Trump’s DEI Order Creates Dilemma for Federal Contractors

Federal contractors are scrambling to figure out how far they should go in changing policies they’ve used to recruit and retain employees, in light of the Trump administration’s crackdown on what it describes as “illegal” DEI.

Companies that provide goods and services to the US government have a lot at stake. Agencies reported spending more than $770 billion in prime contracts in 2024, and there could be legal repercussions and hefty penalties for crossing the line on diversity, equity and inclusion— a line the administration hasn’t clearly defined. At the same time, existing contracts obligate these companies to maintain hiring policies they’ve been practicing for decades.

“The biggest question to me is, what is still in the contract that you need to comply with? How does it get changed, and when, and by whom?” said David Berteau, president and CEO of the Professional Services Council, an industry group that represents federal contractors.

“Those are still, at least from my perspective, unanswered questions on an uncertain timetable,” he added.

President Donald Trump rescinded Executive Order 11246, a 1965 rule that required contractors to practice “affirmative action” in their hiring, recruiting and promotion policies. In practice, this has meant tracking race and gender in their workforces, and identifying any policies that led to some groups being underrepresented, contracting attorneys said.

Under Trump’s order, the government will stop “allowing or encouraging” contractors to practice what the order describes as “workforce balancing” based on certain protected characteristics.

While the prior policy has been largely nullified, some of its elements remain on the books. Federal acquisition regulations based on Executive Order 11246, as well as a 1973 law protecting people with disabilities and a law assisting Vietnam veterans, are still in effect, setting up a tug-of-war between competing contractual obligations.

Its order also requires contractors to certify they’re not operating “any programs promoting DEI that violate any applicable Federal anti-discrimination laws,” wielding the False Claims Act as a sanction. The administration is giving contractors a grace period, through April 21, to comply with its new directive.

“The bigger question is, really, can federal contractors voluntarily do what they’re doing?” said Julia Judish, special counsel at Pillsbury.

“It was legal a month ago, and a lot of the confusion and concern that you’re seeing for federal contractors—and largely in the private sector as well—is, what does ‘illegal DEI’ mean?” she added.

‘Nothing Feels Safe’

Federal contractors were required to practice what the Johnson-era order describes as affirmative action. Until last month, that meant they’d gather and analyze data in search of patterns indicating their recruiting or hiring policies impeded equal employment opportunities, Judish said.

Making hiring decisions based on race was—and remains—illegal. It’s unclear what part of those practices contractors can’t or shouldn’t continue now, government contracting attorneys said.

“Talking anecdotally with clients about this, nothing feels safe, even though some things feel like they ought to be safe,” said Sandeep Nandivada, a partner at Morrison Foerster. Companies are waiting for guidance to help clarify what the government sees as discriminatory conduct, he said.

Craig Leen, who ran the Labor Department’s federal contractor watchdog during Trump’s first administration and is now a partner at K&L Gates, said he recommends federal contractors “start to sunset their EO 11246 affirmative action programs.”

Because the administration has not defined prohibited DEI practices, contractors will largely identify for themselves what practices they should stop. That uncertainty could cause some companies to end programs and practices that might have withstood scrutiny.

Some contractors aren’t waiting. For example, Booz Allen cut its DEI programs and cited the Trump orders as a reason, Bloomberg News has reported.

Both overly and insufficiently risk-averse approaches carry risk, said Isaias “Cy” Alba, a partner at Piliero Mazza. If a contractor decides something isn’t DEI and keeps doing it, the government could argue it was—and refuse to pay the company. But if a company goes too far and stops something it needn’t have, the government could say it was in breach of contract, and terminate the contract or refuse to pay.

Companies are asking if they have to overhaul all of their diversity practices, said Angela Styles, a partner at Akin Gump, and former federal procurement policy administrator at the Office of Management and Budget under President George W. Bush.

“They’re all generally assuming that they’re going to have to make some changes to any DEI practices they may have,” she said.

What’s At Stake?

The consequences are potentially serious.

The False Claims Act allows workers to bring cases against contractors for allegedly discriminatory DEI activities, and includes potential treble damages and per-claim penalties.

“It’s not hard to envision a world in which an employee who is passed up for a promotion or receives other unfavorable employment outcomes could raise concerns about discrimination under this new view of discrimination, and open up companies to False Claims Act liability,” Nandivada said. “It really drastically increases the risk to companies” and will push many contractors to “revisit how they document their employment decisions,” he said.

Trump has also tasked agencies with creating a list of nine companies each for DEI activity investigations.

For large government contractors, “You’re rightfully concerned that you may be targeted for no other reason than the policies have shifted now,” Nandivada said.

Beyond the possible sanctions, contractors that fall afoul of the new regime stand to lose what may be their most important business partner. Attorneys said some clients are already receiving stop-work orders for projects the new administration considers to be related to DEI. The government has the right to end any contract because it’s no longer interested in the work—called a termination for convenience.

“For some small contractors this can be their lifeblood in terms of their contracting and grant business as a whole,” said Christopher Wilkinson, senior counsel at Perkins Coie.

— With assistance from Clara Hudson