New Executive Order Ties DEI Compliance to False Claims Act Risk for Federal Contractors

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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DEI, the False Claims Act, and the New Enforcement Reality for Employers

National Law Review article published this week highlights a significant shift in federal enforcement strategy: the U.S. Department of Justice is now actively using the False Claims Act (FCA) to scrutinize workplace DEI initiatives at companies that receive federal funds or hold government contracts.

Read the article here:
https://lnkd.in/ee_mvzCg

According to the article, DOJ is issuing civil investigative demands to major employers and treating DEI-related inquiries as potential fraud investigations, not policy disagreements. The focus is no longer limited to what a DEI policy says on paper, but how it operates in practice.

For employers and the attorneys, this represents a material change in exposure.

The FCA has traditionally been used to police false billing and fraudulent payment claims. DOJ is now advancing a novel theory: that maintaining certain DEI practices while certifying compliance with federal anti-discrimination laws can constitute a false or misleading claim for payment. This approach has been reinforced by executive orders, DOJ guidance, and public statements from senior DOJ leadership.

Whether courts ultimately endorse this theory remains to be seen. In the meantime, investigations are underway, and the cost of responding to a CID alone can be significant. Documentation, internal decision-making, and how DEI concepts are operationalized are now front and center.

This is exactly why Attorney Andrew Lieb recently served as a featured instructor for a New York State Bar Association CLE titled Risk-Informed DEI: Balancing Legal Exposure and Organizational Culture. The program was designed to address the reality employers and counsel are facing now.

The CLE focuses on practical, defensible frameworks for advising employers in this environment. That includes identifying where FCA risk may arise, understanding how regulators evaluate DEI implementation rather than labels, and developing documentation and compliance strategies that align with both legal obligations and organizational goals.

For attorneys advising employers, and for organizations that contract with or receive funding from the federal government, DEI is no longer a purely cultural initiative. It is a legal risk management issue that requires careful, informed handling.

Details on the NYSBA CLE, including registration and CLE credit information, are available here:
https://lnkd.in/eHK9FHfk

As enforcement continues to evolve, employers should not assume that rebranding or surface-level changes are sufficient. The question regulators are asking is how programs actually function, how decisions are made, and what representations are being made to the government. Getting that analysis right now can make the difference later.

New York's Expanding Whistleblower Law: Empowering Employees or Encouraging Tattle-tailing on Taxes

The state's taxpayer whistleblower law was recently expanded by Part DD of S4009C, the state budget, and employers should be nervous because now employees can bring lawsuits on suspicion that their employer evaded their tax obligations. 

The whistleblower law, which is formally called The New York False Claims Act (FCA), allows whistleblowers to bring suits against individuals and entities that knowingly submit deceptive claims to the government, including tax fraud. Initially, claimants were limited to individuals with specific knowledge of the taxpayer's preparation process. However, as amended under S4009C, New York State Finance Law Art. 13 §189-h now enables claims against individuals or entities who deliberately evade tax obligations where claims can be advanced solely on suspicions. 

Given that the FCA allows whistleblowers to recover monetary damages of 30 percent of the government's recovery and that the government can recover three times the loss sustained by the state, it bodes to reason that disgruntled employees are quite incentivized to bring claims in selling out their employers. 

The amendment permits claims on tax concealments from May 3, 2020, but does not allow raising retroactive claims in pending cases. Individuals and business entities should immediately reassess their filing obligations and be clear on which employees have access to their records. 

As amended, the FCA is very likely to shake up the dynamic between bosses and employees. With enticing financial incentives on the line for successful whistleblowing claims, things are about to get interesting.