Executive Order Proposes New Contract Clause Regarding “DEI Discrimination” By Federal Contractors

DEI Contract Clause Terms

On March 26, 2026, President Trump signed an executive order, “Addressing DEI Discrimination by Federal Contractors” (the Order), directing federal agencies to include specific language in federal contracts prohibiting “racially discriminatory [diversity, equity, and inclusion (DEI)] activities” and imposing potential reporting obligations on federal contractors and subcontractors to ensure compliance.Exec. Order No. 14398, Addressing DEI Discrimination by Federal Contractors (Mar. 26, 2026), available at https://www.whitehouse.gov/presidential-actions/2026/03/addressing-dei-discrimination-by-federal-contractors/. The Order directs executive departments and agencies (including independent agencies) subject to the Federal Property and Administrative Services Act to ensure that “contracts and contract-like instruments, including contractors’ subcontracts and subcontractors’ lower-tier subcontracts” include the following clause:Id. § 3 (emphasis added).

In connection with the performance of work under this contract, [the contractor/appropriate party (contractor)] agrees as follows:

1. 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);
2. 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;
3. 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;
4. 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;
5. 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
6. 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).Id.

Critically, the Order imposes a reporting requirement, requiring contractors to report “known or reasonably knowable conduct” by subcontractors that may violate this clause. The requirement to monitor subcontractors is a significant departure from most flow down requirements, which usually allow contractors to rely on a certification of compliance from a subcontractor. As specified in prior DEI executive orders, contractors must agree that compliance with the clause is material to the government’s payment decision, as required for liability under the False Claims Act (FCA).Id.

Scope of DEI Practices Under Scrutiny 

While previous DEI executive orders (discussed in this Latham blog post and this Latham Client Alert) referenced “unlawful” DEI practices,See, e.g., Exec. Order No. 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity (Jan. 21, 2025), available at https://www.whitehouse.gov/presidential-actions/2025/01/ending-illegal-discrimination-and-restoring-merit-based-opportunity. this Order addresses only “racially discriminatory DEI activities.” This term is defined broadly 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 any entity’s resources.”Exec. Order No. 14398, § 2. “Program participation” is also a defined term: “[M]embership 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.” The Order’s definition is broad and extends beyond employment actions to recruitment activities, vendor agreements, resource allocation, and other limits on program participation.The specific reference to recruitment efforts targeted at protected groups aligns with recent DOJ guidance (summarized in this Latham Client Alert), which broadly states that efforts to recruit from particular organizations or geographic areas can constitute unlawful activity if these entities or locations were chosen “because of their racial or ethnic composition rather than other legitimate factors.”

Penalties for Non-Compliance

The Order includes significant potential penalties for non-compliance with the proposed clause, including directing contracting agencies to cancel, suspend, or terminate contracts and pursue suspension or debarment for contractors or subcontractors that fail to comply with the proposed clause. 

The Order additionally directs the Attorney General to (i) consider bringing FCA actions against any contractors or subcontractors that violate the proposed language and (ii) promptly review privately initiated whistleblower FCA claims.Exec. Order No. 14398, § 4.

Timing of Implementation and Additional Guidance

The Order directs the Federal Acquisition Regulatory Council (FAR Council) to amend the Federal Acquisition Regulation (FAR) to include the mandatory clause and remove conflicting provisions. The process of amending the FAR could take an extended period of time, even if the FAR Council exercises its authority to promulgate a temporary rule that would be effective upon publication without the typical 60-day publication period. The Office of Information and Regulatory Affairs will likely review the proposed FAR clause, which is often a lengthy process. The proposed FAR provision related to the prior DEI executive order has been under review since April 14, 2025.

In the interim, the Order directs agencies to include the proposed clause in contracts and subcontracts within 30 days.Id. § 3. A class deviation is an authorized change to acquisition policies that affects more than one contract action. An individual deviation affects only one contract and is authorized by an agency head.  To assist that process, the FAR Council must issue deviation guidance within 60 days. Particularly given the tension of this timing, each agency is likely to rely on individual deviations or release its own independent class deviation that applies solely to that agency’s contracts. Because the Order includes specific language to implement, we anticipate individual or class deviations will be nearly identical. However, differences may arise in the exact scope of implementation. For example, in response to executive order 14173, issued January 21, 2025, agencies released similar class deviations with slightly varied implementation of a similar directive.

Considerations for Federal Contractors

The practical effect of this Order remains to be seen as we wait for forthcoming guidance from individual agencies as to how the Order will be implemented and enforced, as well as the outcome of any legal challenges. To mitigate regulatory risk, contractors should consider the following steps:

• Monitor and prepare for contract changes: In the near term, contractors and subcontractors should closely monitor guidance and memoranda from their contracting agency as to how the agency will implement the requirements of the Order. Agencies will likely begin including the clause in new solicitations and modifications of existing contracts. In the long term, contractors should monitor their contracts and the Federal Register for the forthcoming FAR clause.
• Flow down applicable clauses: When contractors receive a contract or contract modification that includes the clause proposed in the Order, the contractors should ensure that it and other applicable regulatory requirements are flowed down to lower-tier subcontractors.
• Conduct a proactive compliance review: Contractors should conduct a privileged review of any DEI-related policies and programs, including vendor agreements and programs, in order to ensure compliance with new interpretations of civil rights and anti-discrimination laws.
• Ensure proper compliance controls are in place: Contractors should have policies and processes in place to monitor and address compliance concerns, including subcontractor compliance given the clause’s reporting obligations. The FCA-related provisions in the Order indicate that FCA enforcement will ramp up in this area.

Latham will continue monitoring developments in this area. If you have questions about this Client Alert, please contact one of the authors listed below or the Latham lawyer with whom you normally consult.