Six Questions Federal Contractors Are Asking About the New DEI Executive Order

Key Takeaways 

• Executive Order 14398 narrows the administration’s focus to race- and ethnicity-based DEI practices but expands contractor risk through mandatory contract clauses, reporting obligations, and a more robust enforcement framework.
• Although EO 14398 does not expressly state that it applies retroactively, federal contractors should expect it to affect existing contracts quickly as agencies begin adding the required clause, and contractors begin flowing it down to subcontractors.
• The order creates significant uncertainty for contractors balancing federal requirements with state and local affirmative action obligations, making careful review of current programs and contracting practices essential.
• Federal contractors should act now to assess diversity, equity, and inclusion-related (DEI) policies, strengthen documentation and certification processes, and build oversight mechanisms for subcontractor compliance in light of potential False Claims Act (FCA) exposure. 

The recent Executive Order 14398 (EO 14398) titled, “Addressing DEI Discrimination by Federal Contractors,” signals a significant escalation of the administration’s efforts to curtail DEI practices by federal contractors. EO 14398 differs from prior directives by cabining its reach to racially based DEI programs, rather than all DEI. By introducing a new concept—“racially discriminatory DEI activities”—this EO seeks to end many DEI practices disfavored by the administration. Like previous directives that have sought to address “illegal” DEI, EO 14398 and the accompanying fact sheet do not provide significant insight or direction to federal contractors as to what practices would violate the administration’s guardrails. Federal contractors and subcontractors should carefully evaluate the EO’s requirements and begin preparing now for compliance. The language of EO 14398 is ambiguous in many respects and presents novel questions regarding its reach. Additional clarification by the administration would greatly assist in interpreting its practical application to federal contractors. Below, we address some of the many questions raised by the EO. 

1. How Is This Different From the Previous DEI Executive Order? 

EO 14173, issued in January 2025, targeted DEI programs broadly. We discussed that EO here. EO 14173 required agencies to include two contract terms: one requiring contractors to comply with federal antidiscrimination laws and another requiring certification that the contractor does not operate “illegal” DEI programs that violate those laws. EO 14173 also stated that noncompliance could trigger FCA liability. In addition, EO 14173 revoked Executive Order 11246, the longstanding antidiscrimination and affirmative action framework for federal contractors, and directed the U.S. Department of Labor’s Office of Federal Contract Compliance Programs to cease holding contractors responsible for “affirmative action.” As to nonfederal contractors, EO 14173 directed the attorney general to develop an enforcement plan targeting the “most egregious” DEI practitioners.  

Several of EO 14173’s key provisions faced legal challenges across multiple circuits. The Fourth Circuit vacated a preliminary injunction after finding that the plaintiff was unlikely to succeed on First and Fifth Amendment facial constitutional challenges. Nat’l Ass’n of Diversity Officers in Higher Educ. v. Trump, 167 F.4th 86 (4th Cir. 2026). In the Seventh Circuit, oral argument signaled that the panel could strike down or limit EO 14173. Chicago Women in Trades v. Trump, No. 25-2144. Content-based restrictions on federal contractors’ speech have faced stiff legal headwinds. See, e.g., Santa Cruz Lesbian & Gay Cmty. Ctr. v. Trump, 508 F. Supp. 3d 521, 545 (N.D. Cal. 2020) (striking down executive order banning DEI-related training).   

Notably, EO 14173 addressed “illegal DEI” without defining the term, covered a broad range of protected characteristics (e.g., race, color, sex, sexual orientation, religion, and national origin), and left agencies with significant discretion in how to implement its requirements. 

EO 14398 is narrower but sharper. Some differences include: 

• Focus on race and ethnicity. EO 14398 zeroes in on race and ethnicity specifically and introduces the defined term “racially discriminatory DEI activities,” describing them as “disparate treatment based on race or ethnicity in recruitment, employment (including hiring and promotions), contracting (including vendor agreements), program participation, or the allocation or deployment of an entity’s resources.” The EO’s focus on disparate treatment is consistent with its efforts to limit any use of disparate impact theories.
• Specified contract language. Rather than directing agencies to add general terms, it prescribes specific mandatory contract clause language that must be incorporated by April 25, 2026. That language (1) forbids racially discriminatory DEI activities, (2) requires contractors to provide records upon request to determine compliance, (3) threatens contract-related sanctions, (4) obliges contractors to report “known or reasonably knowable conduct” that violates the EO, (5) requires reporting of any suits related to the EO, and (6) deems the representations material for purposes of the FCA.
• Penalties. EO 14398 also builds out a detailed enforcement architecture—including directed FCA actions by the attorney general, prompt review of qui tam whistleblower suits; sector-specific compliance guidance; and contract cancellation, termination, and even debarment remedies—that goes well beyond the general enforcement direction in EO 14173.  

2. Does This Apply Retroactively to Contracts Already in Place? 

Courts have recognized a presumption that executive orders operate prospectively unless their plain language indicates retroactive intent. See Sea-Land Service, Inc. v. ICC, 738 F.2d 1311, 1314 (D.C. Cir. 1984) (applying retroactivity where the plain language of an executive order reflected the intent that it apply retroactively). Moreover, federal contractor-related EOs often provide that they apply to new contract actions such as renewal or modifications. EO 14398 does not include such standard language, which indicates that it is not retroactive. However, it requires quick action on existing contracts by directing federal agencies to include the prescribed clause in all contracts within 30 days (i.e., by April 25, 2026). In addition, contractors will likely have the duty to flow down these clauses on subcontractors. Further, agencies will also be implementing the clause in new contracting vehicles. While EO 14398 does not specifically state that it will be retroactive, it will likely affect existing contracts, and contractors should be preparing now to incorporate the clause across their full portfolio. 

3. How Does This Affect State and Local Affirmative Action Obligations? 

Many federal contractors hold state or local government contracts that impose affirmative action obligations, including workforce analysis, goal setting, and efforts to address underutilization of protected groups. EO 14173 created significant tension based on the direction that the federal government abandon affirmative action. EO 14398 heightens that tension by defining “racially discriminatory DEI activities” broadly to cover disparate treatment in recruitment, contracting, or program participation based on race or ethnicity. As a result, compliance with a state or local affirmative action program requiring outreach and recruitment to minority-owned businesses could, depending on all of the facts, conceivably constitute disparate treatment as defined in EO 14398. At the same time, EO 14398 says nothing about state and local affirmative action plans and does not indicate that compliance with these obligations are disfavored DEI activities. Further, it is also notable that EO 14398 uses the term “racially discriminatory,” which might indicate that the federal government can target only actions that violate antidiscrimination laws. Many state and local affirmative action programs have withstood legal scrutiny. See, e.g., Rutherford v. City of Cleveland, 179 F. App’x 366 (6th Cir. 2006) (upholding the city’s race-conscious hiring plan as narrowly tailored where it did not set quotas and established a flexible minority-to-non-minority hiring ratio).  

This ambiguity in EO 14398 places a premium on contractors’ efforts to carefully review their state and local affirmative action obligations with experienced counsel. 

4. How Do We Mitigate the Risk of FCA Liability? 

This provision warrants careful attention. Under the prescribed contract clause, compliance is material to the government’s payment decisions under 31 U.S.C. § 3729(b)(4)—the FCA’s materiality standard. EO 14173 contained similar language that attempts to circumvent the high hurdle the government must prove to establish FCA liability. See United States ex rel. Foreman v. AECOM, 19 F.4th 85, 106, 109 (2d Cir. 2021) (finding that the materiality bar is a “demanding” and “rigorous” standard, “inasmuch as it serves to protect the FCA from being transformed into a vehicle for punishing garden-variety breaches of contract or regulatory violations”). It remains to be seen whether courts will follow this novel approach. Nonetheless, this language has a practical effect as it expands the avenues for whistleblower claims, qui tam suits, or government investigations under the FCA contemplated by EO 14173.  

The potential consequences—including treble damages, civil penalties, and reputational exposure—underscore the importance of treating this as a meaningful compliance priority. The enforcement outlook also bears watching. EO 14398 reflects the administration’s view that some contractors have continued racially discriminatory DEI-related practices under different labels, which suggests that targeted inquiries and sector-specific review activity are likely. The practical takeaway: Contractors should prioritize certification readiness and confirm that representations made to federal agencies are accurate, well-documented, and supportable. 

5. What Do We Need To Do About Our Subcontractors? 

EO 14398 imposes a flow-down requirement, meaning that the prescribed clause must be included not only in prime contracts but also in subcontracts at all tiers. This creates several practical obligations that contractors need to operationalize quickly. After federal agencies issue new contract clauses, contractors should amend existing and future subcontracts to include the required clause. While we expect federal agencies to wait until after the 60-day deadline that the Federal Acquisition Regulatory (FAR) Counsel has to issue contract deviation and interim guidance, some federal agencies may begin including the EO 14398 clause. Should contractors receive the clause before the FAR Counsel’s actions, they should contact the federal contracting officer and discuss the inclusion of the clause. In any event, contractors subject to the clause must report any subcontractor conduct that is known or reasonably knowable and may violate the clause and take remedial actions as directed by the contracting agency. The “reasonably knowable” standard presents significant compliance challenges, as government investigators would have wide latitude to assert that contractors were aware of the subcontractors’ activities. This potentially creates a duty of oversight, meaning contractors should consider compliance monitoring and reporting mechanisms across their subcontractor relationships. Additionally, contractors must notify the contracting agency if a subcontractor files suit challenging the validity of the clause.  

6. What if the Substance of the Federal Work Entails Analyzing Racial and Ethnic Statistical Disparities? 

Many federal contractors work with governments and private foundations to study governmental activities to evaluate whether they result in racial or ethnic disparities. This EO raises the question of whether those efforts may continue. The language of EO 14398 (and EO 14173) does not forbid such work by federal contractors. Rather, EO 14398 focuses on employment activities, contracting and participation in employer-sponsored internships, affinity groups, and clubs. At the same time, the administration remains determined to take broad views of DEI activities. Contractors should carefully review their activities to ensure that any work in this area does not unwittingly trigger a violation of the contract clause.  

Looking Ahead 

EO 14398 includes vague terms and presents many compliance challenges. Contractors should be using the time before the clause appears in their contracts to audit current practices; align compliance programs across federal, state, and local obligations; and ensure that every certification they make to a federal agency is accurate and defensible. We will continue to monitor agency implementation and enforcement developments as they unfold.