent avenue for private enforcement. The compliance landscape is likely to evolve rapidly as OMB issues implementing guidance, the FAR Council promulgates interim and final amendments, and agencies begin incorporating the mandatory clause into contracts.

Ogletree Deakins’ Diversity, Equity, and Inclusion Compliance Practice Group, Government Contracting and Reporting Practice Group, and Workforce Analytics and Compliance Practice Group will continue to monitor developments and post updates on the Diversity, Equity, and Inclusion Compliance, Government Contracting and Reporting, Governmental Affairs, and Workforce Analytics and Compliance blogs as additional information becomes available.

Ogletree Deakins will present a webinar on April 7, 2026, discussing the implications of this executive order for federal contractors and subcontractors. Our speakers will include Simone R.D. Francis, a shareholder and co-chair of the firm’s Diversity, Equity, and Inclusion Compliance Practice Group, Joseph E. Ashman, a shareholder and co-chair of the firm’s Government Contracting and Reporting Practice Group, and Cameron W. Ellis, of counsel and also a member of the Government Contracting and Reporting Practice Group. Register here.

This article and more information on how the Trump administration’s actions impact employers can be found on Ogletree Deakins’ Administration Resource Hub.

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