New Executive Order Targets "DEI Discrimination" by Federal Contractors

President Donald Trump on March 26, 2026, issued a new executive order (EO) titled "Addressing DEI Discrimination by Federal Contractors." The EO is the latest – and among the most consequential – steps in the Trump Administration's broader campaign against what it views as discriminatory, illegal diversity, equity and inclusion (DEI) practices. Earlier executive actions have focused on eliminating DEI programs within the federal government itself, as well as among government contractors and the private sector more broadly. But this EO is even more direct than previous actions, imposing a new contract clause on contractors and their subcontractors, with violations risking False Claims Act (FCA) liability, contract termination, and suspension and debarment. The EO also directs the U.S. Department of Justice (DOJ) to prioritize DEI-related FCA enforcement.

Background and Purpose

The EO comes on the heels of proposed updates to the U.S. General Services Administration's official website, SAM.gov. Those updates would require federal contractors and federal assistance recipients to certify compliance with the EO's requirements.

The EO describes so-called DEI activities as "unethical and often illegal" when employees, applicants or contracting parties are treated differently based on race or ethnicity. The EO then states that such practices create waste and inefficiency that is ultimately borne by the federal government and American taxpayers. According to the EO, these sorts of DEI activities impose artificial costs in hiring and operations, increase workforce turnover by elevating immutable characteristics over job performance and reduce the available labor pool by limiting hiring to certain individuals based on protected characteristics. These costs, the EO states, are "inevitably passed on to the Federal Government" when it contracts with companies that engage in these practices. Like many past EOs from both Republican and Democratic administrations, this EO invokes the Federal Property and Administrative Services Act as its authority and that act's language encouraging "economy and efficiency" in government contracting as its rationale. Notably as well, this authority and rationale was the basis for the government's previous antidiscrimination regime under EO 11246 and its enforcement through the now-all-but-gone Office of Federal Contract Compliance Programs.

The new EO 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." It then defines "program participation" as "membership or participation in, or access or admission to: training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor."

At its core, the EO is targeting conduct that may already violate Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 1981, and similar statutes – namely, treating individuals and contracting entities differently based on their race or ethnicity rather than on their qualifications and performance.

This EO builds on a series of Trump Administration actions aimed at dismantling DEI across the public and private sectors. The March 26, 2026, EO now brings the Trump Administration's attention on the contracting community into sharper focus, establishing what the administration describes in its fact sheet as "strong accountability mechanisms to ensure compliance is genuine and verifiable."

Key Requirements

The centerpiece of the EO is a mandatory contract clause that federal agencies must incorporate into contracts and contract-like instruments – including subcontracts and lower-tier subcontracts – by April 25, 2026. It is important to note that the obligation to insert this clause falls on the contracting agency, not the contractor. However, the clause itself creates direct obligations for contractors and flows down to subcontractors at all tiers.

The required clause contains six elements, as follows:

1. No Racially Discriminatory DEI Activities. The contractor will not engage in any racially discriminatory DEI activities, as defined in Section 2 of the EO.
2. Access to Books and Records. The contractor will furnish all information and reports, including access to books, records and accounts, as required by the contracting agency for purposes of ascertaining compliance.
3. Remedies for Noncompliance. In the event of noncompliance by the contractor or a subcontractor, 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.
4. Reporting of Subcontractor Conduct. The contractor will 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. Notably, the EO does not define the term "known or reasonably knowable conduct," leaving open significant questions about the scope of a contractor's monitoring and reporting obligations with respect to its subcontractors and their interaction with the FCA's scienter standard.
5. Notification of Litigation. The contractor will inform the contracting agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of the clause.
6. FCA Materiality. The contractor recognizes that compliance with the clause is "material" to the government's payment decisions for purposes of the FCA.

Penalties and Enforcement

Though prior directives from the Trump Administration have targeted DEI programs, the EO is the most significant and consequential for federal contractors. The EO lists a host of penalties that can be assessed against contractors who violate the clause, including FCA liability, suspension and debarment, and contract termination. 

The EO directs contracting agencies to cancel, terminate or suspend contracts (or portions of them) and "take appropriate action to suspend and debar contractors or subcontractors for … failures to comply." Suspension and debarment, as explained in a previous Holland & Knight blog post, are drastic administrative actions that essentially cut off an entity from federal funds for the exclusion period. If suspended or debarred, a company is listed in SAM.gov and becomes ineligible for federal contracting and all forms of federal assistance, including grants, loan guarantees and other benefits. Though suspension or debarment is intended to be a forward-looking measure to protect the government, not punitive or remedial, the possibility of suspension or debarment may nonetheless deter organizations that rely on government contracts.

The EO also includes new enforcement priorities. It directs the U.S. Attorney General to consider whether to bring FCA actions against noncompliant contractors and ensure prompt review of qui tam actions brought by private whistleblowers. As outlined in a previous Holland & Knight alert, this is consistent with recent remarks by senior DOJ officials signaling that the government views compliance with antidiscrimination laws as a material term of government contracts and intends to use the FCA as an enforcement tool against contractors that engage in discriminatory practices. 

The FCA carries significant financial penalties, treble the damages sustained by the government and other penalties. Remarks by the DOJ indicate it will seek penalties in DEI cases, a departure from common practice during settlement on FCA matters. The calculation of damages will depend on the nature and breadth of the alleged violations and theory of harm DOJ advances. Under a fraud-in-the-inducement theory, the government would contend that the full contract or order would never have been awarded absent the alleged misrepresentations, and the full value constitutes damages. Alternatively, the DOJ could seek recovery of costs associated with allegedly discriminatory programs passed through to the government, or it could employ a hybrid approach combining elements of both theories.

By seeking to incorporate an express clause in the contract, one that acknowledges materiality of nondiscrimination practices, the DOJ is shoring up its ability to bring FCA cases by showing express certifications are false.

The EO similarly directs the Office of Management and Budget, in coordination with the White House, DOJ and U.S. Equal Employment Opportunity Commission, to identify high-risk economic sectors and issue compliance guidance for them.

The EO also requires each agency head to review implementation of the contract clause within 120 days and directs the Federal Acquisition Regulatory Council to amend the Federal Acquisition Regulation to incorporate the new clause.

Obligations to Assess and Report Subcontractors

Under the EO, a contractor is obligated to "report any subcontractor's known or reasonably knowable conduct that may violate this clause," which has significant ramifications for a prime contractor. This provision represents a compliance challenge because the phrase "reasonably knowable" is not defined, rarely used in federal law and appears to put the onus on the prime contractor to investigate its own subcontractor. 

The language indicates that a prime contractor may be responsible for making a reasonable effort to determine if a subcontractor is engaged in "racially discriminatory DEI activities." Thus, it appears that a prime contractor cannot claim ignorance of a subcontractor's noncompliant conduct and potentially cannot disclaim liability if that conduct could have been identified through normal business processes and the exercise of ordinary diligence. 

Takeaways

Though the definition of "racially discriminatory DEI activities" largely mirrors existing antidiscrimination principles, the EO creates new reporting, compliance and certification obligations that carry substantial enforcement risk – particularly given the express link to the FCA, contract termination, and suspension and debarment. Federal contractors should consider taking steps to maintain compliance, including those laid out below.

• Review Existing Programs: Contractors should evaluate their DEI-related programs, policies and practices to determine whether any involve disparate treatment based on race or ethnicity in hiring, promotions, contracting, resource allocation, or access to training and development opportunities. This includes programs that may involve demographic goals tied to compensation, preferential treatment in hiring or promotions, or exclusive career opportunities based on protected characteristics.
• Assess Subcontractor Risk: The EO places responsibility on prime contractors to monitor and report subcontractor conduct that may violate the clause. Contractors should review their subcontractor agreements and oversight processes to ensure they have mechanisms in place to identify and address potential noncompliance down the supply chain. This should include updating subcontract terms and conditions to flow down any provisions or clauses related to the EO.
• Prepare for New Contract Terms: Because the obligation to insert the clause falls on the contracting agency, contractors should expect to see the new language appearing in solicitations, new contracts and potentially modifications to existing contracts in the coming weeks. Contractors should review the clause language carefully and understand their obligations before signing.
• DEI, by Itself, Is Not Unlawful: The EO prohibits "racially discriminatory DEI activities." Thus, a DEI program by itself is not unlawful.   

This is a rapidly evolving area, and the March 26 EO represents a significant escalation of the Trump Administration's efforts to regulate DEI practices in the federal contracting space. Contractors and subcontractors at all tiers should act promptly to assess their exposure and align their programs with the new requirements.

If you have questions about how this EO may affect your organization, please contact the authors of this alert or a member of Holland & Knight's DEI Task Force.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.