Another Round on DEI: EO 14398 Targets Race-Based Discrimination and Expands Compliance Obligations for Federal Contractors 

On March 26, 2026, the administration issued Executive Order 14398, “Addressing DEI Discrimination by Federal Contractors” (the “Order” or “EO 14398”), reinforcing Executive Orders issued in January 2025—particularly Executive Order 14173, "Ending Illegal Discrimination and Restoring Merit-Based Opportunity" (January 21, 2025), which revoked Executive Order 11246’s longstanding affirmative action requirements for federal contractors. Once again, this Order does not (and cannot) categorically ban DEI within organizations. It does, however, establish a new contractual obligation for federal contractors and subcontractors. Contractors that do business with the federal government should prepare now for introduction of this clause in the coming weeks.   

Like previous executive orders, EO 14398 does not outlaw DEI but seeks to attach concrete legal risk to internal diversity-related decision making through several mechanisms: 

• It establishes a new mandatory federal contract clause requiring federal contractors to agree that “[i]n connection with the performance of work under [the applicable] contract,” they “will not engage in any racially discriminatory DEI activities.” 

• The Order requires federal contractors to report any subcontractors’ “known or reasonably knowable conduct” that may violate the clause. 

• It embeds a contractual acknowledgement that compliance is material to government payment decisions and ties compliance to potential exposure under the False Claims Act, 31 U.S.C. § 3729(b)(4). 

Here, we discuss what this EO adds to previous orders about DEI and offer some insights to contractors navigating uncertainty in response to this latest order. For more on the current administration’s executive orders, see PLG’s coverage here. 

Timeline and Applicability  

The Order does not affect federal grants, only federal contracts. It does not specify a monetary minimum for covered contracts or clearly indicate whether it applies to existing contracts or only prospective awards and modifications.  

The Order sets out certain timelines for deployment:  

• 30 days (by April 25, 2026): All federal agencies must add the clause from EO 14378, § 3 to their contracts and contract-like instruments within the authority of the Federal Property and Administrative Services Act (FPASA). 40 U.S.C. § 101 et seq.   

• 60 days (by May 25, 2026): The FAR Council must issue deviation and interim guidance, followed by a formal Federal Acquisition Regulation amendment.   

Scope of Prohibited Activity 

“In Connection with the Performance of Work Under this Contract” 

The fundamental effect of this EO is a requirement that federal contractors commit that  “[i]n connection with the performance of work under this contract,” they “will not engage in any racially discriminatory DEI activities.”  EO 14398, § 3. Depending on the type of contract and the organization’s structure, many contractors may conclude that certain programs and activities fall outside the reach of this clause because they are not within the “performance of work under” their federal contracts. Substantial uncertainty remains in several areas, including: 

• If state or local law requires race-conscious activities, can those activities be carved out from EO 14398’s prohibitions? States including California, Illinois, and New York have supplier diversity requirements that may create tension with the EO’s restrictions on race-based contracting decisions. 

• Does the EO cover initiatives that apply to the organization writ large (such as a general mentorship program not tied to any contract)?  

• Does the result depend on the contract itself or on the volume of work to be performed under the contract? 

Regardless, the focus on the performance of the contract itself gives contractors a place to start on compliance adjustments, specifically: hiring, promotion, selection of subcontractors, and other decisions related to the contract. 

“Racially Discriminatory DEI Activities”  

The Order defines “racially discriminatory 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.” There are several key points to take away:  

• The use of the term “DEI” suggests activities benefiting underrepresented groups, but the definition makes clear that activities favoring or burdening any race violate the EO.  

• The explicit call-out of “contracting (e.g., vendor agreements)” may implicate supplier diversity programs, including those established under state law. 

• “Program participation” is broadly defined as “membership or participation in, or access or admission to: training, mentoring, or leadership development programs; educational opportunities; clubs; associations; or similar opportunities” that are “sponsored or established by the contractor or subcontractor.” EO 14398, § 2(b). This encompasses internal mentoring programs, sponsored educational initiatives, employee clubs and associations, and any comparable access-based programs—with a catch-all for “similar opportunities” that could reach a wide range of activities. 

• The broad and undefined “allocation or deployment of an entity’s resources” could reach any number of activities, including sponsored events, speaker programs, and charitable giving. 

• The reference to “disparate treatment” rather than merely “discrimination” is consistent with the administration’s stance in previous executive orders that only intentional discrimination counts—but “disparate impact” discrimination remains a basis of liability under Title VII and other federal and state civil rights laws.  

• Though “disparate treatment” has a judicially developed meaning consistent among federal civil rights laws, the absence of any explicit invocation of those statutes leaves ambiguous whether the EO (grounded in executive procurement authority and not enforcement of civil rights laws) intends to prohibit some unspecified “disparate treatment” not tied to the Title VII standard. 

In considering what “racially discriminatory DEI activities” are prohibited and how to deal with the substantial gray area here, businesses may wish to keep in mind that “DEI,” as intended and done properly, prevents unlawful discrimination. Changes to align with the Order’s stated policy should be undertaken cautiously and mindful of the full spectrum of discrimination-related risk. The EO cannot excuse federal contractors from compliance with federal statutes and is unlikely to be interpreted in a manner that would require contractors to violate federal law; abandoning lawful DEI activities that ensure compliance with federal antidiscrimination laws may create more risk than it avoids. On the other hand, DEI activities may not discriminate against majority groups—this has been the law nearly since Title VII’s inception—so if contractors’ DEI activities are discriminatory under Title VII, those activities were likely always unlawful. This moment offers opportunity to review and adjust accordingly.  

Subcontractor Flow Down 

The Order requires the clause to flow down through subcontracts, imposing affirmative obligations on contractors at each tier. Contractors at each tier must include the clause in their subcontracts, report any “known or reasonably knowable” subcontractor violations to the contracting agency, and take remedial actions as directed. EO 14398, § 3. The “reasonably knowable” standard is not defined and could be interpreted to impose affirmative investigation duties. This poses a potentially significant operational burden, and contractors should consider what due diligence steps may satisfy this standard, drawing on analogous formulations in other regulatory contexts. 

For subcontractors, the implications are equally significant. The clause is a mandatory flow down to their own subcontractors; the prime contractor has an affirmative obligation to report potential violation and the full range of remedies for noncompliance—including contract termination, suspension, debarment, and potential FCA exposure—flows through to subcontractors. As a practical matter, this creates an incentive for prime contractors to impose more stringent compliance requirements on subcontractors than the Order itself mandates, as they seek to insulate themselves from reporting obligations and potential vicarious exposure. 

False Claims Act Exposure  

The Order states that compliance is “material” to government payment decisions and directs the Attorney General to consider False Claims Act (FCA) enforcement. The FCA is a well-established enforcement mechanism that carries significant consequences: treble damages, per-claim civil penalties of over $27,000, and—critically—qui tam whistleblower enforcement that permits private individuals to bring suits on behalf of the government and share in any recovery. But while an EO’s declaration that something is “material” serves as evidence, it is not conclusive; the Supreme Court has held that materiality is evaluated on statutory and common-law factors and the standard is “demanding.”  A successful FCA case also requires proof of a false or fraudulent claim and knowledge of the falsity.  If actions are reasonably and in good faith believed to be in compliance with the law, this is a defense to liability. See U.S. ex rel. Schutte v. SuperValu Inc., 598 U.S. 739 (2023) (holding that a defendant's subjective belief at the time of the claim is relevant to scienter, regardless of whether the conduct was objectively reasonable). Contractors facing qui tam exposure may also have defenses under the FCA’s “public disclosure bar,” which generally requires dismissal of a whistleblower suit if “substantially the same allegations or transactions” were previously disclosed publicly—including through news media, government reports, or other public sources, which courts have held may include public disclosures or websites.  

With this in mind, transparent public disclosure of diversity-related programs may help insulate against some qui tam suits, may demonstrate the contractor’s good-faith belief that they were in FCA compliance, and undermine the government’s contention that the term was material. On the other hand, it (1) does not affect DOJ’s ability to bring enforcement actions directly and (2) may also attract scrutiny from contracting agencies, OMB, or OFCCP; (3) may provide advocacy groups with a factual record for complaints, so contractors should proceed carefully after considering all of these factors. 

Enforcement Realities and Anticipated Litigation 

Right now, employers have only the text of the Order to go on—in attempting to deal with the uncertainty, federal contractors should consider the extent to which they may be an enforcement target (or not), as well as the fact that the Order is likely to be challenged in court. Constitutional challenges are likely forthcoming, which may include: First Amendment facial challenges (e.g., that the covered conduct definition is unconstitutionally vague, that compliance requirements chill protected speech) or as-applied challenges (e.g., if enforcement actions infringe on protected speech); Equal Protection as-applied challenges (e.g., if enforcement applies selectively to favor some races more than others); and possibly arguments that the Order exceeds the scope of executive branch authority (e.g., that the required nexus between regulating internal organizational programs and federal procurement efficiency has not been established). Once agencies translate the Order into binding procurement instruments—such as FAR amendments, mandatory clauses, or enforcement guidance—those measures may be considered “final agency action,” enabling APA challenges for failure to follow required procedures, arbitrary and capricious reasoning, and action in excess of statutory authority. Whether these arguments will succeed is unclear, but the likely cloud of legal uncertainty may guard against overzealous or unreasonable enforcement. Enforcement activity following related anti-DEI executive orders from January 2025 may provide some insights. For example, agencies have launched high-profile investigations resulting in several agreed-upon settlements (notably among law firms and universities), but few if any violation determinations have been issued.  

Federal Contractor (and Subcontractor) Action Items 

For federal contractors, standard due diligence should prompt a review of relevant practices through the lens of EO 14398. Organizational context is critical, and there is no single answer on how to avoid risk.  

Though the order uses “DEI” terminology, contractors should not assume that activities are permissible simply because they do not use that language. The January 2025 Orders explicitly directed agencies to identify programs that “have been misleadingly relabeled.” EO 14151, § 2(b)(ii). EO 14398 states that “some entities continue to engage in DEI activities and often attempt to conceal their efforts to do so.” EO 14398, § 1. The focus is on substance—whether the program involves disparate treatment based on race—not nomenclature. 

Contractors should also be cautious about “overcompliance,” that is, going beyond what is necessary to fulfill the Order’s mandate. Dismantling diversity-related infrastructure broadly could result in discrimination liability and could inadvertently compromise compliance with other affirmative action obligations such as under Section 503 of the Rehabilitation Act (disability), the Vietnam Era Veterans' Readjustment Assistance Act (VEVRAA), and any relevant state and local affirmative action requirements, many of which specifically affect race. As the Order’s prohibited activities appear to be tied to performance of the federal contract, eliminating activities without a clear connection to the contract itself—particularly inclusion-related activities that do not exclude participation based on someone’s race—may be unnecessary and counterproductive. 

Each organization must consider specific factors, including existing program design, documentation practices, jurisdictional requirements, and risk tolerance. Near-term steps may include: 

• Update templates. Assess subcontract templates and be prepared to amend existing subcontracts to include required flow-down clauses. 

• Review existing federal contracts. Look at existing contracts with a view to assessing enforcement risk, and what types of activities might be considered “in connection with the performance of” the contract. 

• Review state and local contracts. Check state and local contracts that may contain race-related affirmative action requirements. 

• Determine subcontractor compliance strategy. Given the Order’s monitoring requirements, develop a strategy for good-faith compliance, which may include additional representations in subcontracts or basic audits. 

• Assess potentially prohibited activities. If any applicable programs involve race-related eligibility criteria or resource allocation—not just programs under a “DEI” umbrella—evaluate any potentially-necessary adjustments, considering 

• the activity’s connection to the performance of the federal contract; 

• the extent to which the applicable activity is necessary to ensure compliance with federal antidiscrimination statutes; 

• the extent to which eliminating or adjusting the applicable activity might simply shift the target of discrimination to a different race; and 

• the extent to which the activity is employer-driven.    

• Prepare compliance documentation for “books and records” access. Proactively organize relevant records, establish retention policies, and consider which materials may be protected by attorney-client privilege or work-product doctrine. 

• Carefully review requested certifications. Contractors should ensure that any certifications they are asked to provide match the language required by their specific contract modifications, as agencies may implement the Order with varying degrees of specificity during the transition period before FAR amendments are finalized. 

• Identify and document business justifications. To the extent that workforce programs are designed to improve operational effectiveness, expand talent pipelines, or address demonstrated business needs, those justifications should be documented. Such documentation is relevant both to FPASA nexus analysis and to any enforcement inquiry.  

• Assess FCA exposure. While the Order invokes the False Claims Act, it does not create strict liability. Actual FCA exposure requires knowledge of falsity and materiality. Contractors who make good-faith certifications based on reasonable interpretations of the Order’s requirements have defenses available.  

• Monitor developments. Watch for OMB guidance, FAR Council deviations, and agency-specific implementation, which may vary; track relevant cases, including from previous DEI-related orders. 

• Stay connected. With so much uncertainty, stay connected in networks where contractors may share strategies and updates on enforcement. Consult advisors where appropriate. 

Conclusion 

This Order represents a continuation of the administration’s approach to civil rights policy through federal procurement authority. It creates new compliance obligations and potential liability exposure for federal contractors engaged in race-conscious employment and contracting practices.  It does not change Title VII or the statutory frameworks governing employment discrimination.  

For federal contractors, the appropriate response is a careful assessment of existing practices, documentation of business justifications, and continued monitoring of an evolving legal landscape.