New Executive Order Targets DEI Practices by Federal Contractors, Imposes Mandatory Contract Clause and FCA Liability

By Edwin O. Childs, Abram J. Pafford, Jack White, John Adams, Elissa Baur, James Dougherty, Brett Barnett, Michael J. Podberesky, David Greenspan, John E. Thomas, WIlliam Doyle, Elena Marcuss, Michael R. Phillips, Jason M. Vespoli, John Sullivan & Sophie Marsh on April 2, 2026

Continuing his Administration’s efforts to eliminate diversity, equity, and inclusion (DEI) activities, President Donald Trump signed an executive order, “Addressing DEI Discrimination by Federal Contractors,” on March 26, 2026 that directs all executive departments and agencies to include a new clause in all federal contracts and subcontracts prohibiting what the order defines as “racially discriminatory DEI activities.” The order represents another escalation of the Administration’s efforts to restrict DEI programs in the federal contracting space — building on Executive Order 14173 and the Department of Justice’s May 2025 Civil Rights Fraud Initiative — and carries substantial enforcement implications, including potential liability under the False Claims Act (FCA).

This alert summarizes the key provisions of the new executive order, analyzes the practical implications for federal contractors and subcontractors, and outlines recommended steps for compliance.

Background

The executive order is the latest in a series of actions by the Trump administration targeting DEI activities related to federal contracting and funding agreements. In January 2025, President Trump issued Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which revoked the longstanding affirmative action framework under Executive Order 11246 and directed agencies to require contractors and grantees to certify compliance with federal antidiscrimination laws. In May 2025, Deputy Attorney General Todd Blanche announced the creation of the Civil Rights Task Force, under which the DOJ plans to use the FCA to investigate and pursue claims against recipients of federal funds in connection with violations of federal civil rights laws. In February 2026, Deputy Assistant Attorney General Brenna Jenny provided further insight into enforcement priorities, indicating that DOJ is targeting discriminatory implementation of DEI programs — not DEI programs themselves per se — and identifying specific targeted practices, including diverse slate policies, demographic goal tracking tied to compensation, and race- or sex-restricted training and mentoring programs as potentially problematic.

The new executive order goes further than its predecessors by mandating a specific contractual clause and directing all agencies to incorporate such clause into federal contracts and subcontracts within 30 days.

Definition of “Racially Discriminatory DEI Activities”

The executive order defines “racially discriminatory DEI activities” 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.” “Program participation” is further defined to include membership or participation in, or access or admission to, training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities sponsored or established by the contractor or subcontractor. This definition is notable in that it focuses exclusively on race and ethnicity, rather than the broader category of protected characteristics referenced in some prior executive orders and DOJ guidance. The definition is also notable for its breadth, in that it encompasses not only hiring and promotion decisions but also internal resource allocation, vendor relationships, and access to development and training programs.

Notably, the executive order’s definition of “racially discriminatory DEI activities” establishes a standard that operates independently of, and is not coextensive with, the “any applicable Federal anti-discrimination law” standard set forth in Executive Order 14173. Rather than merely reiterating existing prohibitions on discrimination under Title VII, Section 1981, or other established federal civil rights statutes, the new order appears to impose a distinct and novel standard of liability that differs meaningfully from both prior executive orders and the existing federal anti-discrimination framework. This new standard is, in one respect, narrower than traditional federal anti-discrimination law: by focusing exclusively on “disparate treatment based on race or ethnicity,” the order omits protections against discrimination based on religion, sex, sexual orientation, and other characteristics that are covered under Title VII and related statutes. At the same time, however, the standard is broader in another significant respect, it reaches a wider segment of activity than traditional employment discrimination frameworks by encompassing not only recruitment, hiring, and promotions, but also “contracting,” “program participation,” and, critically, the “allocation or deployment of an entity’s resources”. This last category, in particular, could implicate a federal contractor’s own charitable giving, philanthropic commitments, and grantmaking activities to the extent those activities involve any consideration of race or ethnicity; a scope of reach that extends well beyond traditional anti-discrimination enforcement and warrants careful assessment by compliance counsel.

Mandatory Contract Clause

The core operative provision of the executive order requires that, within 30 days of issuance (i.e., by Saturday, April 25, 2026), all executive departments and agencies subject to the Federal Property and Administrative Services Act (FPASA) ensure that contracts and contract-like instruments — expressly including subcontracts at all tiers — include the following clause:

In connection with the performance of work under this contract, [the contractor] agrees as follows:

The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);
The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;
In the event of the contractor’s or a subcontractor’s noncompliance with this clause, this 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 will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting department or agency and take any appropriate remedial actions directed by the contracting department or agency;
The contractor will inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of this clause; and
The contractor recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).

The final element of the clause is notable in that it establishes a factual predicate that the failure to comply with the clause is material to the government’s decision to pay invoices under the contract. Materiality is an element that the government must prove in establishing a contractor or subcontractor’s liability under the False Claims Act. While materiality is assessed based on the facts of each particular case, to include a contracting officer’s actual knowledge and conduct, this statement is likely to at least color DOJs, if not a court’s or jury’s review of that element. This is consistent with the Administration’s other DEI-related executive orders and is likely to give insiders further incentive to bring claims under qui tam (whistleblower) provisions of the False Claims Act.

Enforcement Mechanisms and Penalties

The executive order establishes a multi-layered enforcement framework:

Contract Remedies. Contracting agencies are directed to cancel, terminate, or suspend any contract or portion thereof for failure to comply with the mandatory clause. The executive order also directs agencies to take appropriate action to suspend and debar contractors and subcontractors that fail to comply with the clause.
OMB Guidance. The Director of the Office of Management and Budget (OMB) is required to issue guidance to contracting agencies ensuring compliance with the clause. The executive order also requires OMB, in coordination with the Attorney General, the Assistant to the President for Domestic Policy, and the Chairman of the Equal Employment Opportunity Commission, to identify economic sectors that pose a “particular risk” of entities engaging in racially discriminatory DEI activities and issue additional sector-specific guidance. This is, most notably, consistent with similar direction to agencies under prior DEI-related executive orders, which we understand have resulted in targeted enforcement activities in key sectors.
False Claims Act Enforcement. The Attorney General, in consultation with contracting agencies, is directed to “consider whether to bring actions under the False Claims Act” against contractors or subcontractors that violate the mandatory clause. The executive order also directs the Attorney General to ensure prompt review of qui tam actions filed by private persons under 31 U.S.C. § 3730(b)(1), including by rendering a decision on whether to proceed with such actions, to the maximum extent practicable, within the 60-day period described in 31 U.S.C. § 3730(b)(2). This provision is designed to expedite the government’s response to whistleblower-initiated FCA lawsuits and signals the administration’s intent to actively leverage private enforcement.

Key Timelines

The executive order establishes the following deadlines:

30 days (April 25, 2026): The executive order directs agencies to ensure that the mandatory clause is included in all new and modified contracts and subcontracts.
60 days (May 25, 2026): The executive order directs the FAR Council to issue deviations and interim guidance under FAR Subpart 1.4 regarding agency implementation of the clause.
120 days (July 24, 2026): The executive order directs agency heads to review each agency’s implementation and report to the Assistant to the President for Domestic Policy on compliance.

In addition, the executive order directs the FAR Council to amend the FAR to formally incorporate the mandatory clause and remove any conflicting provisions, although no specific deadline is imposed for such rulemaking.

While certain of these dates may necessarily slide (and may be subject to litigation), we note that most agencies have come relatively close to meeting similar deadlines under other Administration executive orders.

Practical Implications for Federal Contractors

The executive order has significant and immediate implications for federal contractors and subcontractors at all tiers:

First, we note that the 30-day implementation window is aggressive. Contractors should anticipate that contracting officers will begin seeking to incorporate the new clause into contracts on or shortly after April 25, 2026. It is likely that any such changes would need to be bilateral modifications, although subject to the contracting officer’s broad termination rights. Any new contract awards, modifications, or option exercises after that date are likely to include the clause, and the 60-day interim guidance from the FAR Council may further clarify the scope of application to existing contracts. As such and, again, while potentially subject to legal challenge, contractors should start preparing to implement these requirements, both themselves and within their subcontracting and supply bases to ensure prompt compliance if and when required.
Second, the contemplated obligation to monitor and report subcontractor conduct represents a new and potentially significant compliance burden. Depending on the Administration’s interpretation, the clause may require prime contractors to report “known or reasonably knowable” subcontractor violations—a standard that suggests the intent to require prime contractors to implement some kind of a monitoring or, at a minimum, certification program.
Third, the express linkage to the False Claims Act establishes a clear enforcement intent that is fully consistent with our experience related to DEI issues. The materiality provision in the clause is designed to address one of the key elements that has been subject to litigation in connection with False Claims Act matters. By requiring contractors to at least initially acknowledge materiality under the clause and although subject to further factual considerations in any specific case, the order would seem to strengthen the government’s (and relators’) position in future False Claims Act litigation with respect to the element of materiality from a legal perspective.
Fourth, the breadth of the definition of “racially discriminatory DEI activities” introduces significant uncertainty from a compliance perspective. While the definition focuses on disparate treatment based on race or ethnicity, the application of this standard to specific programs — such as mentoring initiatives, supplier diversity programs, employee resource groups, or scholarship and internship programs — may not be straightforward. To that end, the executive order raises questions regarding inconsistencies with certain small and disadvantaged business subcontracting requirements that are required by the Small Business Act and incorporated into most government contracts. The February 2026 remarks by DAAG Jenny suggest that DOJ is focused on programs that pressure supervisors to make race-based hiring and promotion decisions, tie compensation to demographic goals, or restrict access to training and development opportunities on the basis of race or sex. However, the scope of enforcement activity could expand, particularly as OMB identifies “particular risk” sectors.

Recommended Action Items

In light of the executive order and the accelerated timelines for implementation, federal contractors and subcontractors may want to consider the following steps:

Conduct a comprehensive internal review of all DEI-related programs, policies, and practices, including hiring and promotion processes, mentoring and leadership development programs, supplier diversity initiatives, and resource allocation decisions, to identify any activities that could be characterized as involving disparate treatment based on race or ethnicity. Many contractors have already engaged in such reviews under the Administration’s earlier executive orders, although, as noted, the March 26 executive order raises new questions and appears to be premised upon broadening the scope of such earlier efforts.
Evaluate whether any programs tie employee compensation, bonuses, or promotion eligibility to the achievement of demographic goals or require supervisors and managers to consider race or ethnicity in employment decisions. The DOJ has specifically identified these practices as areas of active enforcement interest.
Work with supply chain and subcontracting personnel to review and, where possible and prudent, update existing practices (including, where appropriate, disclosure requirements). This may include updating subcontract terms to flow down the new clause, implementing periodic compliance certifications from subcontractors, and establishing internal protocols for escalating and reporting potential issues.
Engage with legal counsel if issues arise to assess FCA exposure, including the risk of qui tam actions by current or former employees, competitors, or other private parties. Companies should ensure that any compliance representations made to the government — including in connection with invoicing and payment requests — are accurate and defensible.
Document the business rationale and legal basis for any continuing DEI-related activities to demonstrate that such activities are compliant with legal requirements (e.g., small and disadvantaged business subcontracting) and not based on disparate treatment on the basis of race or ethnicity. DOJ officials have recognized that companies can operate DEI programs without engaging in discrimination, and the government’s stated focus is on discriminatory implementation rather than DEI programs as such.
Monitor forthcoming guidance from OMB, the FAR Council, and contracting agencies for additional clarity on the scope and application of the mandatory clause, particularly with respect to the identification of “particular risk” economic sectors.

Looking Ahead

This executive order represents a significant new chapter in the administration’s approach toward restricting DEI activities in the federal contracting ecosystem. Coming on the heels of Executive Order 14173, the DOJ Civil Rights Fraud Initiative, and DAAG Jenny’s February 2026 remarks, the order creates a concrete, enforceable contractual obligation backed by the full weight of the False Claims Act. As with prior actions in this area, the order may face legal challenges — the Fourth Circuit’s March 2025 decision in the EO 14173 litigation allowed key provisions of the earlier executive orders to proceed, but the underlying legal questions regarding the scope of executive authority and First and Fifth Amendment constraints remain unresolved.

Federal contractors should act promptly to assess their exposure, update their compliance programs, and prepare for the inclusion of the mandatory clause in their contracts beginning in late April 2026.

For questions about this executive order and its implications for federal contracting, DEI programs, and False Claims Act compliance, contact the authors or members of the firm’s False Claims Act, government contracts, or labor and employment teams.