New Executive Order Further Targets Federal Contractors’ DEI Practices

President Trump issued a new executive order formally requiring federal contractors to certify that they do not engage in discriminatory DEI practices or risk contract termination and/or debarment.

Background: President Trump previously issued an Executive Order in 2025 that targeted federal contractors’ DEI practices; this new Order formalizes previous requirements and creates substantial new ones.

What’s in the EO: “Addressing DEI Discrimination by Federal Contractors” requires all federal contracts to include a certification that “the contractor will not engage in any racially discriminatory DEI activities.”

• Opening the books to the government: Contractors must “furnish all information and reports, including providing access to books, records, and accounts” to the contracting agency for purposes of ensuring compliance.

• Reporting requirements: Contractors will also be required to report any known or reasonably known noncompliance of subcontractors.

• DOJ enforcement: Each agency will regularly submit compliance reports to the White House and Attorney General, which will then consider legal action under the False Claims Act and federal anti-discrimination laws for alleged violators.

• Penalties: Failure to comply could result in contracts being suspended, cancelled, or terminated, and the contractor being suspended or debarred from future contracts.

What does “racially discriminatory DEI activities” mean? The EO defines such 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” means 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.”

• The bottom line: Any employment decision, program or initiative (such as ERGs, mentorship programs, etc.), or third-party partnership or sponsorship (such as a scholarship program) that is predicated on race or ethnicity would be noncompliant.

  • E.g., diverse candidate slates, ERGs or mentorship programs open only to certain races or ethnicities.

Does it apply to existing contracts (as well as new contracts)? It is likely that existing contracts will be modified to include these new certification clauses.

• However, such a modification would likely require the contractor’s approval (although, of course, refusal could result in the contract’s termination).

Is this legal? There are many examples in recent history of courts blocking Presidents’ attempts to effect policy change through federal contracting requirements (see President Biden’s vaccine mandate), and lawsuits are certain.

• However, the Supreme Court has been more receptive to the Trump administration’s efforts, and lower courts have already blessed this type of certification requirement as spelled out in last…

• False Claims Act liability generally requires any false certification to be material to payment – whether DEI initiatives would be considered material to payment is an open question.

What employers need to know:

• Certifications coming soon: To the extent that it has not already happened, employers with federal contracts – existing or upcoming – can expect to see these certification clauses added within 30 days.

• Refusal to certify = loss of contracts: Failure to certify will almost certainly result in the suspension or loss of a contract, and could prevent a contractor from receiving contracts (from this administration) in the future.

• False Claims Act risks and whistleblowers: Should a contractor certify and then later be found to have noncompliant DEI initiatives, the company and/or its officers could be liable under the False Claims Act.

  • There is a significant whistleblower risk here – i.e., disgruntled employees or applicants alleging noncompliant DEI practices (something this administration is expressly encouraging).

• Transparency risks: Under the EO, contractors are required to furnish all relevant information to the government regarding noncompliant DEI practices, for the duration of the contract. This type of ongoing microscope carries significant liability risks.

• Race/ethnicity only: The Executive Order does not apply to programs based on gender or sex, although a similar order targeting such classifications may be forthcoming.

What to do now:

• Risk audit: Conduct an audit of all DEI programs and initiatives under attorney-client privilege, even if you have already conducted similar audits. Focus on any program or initiative that is predicated on belonging to a particular ethnic or racial group.

• Communications strategy: Develop a top-down communications strategy on DEI initiatives and potential responses to internal or external pressures.

• Training: Train managers for the intense scrutiny corporate DEI initiatives are likely to undergo and importance of clean email communications (which may be used as evidence in litigation and investigations).