New Executive Order Ties DEI Compliance to False Claims Act Risk for Federal Contractors
On March 26, 2026, the White House issued an executive order titled Addressing DEI Discrimination by Federal Contractors. The order states that its purpose is to “promote economy and efficiency in Federal contracting by preventing racial discrimination.”
The order does not regulate DEI programs in the abstract. It directly connects certain practices to federal contracting eligibility, payment, and potential liability under the False Claims Act. Interestingly, the False Claims Act is now before the Supreme Court in Eli Lilly and Company v. United States, et al., ex rel. Ronald J. Streck, where it could undercut or strengthen this executive order by clarifying the rights of a private citizen to bring a claim in claiming an "injury" exists to the United States.
What the Executive Order Requires
The order requires federal agencies to include a clause in contracts stating that:
“The contractor will not engage in any racially discriminatory DEI activities…”
It also defines those activities as “disparate treatment based on race or ethnicity in the recruitment, employment… contracting… program participation, or allocation or deployment of an entity's resources.”
Contractors must also:
- “furnish all information and reports, including providing access to books, records, and accounts”
- report subcontractor conduct that “may violate this clause”
- comply with agency-directed remedial actions
Payment and the False Claims Act
The order expressly links compliance to payment under federal contracts. The required clause states:
“The contractor recognizes that compliance with the requirements of this clause are material to the Government's payment decisions…”
The order further directs that the Attorney General shall:
“consider whether to bring actions under the False Claims Act against any contractors or subcontractors that violate the clause…”
It also requires prompt review of whistleblower actions brought under 31 U.S.C. § 3730, but again, see the case now before the Supreme Court.
As a result, practices tied to hiring, promotion, training programs, or vendor selection may have implications beyond contract compliance where payment certifications are involved.
Subcontractor and Vendor Requirements
The order applies to subcontractors and lower-tier subcontractors. It requires that:
“The contractor will report any subcontractor's known or reasonably knowable conduct that may violate this clause…”
It also provides that contracts may be:
“canceled, terminated, or suspended… and the contractor or subcontractor may be declared ineligible for further Government contracts.”
Scope of Covered Programs
The order defines “program participation” broadly to include:
“training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities…”
This definition extends beyond hiring and promotion and includes internal programs sponsored by the contractor.
Enforcement Framework
The order directs agencies to take action for noncompliance, including:
- contract cancellation, termination, or suspension
- suspension and debarment
It also directs federal agencies to identify “economic sectors that pose a particular risk” and issue further compliance guidance.
Implementation Timeline
- Within 30 days: agencies must begin including the required clause in contracts
- Within 60 days: interim FAR guidance is expected
- Within 120 days: agencies must review and report on implementation
What General Counsel Should Review
- Hiring and promotion practices tied to federal contracts
- Eligibility criteria for training, mentorship, and leadership programs
- Vendor and subcontractor selection and oversight
- Contract terms addressing compliance and reporting obligations
- Internal records, communications, and documentation subject to agency review
- Statements or certifications tied to payment requests
- The case before the Supreme Court and the precedent it sets
Bottom Line
This executive order establishes that certain internal practices may affect federal contract eligibility, payment, subcontractor oversight, and potential False Claims Act exposure. It requires alignment between company practices, documentation, and contractual representations in connection with federal work.
Lieb at Law, P.C. represents companies in litigation arising from federal contract compliance, including False Claims Act claims, contract termination disputes, and enforcement actions. We focus on defending complex matters where regulatory risk becomes litigation.
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