Federal Contractors Face New DEI Compliance Obligations Under Recent Executive Order

While navigating the latest scrutiny of diversity, equity, and inclusion (DEI) initiatives in the private sector, federal contractors are also facing heightened legal and operational risk with DEI initiatives.

On March 26, 2026, the White House issued an Executive Order titled “Addressing DEI Discrimination by Federal Contractors.” The order directs federal agencies to incorporate a new contract clause into all federal contracts and subcontracts prohibiting “racially discriminatory DEI activities.” Employers doing business with the federal government should be aware of what this order requires and what it means for existing programs and policies.

What the Executive Order Requires

By April 25, 2026, federal agencies are required to insert a clause into contracts and contract-like instruments obligating contractors to certify that they do not engage in “racially discriminatory DEI activities.” The order defines this term 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.”

Contractors are required to furnish “all information and reports” as required by the contracting agency to ascertain compliance with the order.

Contractors bear an affirmative duty to monitor and report any subcontractor conduct that may violate the order and “take any appropriate remediation actions” directed by the contracting agency. 

Consequences of Noncompliance

Agencies are directed to cancel, terminate, or suspend contracts for noncompliance and to pursue suspension and debarment actions where warranted.

The order also treats compliance as “material” to the government’s payment decisions under the False Claims Act. Contractors found to be engaging in prohibited DEI activities could face liability not only through contract cancellation or debarment but also through False Claims Act suits — both government-initiated actions and private whistleblower (qui tam) actions.

Sector-Specific Guidance Is Forthcoming

Under the order, the Director of the Office of Management and Budget, the Attorney General, the Equal Employment Opportunity Commission Chair, and the Assistant to the President for Domestic Policy are tasked with identifying economic sectors that pose a particular risk of noncompliance based on past and current conduct and issuing sector-specific guidance to contracting agencies regarding best practices to ensure compliance with the order within such sectors.

Employers in industries that are flagged for heightened scrutiny should be prepared for additional oversight in the months ahead.

Next Steps

Employers with federal contracts are encouraged to begin reviewing their DEI-related programs now and consider taking the following steps:

• Audit existing DEI programs. Review all recruitment, hiring, promotion, mentoring, and training initiatives for any element that could constitute disparate treatment on the basis of race or ethnicity.

• Assess subcontractor compliance. Evaluate subcontractor oversight and reporting processes to ensure you can identify and report conduct that may violate the order.

• Review vendor selection practices. Review vendor agreements and vendor engagement programs for any race- or ethnicity-based criteria that could fall within the order’s definitions.

• Update certifications. Ensure that representations made to the government regarding compliance are accurate and well-documented.

• Monitor regulatory guidance. Track interim guidance regarding the order, including any sector-specific guidance that is expected to be issued in coming months. 

While this trend in DEI scrutiny does not necessarily signal the end of DEI efforts for federal contractors, it does require awareness and careful recalibration by employers.