A new Executive Order is putting federal contractors and subcontractors on notice. On March 26, 2026, President Trump signed “Addressing DEI Discrimination by Federal Contractors,” an order that directs agencies to add a new clause to covered federal contracts prohibiting what the Order calls “racially discriminatory DEI activities.”
For employers, this is not just political headline material. It is a compliance issue with potential contract, audit, and enforcement consequences. The Order does not ban every diversity, equity, and inclusion effort. Instead, it targets race- or ethnicity-based disparate treatment in specific employment and contracting contexts.
What the New Executive Order Actually Does
The Executive Order says covered federal contracts must include a clause stating that the contractor will not engage in racially discriminatory DEI activities. It also requires contractors to provide information and records requested by the contracting agency to assess compliance.
The Order defines “racially discriminatory DEI activities” as disparate treatment based on race or ethnicity in areas such as recruitment, employment, contracting, program participation, and the allocation or deployment of organizational resources.
That definition matters because it reaches beyond hiring. Employers should read this as a signal to review not only recruiting and promotion practices, but also internal programs that affect access to opportunities.
Programs That May Be Affected
The Executive Order defines “program participation” broadly. It includes participation in or access to training, mentoring, leadership development, educational opportunities, clubs, associations, and similar contractor-sponsored opportunities.
In plain English, if an employer has a program where eligibility, selection, or access is limited by race or ethnicity, that program may now create federal contract risk. This is where employers need to slow down, review the details, and avoid assuming that a well-intended program is automatically low risk. Good intentions do not usually win arm-wrestling matches with federal contract language.
Who Needs to Pay Attention
This Order is aimed at federal contractors and subcontractors, and the required clause is intended to flow down through subcontracts and lower-tier subcontracts where permitted by law. That means this is not just a prime contractor issue. Employers that subcontract on federal work may also be affected.
If your organization touches federal contract work in any meaningful way, even indirectly, this should be on your radar now.
Why This EO Has Teeth
The required contract clause states that if a contractor or subcontractor fails to comply, the contract may be canceled, terminated, or suspended, and the contractor or subcontractor may be declared ineligible for future government contracts.
That alone is significant. But the Order goes further.
It states that compliance with the clause is material to the Government’s payment decisions for purposes of the False Claims Act. The Order also directs the Attorney General to consider appropriate enforcement and to prioritize related civil actions.
That raises the stakes considerably. Once False Claims Act language enters the chat, employers should stop treating this like a routine policy update and start treating it like a serious risk-management issue.
Subcontractor Oversight Is Part of the Picture
The Order also places responsibility on contractors to report subcontractor conduct that is known or reasonably knowable and may violate the required clause, and to take remedial action as directed by the agency. Contractors must also notify the contracting agency if a subcontractor files litigation challenging the clause.
This means federal contractors should be thinking now about how they will:
- review subcontract language
- communicate expectations to subcontractors
- document compliance efforts
- escalate concerns internally when a program or practice appears risky
More Guidance Is Still Coming
The Executive Order directs the Office of Management and Budget to issue guidance to contracting agencies, and it directs the Federal Acquisition Regulatory Council to amend the FAR and issue deviation and interim guidance within 60 days of the Order.
That means employers should expect additional implementation guidance, and possibly agency-specific interpretations, in the near term. The legal and operational picture may continue to evolve as agencies roll this out.
What Employers Should Do Right Now
Federal contractors and subcontractors should start with a focused compliance review. That review should look at whether any policies, practices, or programs use race or ethnicity as a basis for eligibility, selection, participation, preference, or resource allocation. The Executive Order specifically points to employment, contracting, and program participation as key areas of concern.
Here are smart next steps:
1. Review DEI-related programs
Assess mentoring programs, leadership programs, internships, sponsorship efforts, ERG-related benefits, training opportunities, and vendor initiatives for race- or ethnicity-based restrictions or preferences.
2. Review contract templates
Identify where the new clause may need to be added or flowed down, especially in subcontracting arrangements.
3. Review documentation practices
Make sure HR, legal, and procurement teams can document the business purpose and selection criteria for programs and decisions. Strong documentation is about to become even more attractive than your favorite color swatch deck.
4. Coordinate with counsel
This is an area where legal review matters, especially if your organization has longstanding DEI programs tied to recruiting, development, supplier diversity, or internal participation opportunities.
5. Watch for implementation updates
The Order is already in place, but agencies still need to operationalize parts of it. Employers should monitor OMB, FAR, and agency guidance closely.
Bottom Line for Employers
This new Executive Order is a major development for federal contractors and subcontractors. It creates a new contract compliance requirement, expands scrutiny of race-based DEI practices, and adds potential exposure through contract remedies and False Claims Act theories.
For employers doing business with the federal government, this is the time to review programs carefully, tighten documentation, and make sure HR, legal, and procurement are aligned. The issue is no longer just whether a DEI program supports organizational goals. The issue is whether it creates contract risk under a new federal mandate.
This article is for informational purposes only and does not constitute legal advice. Employers should consult qualified legal counsel regarding the application of this Executive Order to their specific contracts, programs, and workplace practices.
Note: This blog post is for informational purposes only and should not be construed as legal advice. Always consult with a legal professional for advice specific to your situation.
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Lisa Smith, SPHR, SHRM – SCP
Certified EEO Investigator (EEOC)
Lead Support and Content Chief – HelpDeskforHR.com
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