New Executive Order Targets “Racially Discriminatory DEI Activities” by Federal Contractors and Significantly Expands FCA Exposure

On March 26, President Trump issued an Executive Order titled “Addressing DEI Discrimination by Federal Contractors.” Although styled as a procurement measure, the order represents a significant escalation in the federal government’s use of the False Claims Act (FCA) to police conduct related to diversity, equity and inclusion (DEI). DEI practices of federal contractors are no longer merely a matter of policy preference or employment compliance; they are a potential basis for FCA liability tied directly to federal payments.

For federal contractors and subcontractors who engage in DEI related practices, the order creates substantial risk. It does so in an enforcement environment already marked by increased FCA filings, aggressive U.S. Department of Justice (DOJ) theories of liability, and heightened reliance on employee‑whistleblowers. The order introduces considerable uncertainty as to what constitutes impermissible “DEI” conduct, while simultaneously signaling that federal agencies and DOJ will be actively looking for cases to enforce the new framework.

Scope of Prohibited Conduct
The executive order requires federal agencies to include a new clause in federal contracts—and all subcontracts at every tier—prohibiting “racially discriminatory DEI activities.” The clause defines such conduct as disparate treatment based on race or ethnicity in connection with:

• Recruitment and hiring

• Promotions and other employment decisions
• Contracting and vendor relationships
• Program participation
• Allocation or deployment of an employer’s resources

“Program participation” is defined broadly to include training programs, mentoring initiatives, leadership development pipelines, educational opportunities, clubs, associations, and similar employer‑sponsored programs. As a result, a wide range of HR and DEI initiatives, many of which employers adopted in good faith and without prior enforcement concern, now fall squarely within the scope of the order.

While the conduct targeted by the order overlaps with existing federal antidiscrimination laws, including Title VII and Section 1981, the order recasts alleged violations as contractual compliance failures with direct payment consequences.

FCA Materiality Is the Point
Historically, one of the principal challenges in extending FCA enforcement to DEI‑related conduct has been establishing materiality—namely, whether the contracting party’s alleged misrepresentations to the federal government about its contractual performance would have affected the federal government’s decision to contract overall or to pay claims. Does compliance with DEI really matter to the performance of the contract?

The executive order directly targets that challenge. By requiring federal contractors to explicitly agree to a contract provision that their compliance with the nondiscrimination requirement is material to payment, the order tries to overcome traditional barriers to FCA enforcement. Allegations that a contractor maintained or administered DEI programs later characterized as racially discriminatory may now be framed as false certifications supporting claims for payment.

The order significantly strengthens the federal government’s and relators’ ability to plead and prove materiality in subsequent FCA actions. The resulting exposure includes treble damages, penalties, and the costs of defending FCA litigation.

A Deliberate Enforcement Expansion—Including Subcontractors
The order also expands the zone of risk by extending these requirements to subcontractors at every tier and by requiring federal contractors to report subcontractor conduct that is “known or reasonably knowable” to violate the clause.

Prime contractors may therefore face FCA exposure not only for their own DEI practices, but for how they oversee and report on the practices of others.  This subcontractor reach is particularly consequential given that many subcontractors maintain their own HR and DEI programs outside the prime contractor’s direct control.

Enforcement Will Likely Be Employee‑Driven
Given the nature of DEI programs and the FCA’s incentive structure, employees are likely to play a central role in enforcement. HR‑administered programs are highly visible internally, often controversial, and frequently described in aspirational terms in policies and proposals. Disputes over how such programs operate in practice create fertile ground for whistleblower allegations that compliance was misrepresented. The order effectively converts internal DEI disagreements into potential FCA fact patterns, particularly where contractors have certified compliance as a condition of payment.

Practical Considerations for Contractors
In light of this development, federal contractors and subcontractors should consider taking prompt, documented steps to assess risk, including:

• Reviewing DEI‑related programs and policies for race‑ or ethnicity‑based eligibility criteria, preferences, or exclusions.

• Assessing employee resource groups and affinity programs, particularly where participation or benefits are restricted.
• Evaluating documentation and decision‑making processes to ensure employment actions are grounded in neutral, job‑related factors.
• Identifying certifications and compliance representations tied to contracts or payment requests that reference nondiscrimination or DEI compliance.
• Reassessing subcontractor oversight processes, including what information is requested, reviewed, and documented.
• Coordinating HR and legal review to preserve privilege and ensure consistency across employment, compliance, and contracting functions.

The executive order does not prohibit all DEI efforts. Race‑neutral, merit‑based programs remain permissible. The risk arises where programs can be characterized—fairly or not—as providing differential treatment based on race or ethnicity and where compliance is certified as material to payment.

Conclusion
This executive order represents a consequential enforcement development for federal contractors.  Contractors and subcontractors should not view this executive order as a routine policy update. It is a confirmation that DEI‑related conduct is a clear enforcement priority and that FCA theories will be used to define, and enforce, these objectives.

Please contact  Raquel Ramirez Jefferson, A. Brian Albritton, or any member of the Phelps Labor and Employment or White Collar Defense and Investigations teams if you have questions or need advice or guidance.