On March 26, 2026, President Trump signed Executive Order 14398, entitled Addressing DEI Discrimination by Federal Contractors, requiring federal agencies to add contractual language in all federal contracts prohibiting contractors and subcontractors from engaging in any racially discriminatory DEI activities, as defined by the Executive Order (EO).
While this EO includes language similar to prior DEI-related orders, it introduces a significant expansion in enforcement by subjecting non-compliant contractors to liability under the False Claims Act (FCA), including exposure to whistleblower actions and qui tam litigation. A qui tam claim is a civil action by a private individual on behalf of the government alleging fraud against federal programs and seeking to recover damages.
The new EO states that involvement in any racially discriminatory DEI activities is not only unethical and illegal, but also deemed fraudulent against federal programs because it is material to the government’s payment decisions. The definition of DEI activities here matters, as this EO expands a contractor’s obligations beyond the management of its employment policies and includes prohibitions against funding or expending time or resources on DEI activities and contracting with subcontractors, vendors, or suppliers utilizing DEI programs.
The EO defines “racially discriminatory DEI activities” as disparate treatment based on race or ethnicity in recruitment, employment, contracting (e.g., vendor agreements), program participation, or the allocation or deployment of an entity’s resources. The EO further defines “program participation” as any program sponsored or established by the contractor or subcontractor that provides participation in training, mentoring, or leadership development programs, educational opportunities, clubs, associations, or similar opportunities.
In other words, “DEI-related activities” prohibited under EO 14398 includes activities tied to the hiring, promotion, and training of employees, but also flows down to subcontractor agreements, vendor and supplier agreements, and the company’s use of funds or staff time. A swift review of existing agreements is necessary to ensure compliance.
EO 14398 further requires that, within 30 days of the EO (by April 25, 2026), all new federal contracts incorporate this prohibition and existing contracts be amended to prohibit such activities, or the contractor could face penalties, including cancellation, termination, or suspension of all or part of their contracts with the government. Within 60 days, the Federal Acquisition Regulatory Council is also to issue interim guidance regarding the implementation of the contractual clause prohibiting DEI activities ahead of amending the Federal Acquisition Regulation. Finally, within 120 days of the EO, each head of agency must review implementation of the new contractual clause and report on compliance to the administration.
Key Takeaways
Companies that conduct business with federal agencies should expect an amendment to their federal contracts, or contract-like instruments, that will include this clause. This will apply to all federal contracts at all levels, from contractors to subcontractors.
Consenting to this amendment confirms a contractor’s acknowledgment that the prohibition against DEI activities is material to the government’s pay decisions, a necessary element to establish FCA liability if noncompliance is found.
To ensure compliance with EO 14398, companies should:
- Complete an internal audit of policies and procedures regarding any internal or external policy that could be perceived as DEI activities under the definition of the EO to avoid liability under the FCA. For example, mentoring or leadership programs and Employee Resource Groups (ERGs) may need to be reviewed to avoid limiting eligibility or participation to race, sex, or ethnicity, and companies should ensure that such programs or initiatives are open to all employees.
- Review whether vendors, suppliers, or subcontractors maintain or utilize any DEI initiatives or programming that may run afoul of the contractual clause prohibition.
- Assess whether the continued collection of race or sex information from job applicants or employees is necessary or increases risk.
You may also contact a GRSM Employment attorney to assist with an audit or evaluation of any personnel policies, programs, or existing contractual relationships that may be impacted by EO 14398. This legal alert was authored by Partner Laura De Santos and Law Clerk Monica Prieto.