Federal Contractors Face Escalating Enforcement with New Executive Order Targeting Racial Discrimination as Employers Navigate Increasingly Complex DEI Landscape

New Executive Order: Addressing DEI Discrimination by Federal Contractors (March 26, 2026)

On March 26, 2026, President Trump issued a new Executive Order entitled “Addressing DEI Discrimination by Federal Contractors” (the “March 2026 EO”) which requires federal contractors to, among other things, certify that they do not engage in “racially discriminatory DEI activities”.¹ Federal law has long since prohibited contractors from engaging in racial discrimination, but the March 2026 EO establishes a new framework for monitoring and enforcing compliance.²

The March 2026 EO builds on EO 14173, "Ending Illegal Discrimination and Restoring Merit-Based Opportunity," issued in January 2025, which first required federal contractors to certify that they do not operate any "illegal DEI programs" (the “Certification Provision”)³ and directed the Attorney General to combat “illegal discrimination” by identifying potential compliance investigations and possible litigation (the “Enforcement Threat Provision”).⁴

Unlike EO 14173 which failed to define what constitutes “illegal DEI”, the March 2026 EO, which exclusively focuses on racial and ethnic discrimination, broadly defines “racially discriminatory DEI activities” to encompass disparate treatment based on race or ethnicity across a wide range of contractor activities, including employment (e.g., hiring, promotions), contracting (e.g., vendor agreements), program participation, or the allocation or deployment of an entity’s resources.⁵ Notably, all activities that treat individuals differently based on race or ethnicity are barred, including arguably facially neutral policies that result in a disparate impact. Moreover, the prohibition extends beyond the confines of the employment relationship to include an entity’s “allocation or deployment of …resources”.⁶

Within 30 days of the March 2026 EO’s issuance, or by April 25, 2026, federal agencies must include a clause in all federal contracts, subcontracts, and lower-tier subcontracts requiring that the contractor agree to the following:⁷

• No Racially Discriminatory DEI Activities: The contractor will not engage in any racially discriminatory DEI activities, as defined in the order.
• Reporting and Access Obligations: The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency.
• Penalties for Noncompliance: In the event of noncompliance, the contract may be canceled, terminated, or suspended in whole or in part, and the contractor/subcontractor may be declared ineligible for further Government contracts.
• Subcontractor Monitoring and Reporting Obligations: 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.
• Notice Obligations: 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.
• Noncompliance →False Claims Act Exposure: The contractor recognizes that compliance with the requirements of this clause is material to the Government’s payment decisions for purposes of the False Claims Act.

Critically, the new certification requirement imposes an affirmative obligation on prime contractors to actively monitor their subcontractors for potential noncompliance and to report known or “reasonably knowable” violations to the contracting agency, potentially extending contractor liability well beyond a contractor’s own internal practices. Penalties for violation of these new contract terms can include suspension or cancellation of the contract and debarment. The March 2026 EO also authorizes the Attorney General to consider whether to bring a civil action under the False Claims Act against the contractor. Additionally, the EO directs the Federal Acquisition Regulatory Council to amend the Federal Acquisition Regulation (FAR) to incorporate the new contract clause and remove any conflicting provisions, and to issue interim deviation guidance within 60 days of the Order’s issuance to facilitate agency implementation.

It is worth highlighting that the March 2026 EO does not exist in a legal vacuum. Even before its issuance, the Administration’s efforts to curtail DEI programs faced judicial scrutiny. Indeed, the Fourth Circuit recently addressed the enforceability of the Certification Provision under EO 14173.

Fourth Circuit Vacates Preliminary Injunction Pausing Enforcement of the Certification Provision

In National Association of Diversity Officers in Higher Education v. Trump, plaintiffs — including the City of Baltimore and higher education associations — challenged the Certification and Enforcement Threat Provisions on constitutional grounds, asserting violations of the Spending Clause, the First Amendment and the Fifth Amendment.⁸ The U.S. District Court for the District of Maryland granted a preliminary injunction in March 2025, concluding that the provisions likely chilled protected speech and were impermissibly vague.⁹

On appeal, the U.S. Court of Appeals for the Fourth Circuit vacated the injunction.¹⁰ The Fourth Circuit acknowledged uncertainty surrounding the term “illegal DEI,” but emphasized:

• The Certification Provision requires contractors to attest to compliance with existing federal anti-discrimination laws. An attestation of legality, the court reasoned, does not compel or restrict protected speech.¹¹
• Government funding programs are afforded latitude in imposing subjective criteria tied to compliance with federal law.¹²
• The plaintiffs lacked standing to challenge the Enforcement Threat Provision because the directive was primarily intra-governmental and did not establish a concrete injury-in-fact.¹³

Importantly, Chief Judge Diaz, in concurrence, underscored the narrowness of the decision. The court addressed a facial constitutional challenge — not the legality of any specific DEI program. The concurrence expressly noted that there is “absolutely” DEI activity that falls comfortably within the confines of federal law.¹⁴

The ruling therefore restores the government’s ability to enforce the Certification Provision but leaves unresolved the substantive definition of “illegal DEI.”  That unresolved question, combined with the sweeping new obligations imposed by the March 2026 EO, creates a challenging compliance environment that affects employers across all sectors.

Broader Enforcement Climate: Implications Beyond Federal Contractors

Although the March 2026 EO and the Certification Provision of EO 14173 directly govern federal contractors, the broader enforcement climate affects all employers in several ways:

• FCA investigations and compliance expectations: The U.S. Department of Justice (DOJ) has reportedly launched investigations of several major federal contractors and grant recipients under the False Claims Act to determine if they are maintaining unlawful DEI programs in violation of the Certification Provision. This underscores the Administration’s willingness to pursue aggressive enforcement theories.¹⁵
• EEOC scrutiny: The Equal Employment Opportunity Commission (EEOC), now with a quorum, is positioned to advance enforcement priorities that may challenge DEI-related initiatives — including training, internship, mentorship and leadership development programs — under traditional disparate treatment frameworks.¹⁶
• Private litigation risk: Plaintiffs’ attorneys and advocacy groups may rely on the Administration’s rhetoric, legal interpretations, and enforcement posture to fuel “reverse discrimination” claims against private employers, even where no federal funds are implicated.
• Reputational and business risk: Public scrutiny, shareholder inquiries and state-level enforcement actions may increase as the national debate over DEI continues.

Missouri District Court Dismissal Underscores Limits of “DEI” Claims

While the enforcement risks described above are real and growing, it is equally important to recognize that courts have signaled that DEI-related allegations must still satisfy traditional standing and pleading standards.

In February 2026, a federal district court in Missouri dismissed a lawsuit brought by the Missouri Attorney General alleging that Starbucks’ DEI initiatives constituted unlawful race discrimination. The court concluded that the Attorney General lacked standing and failed to plausibly allege concrete harm or actionable interference.¹⁷

The decision reinforces an important principle: simply labeling a program “DEI” does not establish illegality. Plaintiffs must still demonstrate actionable adverse treatment tied to a protected characteristic under existing anti-discrimination laws.

Practical Advice for Employers

Taken together, the March 2026 EO, the Fourth Circuit’s ruling, and the dismissal granted in State of Missouri v. Starbucks Corp paint a complex picture — one in which the legal and regulatory risks for employers are intensifying even as the outer boundaries of permissible DEI activity remain unsettled. Against this backdrop, proactive compliance planning is essential. To that end, all employers, and federal contractors in particular, should consider the following proactive compliance measures:

• Conduct targeted audits of DEI-related policies, training materials and employment practices to ensure alignment with federal anti-discrimination statutes.
• For federal contractors, reassess certifications tied to government contracts to confirm they are supported by a documented, good-faith compliance review.
• Consult counsel regarding evolving DOJ and EEOC enforcement priorities and potential FCA exposure.
• Strengthen internal reporting mechanisms and promptly investigate allegations of discrimination or retaliation.
• Avoid retaliatory conduct, particularly in response to internal complaints or whistleblower activity, given the significant remedies available under the FCA.¹⁸