Following President Trump’s January 2025 Executive Order (EO) 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” federal contractors have been trying to decode the meaning of “illegal diversity, equity, and inclusion” (illegal DEI) while evaluating their diversity, equity, and inclusion (DEI) initiatives. As discussed in our March 24, 2025, bulletin and Aug. 4, 2025 bulletin, the Equal Employment Opportunity Commission and the Department of Justice (DOJ) have provided limited guidance on this issue.

On March 26, 2026, President Trump issued an executive order entitled, Addressing DEI Discrimination by Federal Contractors.  This EO builds on EO 14173 and provides a definition of what the Administration believes constitutes illegal DEI.

According to the March 26 executive order (the Executive Order), “racially discriminatory DEI activities” refers to any race- or ethnicity-based disparate treatment occurring within recruitment, employment, contracting, program participation, or the allocation of organizational resources. The Executive Order labels these DEI activities as unethical, often illegal, and a source of organizational waste, claiming that these inefficiencies increase costs for the federal government.

Under the Executive Order, federal agencies have 30 days to begin including a mandatory anti-DEI contract clause in their contracts, which requires contractors to certify their rejection of DEI initiatives and grants the government access to contractors’ books, records, and other internal accounts. This new anti-DEI contract will also compel contractors to report any “known or reasonably knowable” violations by a subcontractor and to notify the contracting agency when a subcontractor files a lawsuit against the contractor that questions the validity of the Executive Order’s anti-DEI clause.

Failure to cease racially discriminatory DEI activities or fulfill the clause’s reporting requirements may trigger liability under the False Claims Act (FCA), with the potential for each compliance certification or payment request submitted during a period of non-compliance being treated as an individual false claim. Given the Trump Administration’s focus on FCA enforcement, contractors must exercise caution to avoid FCA exposure.

Although a definition of “illegal DEI” has finally been provided, it is extremely broad in scope, which increases the likelihood that a wide array of workplace inclusivity efforts could face legal scrutiny. If you have questions concerning this guidance and compliance with nondiscrimination laws, contact a member of Taft’s Government Contracts group.