Federal contractors have been required to comply with the Trump administration’s mandate to remove anything that is considered diversity, equity and inclusion for the past 15 months. But under President Donald Trump’s new executive order, signed last night, vendors face harsher penalties that could include False Claims Act lawsuits as well as possible suspension and debarment.
The executive order details six new or expanded requirements for agencies and contractors as well as seven possible penalties for violations of the new order.
“DEI activities are not only unethical and often illegal, but also cause inefficiencies, waste and abuse within entities that engage in such practices. Specifically, DEI activities impose artificial costs in hiring, promotion and operations by precluding implementation of merit-based principles; creating excessive workforce turnover by elevating immutable characteristics over job performance; and jeopardizing the sort of employee collaboration and problem-solving that is essential to fostering efficient and high-quality work,” the president wrote in the EO. “DEI activities also create 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. These costs are inevitably passed on to the federal government when it contracts with companies who engage in racially discriminatory DEI activities, or who use subcontractors who do so.”
The EO defines DEI activities 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.”
Jonathan Aronie, a partner at Sheppard Mullin, said during an interview on Off the Shelf with Roger Waldron that in many ways, the EO is a continuation of a path the administration has been pursuing for the last 15 months. But, at the same time, he said this new EO goes even further in some areas.
“The policy and purpose [of this new EO] are very similar to the prior policy and purpose. There is much about this that’s the same as the prior ones from the president. However, it is not all the same. There is more. There is more detail in this one that I think is very important,” Aronie said.
Contractors must prove compliance
Prior to this EO, Trump issued an executive order for contractors focused on DEI. The first one from January 2025, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” revoked several Biden administration orders, including one that held contractors responsible for taking affirmative action or allowing workforce balancing on certain bases.
After that, the Justice Department issued further guidance to clarify what DEI violations are and created a task force to prosecute companies who violate civil rights laws.
At the same time, the Equal Employment Opportunity Commission (EEOC) issued guidance to further define unlawful discrimination related to “diversity, equity, and inclusion” (DEI) in the workplace.
DoJ furthered this effort in July by releasing guidance for grant-making agencies and recipients.
Aronie said all of these efforts and others are trying to send a clear message to contractors about removing DEI processes and the need to prove to the government that they took the appropriate steps.
He said this latest EO goes further because it’s requiring agencies to add a clause to all contracts by April 26.
Additionally, the Federal Acquisition Regulatory Council has 60 days to issue a FAR deviation and interim guidance.
“It makes clear, don’t wait for the FAR process to run its course. Get this out through either a deviation or an interim rule, whatever you need to do, get it into contracts quickly,” Aronie said.
But more than just a new clause, Aronie said the EO requires contractors to furnish all information and reports, including providing access to books, records and accounts as required by the contracting agency to demonstrate they are complying with the executive order.
“Now, that’s different because it’s really a new audit clause. There are a bunch of audit clauses that apply to government contractors. But this is a new one, expressly focusing on DEI programs,” he said. “Another one is in the event of the contractors or subcontractors non-compliance [with the EO], the contract may be canceled, terminated or suspended. This is stating just the truth of compliance with a contract clause. If it sounds harsh, it is.”
Requirements flow down to subcontractors
James Boland and Dismas Locaria, partners with Venable, wrote in a blog post that these and other aspects of the EO “represent a significant expansion of the administration’s current approach to DEI and greatly increase enforcement risk by facilitating, through a contract clause, the government’s scrutiny of a contractor’s DEI policies.”
If there is a violation of this order, even at the subcontractor level, vendors may be held liable and face possible violations of the False Claims Act.
Aronie said the EO takes typical obligations even further. He said it’s an expansion of the mandatory disclosure rule.
“If the contractor knows, or should have known, reasonably, that they or their subcontractor’s conduct may violate the EO, they have to report it. This is going to put contractors and subcontractors in a very awkward position if the failure to do that now it is non-compliance for the prime,” he said. “Now if the contractor informs the government that a subcontractor has violated the EO and if a subcontractor sues the contractor about the validity of this clause, the prime has to tell the government about the lawsuit, which I presume is because the government might want to intervene on that case to protect its interests.”
Aronie said the new EO means companies will have to figure out how to add these new requirements into their current compliance efforts, including how to pay for it.
“The consequences here probably won’t surprise you. A failure to comply gives the contracting agency the right to cancel, terminate or suspend your contract. It also, importantly, gives them the right to pursue a suspension and/or debarment action. So in a way, this is designed to supplement FAR Part 9 by really adding another clause for suspension and debarment,” he said. “Now the consequences of this have gone up. The likelihood of being looked at has gone up too because we know DOJ has a task force designed specifically to look at this. We know the EEOC is looking at this, and we know the prior executive orders encouraged whistleblowers to turn in companies. We know this clause directs contractors to turn in subs, so, again, the likelihood of being caught is up. If anyone does simple math, this must be incorporated as part of your standard compliance programs and your standard in-house audit and educational programs.”
Aronie added that companies have to get their arms around what the EO means in about 90 days.
“If you’re a company, as you’re putting your internal task force together, my point is broaden the universe of the people within your company who are helping you do this. Human resources, legal, compliance, finance and contracts all will collectively help you reduce risk here,” he said.
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