On March 26, 2026, President Trump signed an Executive Order (EO), titled Addressing DEI Discrimination by Federal Contractors (DEI EO), the latest in a series of EOs issued during his second term that are aimed at targeting alleged illegal diversity, equity and inclusion (DEI) activities by employers, including federal contractors. The new DEI EO imposes mandatory contract language prohibiting racially discriminatory DEI for inclusion in federal contracts and subcontracts starting April 25, 2026. In addition, it imposes new recordkeeping and reporting requirements, provides more clarity regarding what the current administration considers to be prohibited DEI activities, and references enforcement consequences for contractor violations.
Contractor Obligations and Noncompliance Consequences
In early 2025, during the first few weeks of his second term, President Trump issued several EOs marking a shift in the executive branch’s enforcement priorities related to discrimination laws. These 2025 EOs introduced a heightened focus on targeting and eliminating the DEI initiatives and activities of federal contractors and other employers that allegedly constitute illegal and reverse discrimination against members of traditional majority demographic groups based on preferential treatment for members of traditionally marginalized demographic groups, such as women and people of color. In particular, EO 14173, issued in January 2025, required federal contractors to certify compliance with federal anti-discrimination laws, prohibited “illegal” DEI by contractors, and revoked a prior longstanding EO issued by President Lyndon B. Johnson that had established various affirmative action and other obligations by federal contractors with respect to minorities and females.
The March 2026 DEI EO builds on EO 14173 by prohibiting illegal DEI activities by contractors and specifically requiring all new federal contracts, modifications to existing contracts, and lower-tier subcontracts (by “flow down”) to include the following clause:
“In connection with the performance of work under this contract, [the contractor/appropriate party (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).”
This new contractual provision effectively prohibits a federal contractor or covered subcontractor from engaging in “racially discriminatory” DEI activities, and it imposes obligations on a contractor to maintain and, if requested, furnish records related to the contractor’s compliance to the federal government. In addition, the language requires a contractor to report potential subcontractor violations to the federal government and to take any remedial actions directed by the contracting government department or agency. The language also requires affirmative notification to the contracting department or agency if a contractor sues a subcontractor in an action that puts “at issue, in any way, the validity of this clause.”
The contractual provision also includes language covering potential legal consequences for noncompliance. The language states that consequences for noncompliance may include cancellation, termination or suspension of a contract, in whole or in part, or debarment from being a contractor in the future. In addition, the language includes a contractor acknowledgement that the contractual provision is a material condition of the government’s payment decisions, apparently designed to better position the federal government to pursue qui tam actions under the federal False Claims Act (FCA), which prohibits an entity from obtaining federal funding through false pretenses and fraud. This FCA liability risk is consequential, because the FCA exposes federal contractors and subcontractors to fraud claims that can result in treble damages, contract termination and potential debarment from federal contracts entirely.
Defining “Racially Discriminatory DEI Activities”
The latest DEI EO also builds on earlier Trump administration EOs by expressly defining and providing examples of prohibited racially discriminatory conduct. The DEI EO states that “racially discriminatory DEI activities” include “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.”
The DEI EO further 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.”
Key Takeaways
Federal contractors and subcontractors should promptly evaluate the implications of the DEI EO on them, with particular attention to the following areas:
- DEI Activities — Organizations should review their internal policies, programs and practices to assess potential DEI‑related risk exposure and any responsive actions. Engaging legal counsel to assist with an internal audit should be considered, to allow for an audit to be legally privileged and to obtain advice from legal counsel. In connection with such an audit, an entity should assess if their existing policies, programs and activities are free of any quotas, preference or differential treatment based on race and, if not, the potential related risks and responsive measures that might be taken.
- Disclosure and Information Requests — The DEI EO’s contractual requirement to furnish “all information and reports” related to compliance means a contractor or covered subcontractor should engage in careful recordkeeping and prepare for potential government audits and data requests. Contractors should review their information management protocols to ensure that data protected by the attorney-client privilege is sequestered and stored confidentially and securely.
- Subcontractor Compliance — By April 25, 2026, direct federal contractors must ensure that the required language is incorporated into applicable subcontracts to mitigate against subcontractor non-compliance. Federal contractors may want to consider establishing control or oversight mechanisms with their subcontractors.
- Balancing State or Local Affirmative Action Compliance — A federal contractor or subcontractor who also engages in state or local government contracting will need to carefully assess how to comply with state or local affirmative action obligations that might be viewed by the Trump administration as inconsistent with the new contract language required by the DEI EO (although the DEI EO does not have the impact of overriding or preempting state or local law requirements). Not all state or local affirmative action laws will require actions that might contradict the DEI EO, but entities should assess all obligations and seek legal counsel to navigate potentially competing or conflicting obligations.
Additionally, although the DEI EO applies only to federal contracts, its defined terms and requirements are informative for all employers as to what the Trump administration considers to be “illegal” DEI and its continued enforcement priorities and strategies, including possible expansion of use of the FCA. In particular, entities that receive federal funding in other contexts outside of government contracting should take note of the Trump administration’s continued enforcement focus on “illegal” DEI, including by entities receiving federal funding through various means.
Next Steps
Shortly, direct federal contractors and applicable subcontractors can expect to see this new contract language included in contracts. The DEI EO directs the Office of Management and Budget to issue guidance to contracting agencies and identify economic sectors at high risk of engaging in racially discriminatory DEI activities. Federal contractors and subcontractors in these sectors should anticipate heightened scrutiny and potential enforcement actions.
If you have questions about the potential impact of this DEI EO on your organization or contracts, please contact Megan Anderson or Natalie Kay, or your regular Lathrop GPM attorney.