On March 26, 2026, President Trump issued an executive order — “Addressing DEI Discrimination by Federal Contractors” — that creates new DEI-related requirements for federal contractors.
As previously reported, last year, President Trump issued Executive Order 14173 addressing diversity, equity and inclusion programs (DEI), aiming to stop “illegal” DEI programs. Among other things, Executive Order 14173 revoked prior orders that placed certain affirmative action obligations on federal contractors. It also required contractors to certify that they didn’t operate any DEI programs that “violated federal anti-discrimination laws.”
Now, President Trump’s recent order goes further by imposing new DEI-related obligations, including significant consequences for noncompliance.
New Contract Clause Requirements for Federal Contractors
Under the new order, covered contracts must include a clause stating that the contractor will not engage in any “racially discriminatory DEI activities,” which the order defines 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.”
Additionally, contractors must agree to:
- Provide information and reports, including access to books, records and accounts as required by the contracting agency for purposes of ascertaining compliance.
- Report potential violations by subcontractors to the contracting agency or department.
- Inform the contracting agency or department if a subcontractor sues the contractor and the suit puts the validity of the clause at issue.
- Recognize that compliance with the clause’s requirements are material to the federal government’s payment decisions for purposes of the False Claims Act. This language makes it easier for individuals to “blow the whistle” and report violations against contractors under the False Claims Act.
Lastly, the contract must include a provision stating that if the contractor doesn’t comply, the contract may be canceled, terminated or suspended, and the contractor or subcontractor may be declared ineligible for further government contracts.
Implementation and Penalties
The order directs federal agencies to ensure that contracts include the new DEI-related provisions within 30 days of the order’s date. This requirement applies to contractors and subcontractors.
The order directs the Office of Management and Budget to issue guidance to contracting agencies regarding compliance. Consistent with that guidance, contracting agencies are directed to cancel, terminate or suspend contracts for failure to comply and take action to suspend or debar contractors or subcontractors for noncompliance.
Additionally, the Attorney General is directed to consider bringing False Claims Act lawsuits against violating contractors and to prioritize reviewing False Claims Act lawsuits filed by individuals.
Employers Takeaways
Keep in mind that the order doesn’t change federal or state anti-discrimination laws, which have long prohibited discrimination based on race or ethnicity. It does, however, go further than the previous executive order with its obligations to provide reports and information, monitor subcontractors, and potential consequences for noncompliance, including contract cancellation and Fair Claims Act exposure.
While some practical questions remain, covered federal contractors shouldn’t wait before beginning proactive compliance efforts, including the following:
- Review “Addressing DEI Discrimination by Federal Contractors” and its requirements.
- Audit and review any DEI-related programs and policies to ensure they comply with the executive order and federal and state anti-discrimination laws and consider working with legal counsel on ways to expand this audit to subcontractors.
- Review related recordkeeping systems they may use, since they may be required to provide records and reports for compliance purposes.
- Closely monitor for compliance guidance from contracting agencies about how they will implement the order’s requirements.
Federal contractors should consult with legal counsel as they review their policies and procedures for compliance and have this counsel closely review the new contract language when federal agencies begin adding it to their contracts.
James W. Ward, J.D., Employment Law Subject Matter Expert/Legal Writer and Editor, CalChamber
CalChamber members can learn more about Affirmative Action and Federal Contractors and Subcontractors in the HR Library. Not a member yet? See how CalChamber can help you.
