New executive order imposes mandatory DEI prohibition clause and False Claims Act exposure on federal contractors

Background

Since January 2025, the Trump Administration has issued a series of executive orders and agency guidance aimed at eliminating DEI programs that it considers to violate federal antidiscrimination laws across the federal government and among those who do business with it. Earlier executive actions (including EO 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity”)² directed agencies to take steps to discourage “illegal DEI discrimination” among contractors and grant recipients, and directed the U.S. Department of Justice (“DoJ”) to develop enforcement strategies. The Administration’s new Order comes amid ongoing investigations by DoJ into contractors’ DEI practices.³

Key Provisions of the Order

1. Mandatory Contract Clause

The key feature of the Order is its imposition on government contractors and subcontractors of a new mandatory contract clause. Within 30 days of the Order (by April 25, 2026), all executive departments and agencies must insert into all “contracts and contract-like instruments,⁴ including contractors’ subcontracts and subcontractors’ lower-tier subcontracts” ⁵ a clause requiring the following:

1. That the contractor will not engage in “racially discriminatory DEI activities,” as defined in the Order (see below).
2. That the contractor will furnish all information and reports, including access to books, records, and accounts, as required by the contracting agency to ascertain compliance. This marks a notable expansion of federal agencies’ visibility into a contractor’s operations, as this clause contractually grants access by the contracting agency to contractor records related to compliance, without the need for an Office of Inspector General or DoJ subpoena or Civil Investigative Demand.
3. That the contractor will report any subcontractor’s known or “reasonably knowable” conduct that may violate the clause to the contracting agency and take any appropriate remedial actions directed by the contracting agency. This provision imposes a new oversight obligation on contractors, by requiring them to identify and report any subcontractor conduct that is “known or reasonably knowable” that may violate the clause.(Emphasis added.) Although the “reasonably knowable” standard has been used in other areas of law (e.g., business valuations), its use here creates significant questions concerning the contractor’s oversight obligations. We expect the Federal Acquisition Regulation (“FAR”) deviation and interim guidance required by Section 5 of the Order to provide guidance on this issue.
4. That the contractor will inform the contracting agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of the clause. This aspect of the clause opens the door for potential intervention by DoJ personnel in lawsuits filed by subcontractors challenging the validity of the contract clause.
5. That the contractor recognizes that “compliance with the requirements of this clause are [sic] material to the Government’s payment decisions for purposes of [the FCA].” Although a similar provision was included in EO 14173, its implementation in contracts, grants, and cooperative agreements has been inconsistent. Also, unlike EO 14173, the new Order does not include a certification requirement and is limited to “racially discriminatory DEI activities” (as opposed to “any applicable Federal anti-discriminatory laws,” as used in EO 14173). Nonetheless, the language of the new clause, plus enforcement instructions set out elsewhere in the Order, is clearly designed to ease the government’s burden of proving FCA liability for contractors that knowingly engage in “racially discriminatory DEI activities.”
6. That noncompliance with the clause may result in the contract being “canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts.” The clause places contractors on notice that noncompliance may result in contract termination and suspension from government contracting.

2. Scope of Proscribed Activity

The prescribed contract clause applies broadly, covering both employment-related matters and conduct outside the employment context. Specifically, the clause prohibits “racially discriminatory DEI activities,” defined as “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.” “Program participation,” in turn, is defined as “membership or participation in, or access or admission to:  training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities that are sponsored or established by the contractor or subcontractor.” In other words, the administration is signaling that a broad range of contractor programs are subject to scrutiny under the clause, including not only hiring, firing, or compensation decisions, but also training programs, recruiting practices, supplier diversity and vendor contracting programs,⁶ and affinity groups. This broad definition is consistent with the Administration’s prior statements, including recent comments by Deputy Assistant Attorney General Brenna Jenny on which we reported.⁷

Notably, in contrast to EO 14173 and other Administration pronouncements, the Order focuses on race and ethnicity to the exclusion of other protected statuses, including sex.  

3. Penalties and Enforcement.

In addition to imposing potential contract termination and suspension/debarment, the Order instructs the Attorney General to consider bringing actions under the FCA against any contractor and subcontractor that violates the requirements of the new contract clause. Further, revealing its design to prioritize FCA enforcement and encourage whistleblowers, the Order directs the Attorney General to ensure “prompt review” of actions brought by qui tam relators, to the maximum extent practicable, within the FCA’s 60-day review period. The provision is notable because few if any qui tam investigations today are completed within that time frame.

Takeaways

This new EO represents another step in the Trump Administration’s efforts to scrutinize and discourage DEI activity. Federal contractors and subcontractors should be conscious of the heightened consequences posed by the new contractual provision the Order mandates—including an elevated risk of FCA investigation, on the one hand, and then liability on the other, if they are found, subsequent to the inclusion of the contractual provision in their contracts, to have discriminated on the basis of race or ethnicity.

To the extent not done so recently, contractors and subcontractors should strongly consider:

• Auditing any DEI-related programs (whether labeled as “DEI”, “inclusion”, or otherwise) to determine whether they should be continued, modified, or terminated in view of the Order’s requirements and the Administration’s continued scrutiny of DEI-related programs.
• Conducting such audits under privilege, especially in light of the provision required to be included in the new clause that will require contractors to provide access to their books, records, and accounts to verify compliance.
• Updating their subcontract templates and policies/procedures to address the requirements of the new clause to be prepared once the clause takes effect.

Key interpretive questions remain open, some of which we expect to be addressed during the FAR implementation process. 

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Hogan Lovells Government Contracts, Employment, and False Claims Act teams will continue to monitor developments and provide up-to-date analysis of the government’s efforts aimed at addressing activity it deems to constitute illegal DEI activity.

Authored by a multi-specialty team of lawyers from our Government Contracts, Employment, Education, and False Claims Act practices.