On March 26, 2026, President Trump signed Executive Order 14398 entitled Addressing DEI Discrimination by Federal Contractors, the latest in a series of administration orders aimed at diversity, equity, and inclusion (“DEI”) practices in the workplace.
EO 14398 seeks to eliminate DEI practices employed by federal contractors that it views as “unethical” and “often illegal,” and which it states “impose artificial costs in hiring, promotion, and operations.” Specifically, EO 14398 states that “DEI activities” by federal contractors increase costs imposed on the federal government by “creating excessive workforce turnover by elevating immutable characteristics over job performance,” “jeopardizing the sort of employee collaboration and problem-solving that is essential to fostering efficient and high-quality work,” and “creat[ing] unnecessary costs by reducing the pool of available labor by artificially limiting companies to hiring or promoting certain individuals, suppliers, or intermediaries based on their race or ethnicity.”
EO 14398 requires all executive departments and agencies, including independent establishments that are subject to the Federal Property and Administrative Services Act (FPASA), 40 U.S.C. § 102(4)(A), to include a clause in contracts and lower-tier subcontracts prohibiting contractors and their subcontractors from engaging in racially discriminatory DEI activities within 30 days.
- The order also directs the Director of the Office of Management and Budget to issue guidance to contracting agencies to ensure compliance, with “additional guidance” provided to those “economic sectors that pose a particular risk of entities engaging in racially discriminatory DEI activities based on current or past conduct.” It further instructs contracting agencies to cancel, terminate, or suspend contracts—and to suspend or debar contractors—for failure to comply with the order.
- Each relevant agency head is directed to review the agency’s implementation of the order within 120 days and report to the Assistant to the President for Domestic Policy regarding its compliance.
- The order further directs the Attorney General to consider bringing claims under the False Claims Act against contractors or subcontractors who violate the contractual terms prohibiting racially discriminatory DEI activities and ensure that related civil actions brought by private persons are promptly reviewed. The mandatory clause establishes the factual predicate for False Claims Act enforcement by requiring the contractor to acknowledge that compliance is “material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).” This exposes noncompliant contractors to significant potential financial penalties. See 31 U.S.C. § 3729(a)(1).
The text of the mandatory clause reads as follows:
“In connection with the performance of work under this contract, [the contractor/appropriate party (contractor)] agrees as follows:
- The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);
- The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;
- In the event of the contractor’s or a subcontractor’s noncompliance with this clause, this contract may be canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts;
- 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;
- 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; and
- The contractor recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).”