New Executive Order for Federal Contractors Regarding DEI Activities
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Summary of This Post
The Trump administration has issued a new executive order regarding the DEI activities of federal contractors and subcontractors. Federal contractors and subcontractors may have contracts terminated for failure to address what the executive order defines as "racially discriminatory DEI activities." As federal contractors and subcontractors consider what to do about this executive order, they should:
Review all DEI activities. This includes more than employee selection related DEI activities. Any review should include vendor diversity programs and outreach programs targeted at developing diverse candidate pools.
Ensure their personnel practices do not exclude any demographic groups.
Understand that the new executive order requires federal contractors to monitor compliance with the executive order by subcontractors.
Recognize that the False Claims Act may apply to violations of the new executive order.
Various federal agencies will need to take action for this executive order to be implemented. For example, contracting officers at federal agencies will need to begin inserting certain clauses into new or revised contracts, and the FAR Council will need to publish regulations regarding the new executive order.
Introduction
On March 26, 2026, the Trump administration issued a new executive order regarding diversity, equity, and inclusion (DEI) activities. Executive order 14398, entitled "Addressing DEI Discrimination by Federal Contractors," applies to federal contractors and subcontractors. The new executive order continues the administration's efforts to end DEI programs by public and private employers.
Executive Order (EO) 14398 only applies to DEI activities regarding race and ethnicity. Conversely, a related executive order, EO 14173, issued on January 21, 2025, has provisions regarding federal contractor DEI activities involving race, color, sex, sexual preference, religion, or national origin. It is not clear why the new executive order focuses only on race and ethnicity.
Definitions
There are two definitions included in the new executive order. These definitions distinguish the new executive order from other laws that have affected federal contractors such as Executive Order 11246, Section 503 of the Rehabilitation Act, and the Vietnam Era Veterans Readjustment Assistance Act. (EO 11246 was rescinded by EO 14173.) These other laws focused solely on employment selection procedures and personnel policies.
Under the new executive order:
“[R}acially discriminatory DEI activities” means 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 that are sponsored or established by the contractor or subcontractor.
Contract Clauses
The new executive order requires federal agencies to include the following clauses in all new or revised contracts:
The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order [14398];
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 [14398], 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).
Among other requirements, these clauses place a significant burden on federal contractors to monitor the activities of their subcontractors. Contracts may be canceled because of a finding of subcontractor noncompliance. Further, federal contractors are required to contact the relevant federal agency holding a contract if it knows or should know that a subcontractor is in noncompliance.
Oversight by Individual Agencies
Oversight of compliance with the new executive order is not vested in one particular agency. Instead, "executive departments and agencies, including independent establishments subject to [the Federal Property and Administrative Services Act]" are required to insert the clauses noted above in all contracts. These agencies are then tasked with ensuring compliance with the executive order. Contracting agencies are required to:
Cancel, terminate, or suspend any contract for failure to comply with the executive order
Take appropriate action to suspend and debar contractors or subcontractors that fail to comply
Within 120 days of the date of the new executive order, agencies are required to report to the Assistant to the President for Domestic Policy on their compliance with EO 14398.
This situation is similar to original implementation of Executive Order 11246. When it was issued in 1965, EO 11246 required individual agencies to ensure compliance. In 1978, oversight for compliance with EO 11246 was vested in the Office of Federal Contract Compliance Programs (OFCCP). It is not clear whether OFCCP or some other agency will ultimately be responsible for monitoring compliance with EO 14398.
Enforcement
There are two primary mechanisms for enforcement of the new executive order. As noted above, individual agencies are required to recommend cancellation, termination, or suspend of contracts for noncompliance. The Justice Department and private individuals are also allowed to start False Claims Act (FCA) actions against federal contractors or subcontractors for violation of EO 14398. If a private individual begins an FCA action, the Justice Department has been instructed to review the action within the 60-day period described in the FCA.
Regulations and Guidance
Executive Order 14398 instructs the Federal Acquisition Regulatory (FAR) Council to create regulations that implement the executive order within 60 days of the date of the executive order. The FAR Council includes representatives of the Office of Management and Budget (OMB), the Department of Defense (referred to by the Trump administration as the Department of War), the National Aeronautics and Space Administration (NASA), and the General Services Administration. These last three agencies are responsible for much of the contracting that occurs in the federal government.
EO 14398 also instructs the OMB to identify "economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities." OMB will coordinate with the Justice Department, the Assistant to the President for Domestic Policy, and the Equal Employment Opportunity Commission (EEOC) to issue guidance to federal agencies on best practices regarding compliance with the executive order.
Timing of Implementation and Monitoring by Federal Agencies
Federal contractors and subcontractors should closely monitor implementation of the new executive order. Contractors and subcontractors should be aware that federal agencies may begin to include the contract clauses in new or revised contracts any time after March 26. However, it is possible there may be delays in the implementation of EO 14398.
Full implementation of the Executive Order 14398 may not take place until the FAR Council issues final regulations. While there is a 60-day deadline for the FAR Council to issue "interim guidance," final regulations may take much longer to appear.
There may be litigation to enjoin the provisions of Executive Order 14398. The certification provisions of EO 14173 have been enjoined by a number of federal courts. The disagreement about these certification provisions in the federal courts and other issues presented by EO 14173 may be relevant to the implementation of EO 14398.
The federal government will need to determine which agency or agencies will monitor compliance with Executive Order 14398. The language of the executive order suggests that monitoring of compliance will be left to each of the individual contracting agencies. However, federal agencies currently have a multitude of contracting obligations and monitoring compliance with the new executive order may prove difficult for these agencies.
Much of the enforcement of the order may be associated with FCA claims litigated by the Justice Department rather than requests for information by any particular agency.
Considerations for Federal Contractors
Contractors and subcontractors should consider the following:
Federal contractors and subcontractors should review all DEI activities, not just the activities that affect employee selection. The new executive order expects employers to review vendor diversity programs, outreach activities targeted at developing diverse candidate pools, membership in organizations that promote the advancement of a particular race or ethnicity, and other activities.
While Executive Order 14398 focuses only on race and ethnicity, EO 14173 and other actions by the Trump administration have more broadly focused on DEI actions involving a variety of demographic classifications. Federal contractors and subcontractors should ensure their DEI activities and general personnel practices do not exclude any demographic groups.
Executive Order 14398 will require federal contractors to monitor compliance with the executive order by subcontractors. Subcontractors need to be aware that direct contractors may ask more of them because of these monitoring obligations.
Resources Regarding the New Executive Order
The Trump administration has published a fact sheet regarding the new executive order.
Ellen Shong & Associates (ESA) has resources regarding the Trump administration's actions on DEI.
ESA will continue to monitor implementation of the new executive order and provide updates on its News and Insights page.