New Executive Order Increases Federal Contractor Exposure for Certain DEI Practices

On March 26, 2026, President Trump signed an executive order directing federal agencies to cancel, suspend, or deny future contracts to businesses that engage in what the administration describes as “racially discriminatory” diversity, equity, and inclusion (DEI) practices or fail to comply with new anti‑DEI contractual and reporting requirements.

The order applies broadly to federal contractors and subcontractors and carries potentially significant consequences for employers that do business with, or seek to do business with, the federal government.

Core Requirements Under the Order

The executive order instructs federal agencies to update contracts and subcontracts within 30 days to include several new obligations. Among other things, covered entities must agree to contractual terms requiring them to:

• Disavow DEI practices that the administration considers unlawful under federal nondiscrimination standards;
• Provide agencies access to records necessary to evaluate compliance; and
• Report subcontractors that appear to be engaged in prohibited DEI practices.

Failure to comply with these requirements may result in termination or suspension of existing contracts, as well as suspension or debarment (ineligibility for future federal contracting opportunities).

Enforcement Focus and Inter‑Agency Coordination

The order reflects an expanded federal enforcement posture toward DEI initiatives in both the public and private sectors. It directs the White House Office of Management and Budget to coordinate with the US Attorney General, the Chair of the Equal Employment Opportunity Commission, and senior domestic policy officials to identify economic sectors that may pose a heightened risk of engaging in discriminatory DEI activities based on current or past conduct.

Although the order does not define specific industries, this coordination provision signals the potential for targeted review or enforcement activity affecting certain sectors or contractor categories.

False Claims Act Considerations

The executive order also reinforces the administration’s position that alleged noncompliance with DEI‑related contractual terms may implicate the federal False Claims Act (FCA), as the new executive order makes clear that it requires contractors to make material representations relating to the DEI practices being targeted. The Attorney General is directed to work with contracting agencies to assess potential violations and determine whether FCA enforcement is appropriate against contractors or subcontractors.

In addition, the order emphasizes potential whistleblower activity, directing prompt review of civil actions brought by employees who allege that their employer misrepresented compliance with contractual restrictions related to DEI. While the order does not create new FCA liability standards, it underscores the government’s stated intent to use existing fraud statutes as an enforcement mechanism in this area.

Federal Subcontracting Implications

The executive order directs the Federal Acquisition Regulatory Council to, within 60 days, amend the Federal Acquisition Regulation to include the substance of the executive order in future solicitations, remove current provisions that are inconsistent with the applicable directives, and implement interim guidance until the formal rulemaking process is completed.  In addition to tensions caused by the subcontractor reporting requirement referenced above, the executive order’s directive that prime contractors flow down the requirements to lower-tier subcontractors is likely to create a ripple effect that is felt throughout the federal contracting supply chain. Specifically, vendors that do not contract directly with the federal government, will now find themselves needing to assess their compliance with these new directives, given that large prime contractors will likely include these provisions, across-the-board, in their standard flow down templates.

Increased Scrutiny and Practical Next Steps for Employers

Employers with existing federal contracts or plans to pursue federal work should anticipate increased scrutiny of DEI‑related policies, practices, and contractual certifications. The order’s compliance, access‑to‑records, and reporting requirements expand the circumstances under which agency review and enforcement may occur.

In light of this heightened scrutiny, employers may wish to consider the following steps:

• Review DEI policies, practices, and related training materials for consistency with federal nondiscrimination requirements and current contractual obligations;
• Examine federal contract certifications and related representations to ensure they accurately reflect actual practices and compliance measures;
• Evaluate internal processes for responding to agency requests for records or compliance information;
• Review subcontractor management and reporting procedures in light of new contractual requirements; and
• Assess potential exposure associated with employee complaints or whistleblower allegations tied to DEI‑related compliance representations.

Because the order authorizes serious contractual consequences, including termination and potential ineligibility for future federal work, employers should approach compliance reviews carefully and with appropriate legal guidance. Our Butzel team is standing by to assist federal contractors in this quickly changing legal landscape.

Please feel free to contact the authors of this Client Alert or your Butzel attorney for more information.

Regan Dahle
734.213.3268
dahle@butzel.com

Brett Miller
313.225.5316
millerbr@butzel.com

Beth Gotthelf
248.258.1303
gotthelf@butzel.com

Derek Mullins
313.983.6944
mullins@butzel.com

Anthony Scalise
248.258.2612
scalise@butzel.com