DEI Compliance Just Changed for Federal Contractors—Here’s What to Do Next

On March 26, 2026, President Trump signed a new Executive Order, “Addressing DEI Discrimination by Federal Contractors,” (the “Order”) that signals a new approach in the Trump administration’s focus on diversity, equity, and inclusion (“DEI”) initiatives, specifically for federal contractors and subcontractors. The Order indicates that the Trump administration will be digging deeper in its DEI-related investigations by stating, “some entities continue to engage in DEI activities and often attempt to conceal their efforts to do so.” It goes on to state that federal agencies should not do business with contractors who engage in “racially discriminatory DEI activities.”

The Order further requires all federal agencies, federal contractors, and federal subcontractors to include a mandatory clause in federal contracts that prohibits “racially discriminatory DEI activities.” The Order 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.” “Program participation” is defined 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.”

Agency Guidance Brings the Order into Focus

On April 17, 2026, and as directed by the Order, the Federal Acquisition Regulatory Council (FAR Council) issued its initial guidance (the “Guidance”) on the Order. The Guidance establishes new FAR Clause 52.222-90 – ADDRESSING DEI DISCRIMINATION BY FEDERAL CONTRACTORS (APR 2026), which, among other things, requires:

• Effective April 24, 2026, federal agencies must include the Order’s contract clause in all new solicitations and contracts valued over $15,000.
• By July 24, 2026, the Order’s contract clause must be added into existing contracts valued over $15,000.
  • The Guidance provides no leniency and explicitly states that “if a contractor refuses to agree to a bilateral modification, the contracting officer should consider whether, absent the modification, the contract no longer meets the agency’s needs and should therefore be terminated for convenience.”
  • For contracts expiring on or before December 31, 2026, modification to include the contract clause is not mandatory but rather at the contracting officer’s discretion.

Guidance from the U.S. Department of Justice (“DOJ”) and the U.S. Equal Employment Opportunity Commission (“EEOC”) over the last year provides insight into the types of activities by contractors that may be considered “racially discriminatory DEI activities” and will draw scrutiny under the Order. For example:

• Race-based hiring quotas or goals;
• Requiring diverse candidate slates for hiring or promotion decisions;
• Using race as a tiebreaker in employment decisions;
• Modifications to compensation based upon racial hiring goals or race-based employment decisions;
• Supplier diversity initiatives that prioritize vendors based upon race; and
• Limiting access to training, mentorship, affinity groups, or other opportunities based solely on race.

While this particular Order and the Guidance focus only on race and ethnicity, any of the foregoing actions based upon any protected characteristic likely will draw scrutiny from the EEOC or the DOJ, as highlighted by the EEOC’s recent lawsuit against Coca-Cola or the DOJ’s recent $17 million settlement with IBM.

What is particularly noteworthy about the Order and the Guidance is that federal contractors are now required to report any subcontractor’s “known or reasonably knowable” violations of the Order, and they are expected to take appropriate remedial action, thereby requiring prime contractors to police the DEI actions of their subcontractors. The FAR Council’s Guidance reinforces this point by making it clear the new contract clause must “flow down” to subcontractors, regardless of tier. This means contractors are not only responsible for their own compliance but also need to ensure even their low-level subcontractors agree to the same requirements.

Under the Order and the Guidance, noncompliance may result in contract termination, suspension, or debarment from future federal work, as well as liability under the False Claims Act. A violation of the False Claims Act could expose employers to steep treble damages, penalties, and attorneys’ fees. Adding to the potential risk is the fact that the False Claims Act allows civilian whistleblowers to sue on behalf of the government in exchange for receiving a percentage of the recovery.

Early Legal Challenges to the Order Are Taking Shape

The FAR Council’s Guidance comes as legal challenges to the Order are already underway. For example, several associations representing federal contractors and subcontractors have filed suit in the U.S. District Court for the District of Maryland. The lawsuit challenges and seeks to block enforcement of the Order on three grounds:

• Challenge #1: The Order violates the First Amendment, as it facially chills and aims to censor protected expression and association concerning race, ethnicity, diversity, equity, and inclusion, and is unconstitutionally overbroad as it sweeps in substantial amounts of protected speech;
• Challenge #2: The Order violates the First Amendment by imposing content-based burdens on speech and association, targeting only expression and association related to race, diversity, equity, and inclusion, and imposes an unconstitutional condition on the receipt of federal funds; and
• Challenge #3: The Order’s False Claims Act provision exceeds the President’s authority under the Procurement Act.

What This Means for Employers

While legal challenges may ultimately impact how the Order is applied (or whether it is enforced at all), the Guidance makes clear that, for now, the government expects agencies to move forward with its implementation. Accordingly, agencies are already moving forward with its implementation, meaning new contracts, renewals, and modifications will now include the contract clause. Federal contractors should thus treat the Order and the Guidance as currently active and enforceable.

When considering together the Order, the Guidance, and the current administration’s clear enforcement priorities around DEI-related practices, employers should continue taking proactive steps, such as:

• Reviewing and auditing DEI-related policies, programs, and communications, specifically including how they are implemented in practice;
• Evaluating hiring, promotion, and vendor selection practices for potential risk;
• Assessing how existing obligations under non-federal (e.g., state, local) contracts may interact or conflict with the new requirements imposed under the Order and Guidance; and
• Engaging in internal training on the evolving compliance requirements.

Although federal contractor employers should expect further clarification of the Order and Guidance going forward, they also should anticipate continued scrutiny in this area.

Proactive compliance now will put federal contractors in the best position as the EEOC and DOJ continue their enforcement of DEI policies and initiatives.

If you have questions about how best to navigate President Trump’s new Executive Order or other labor and employment law issues, contact Megan E. Bennett, Joel R. Hlavaty, Stacey M. Sanderson, or another member of the Frantz Ward Labor and Employment Group.