The Federal Contractor Ban on DEI Activities
The Basics of Executive Order 14398
On March 26, 2026, President Trump issued Executive Order (EO) 14398, titled “Addressing DEI Discrimination by Federal Contractors.” This follows numerous other executive orders and other federal actions issued and taken last year which broadly attack various entities’ efforts at “diversity, equity, and inclusion” (DEI) and “diversity, equity, inclusion, and accessibility” (DEIA).
Specifically, EO 14398 commands federal agencies to include specific language in their contracts with federal contractors which requires the contractor to certify they will not engage in “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 an entity’s resources.” Among other things, the contractor must also certify they 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.”
EO 14398 lays out a number of potential repercussions for federal contractors and subcontractors who violate its provisions, including: (i) the cancellation of their contracts, (ii) suspension or debarment from further contracting with the federal government, (iii) being sued by the Department of Justice under the False Claims Act, and (iv) being sued by private parties under the False Claims Act (i.e., a qui tam action).
It is notable that EO 14398 only prohibits federal contractors from engaging in certain race-based and ethnicity-based DEI practices, as opposed to also prohibiting certain sex-based or religious-based DEI practices. Perhaps this omission was intentional, given the Administration’s specific interpretation of some anti-discrimination laws.
Why the False Claims Act Accelerates the Impact of EO 14398
The False Claims Act (FCA) is a federal law allowing the government and private parties (known as relators) to sue organizations and individuals who defraud the federal government. Organizations found liable under the FCA must pay: (i) three times the amount of damages sustained by the government; (ii) a civil penalty of between $5,000 and $10,000 for each violation; (iii) in actions brought by the government, the costs to the government of bringing the action; and (iv) in actions brought by relators, their reasonable attorney fees. Notably, private parties are incentivized to initiate actions under the FCA (i.e., blow the whistle via qui tam actions), insofar as they are entitled to between 15% and 30% of the treble damages awarded, depending on (among other things) whether the government intervenes in the qui tam action or not.
The inclusion of a False Claims Act theory as a basis for enforcing this EO has serious consequences for contractors, because the damages are so significant. Whether a contractor could truly be found liable in court for defrauding the federal government simply by violating the terms of their contract with the government as laid out in EO 14398 is still unsettled, but as recently as April 10, 2026, the Department of Justice announced that IBM agreed to pay $17 million to settle allegations that it violated the FCA by failing to comply with anti-DEI requirements in its federal contracts. So the threat is real.
Employer Takeaways:
Federal contractors should immediately engage with counsel to review any policies or practices which might be interpreted as DEI, especially as it relates to race-based or ethnicity-based practices. This might include, for example, the practice of focusing recruitment efforts intended to attract and hire more individuals of a particular race or ethnicity. Not every initiative designed to promote inclusion will be a prohibited practice, but some may be.
Federal contractors who know or suspect that a subcontractor is engaging in conduct that may be prohibited by EO 14398 may want to discuss the issue with an employment lawyer to determine if, based on what the contractor knows, the subcontractor is or is not in violation and whether there is a reporting obligation.
Federal contractors should consider the laws of the states in which they operate as well, particularly if the state requires certain employers (such as state contractors) to take affirmative action in certain areas.
