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Complementing a set of DEI-focused Executive Orders President Trump issued in early 2025, on March 26, 2026, President Trump issued Executive Order (“EO”) 14398 titled “Addressing DEI Discrimination by Federal Contractors.” The EO’s stated purpose and policy are to “promote economy and efficiency in federal contracting by preventing racial discrimination” it contends is occurring through certain diversity, equity, and inclusion (“DEI”) practices.&nbsp;

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The EO asserts that some DEI initiatives treat persons differently based on race or ethnicity rather than merit, impose artificial costs on employers, and increase inefficiencies that are ultimately passed on to the federal government. Citing concerns that existing enforcement mechanisms are insufficient, the EO ties compliance directly to federal contract performance, payment, and eligibility for future federal work through new mandatory contract clauses and enhanced enforcement tools.

The EO defines “racially discriminatory DEI activities” as “disparate treatment based on race or ethnicity in the recruitment, employment (e.g., hiring and promotions), contracting (e.g., vendor agreements), program participation, or allocation or deployment of an entity’s resources.”

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The EO directs federal agencies (to the maximum extent permitted by law) to incorporate, within thirty (30) calendar days into covered contracts and contract like instruments, and flow-down clauses, the following terms in connection with the performance of the work under the contract:

The contractor will not engage in any racially discriminatory DEI activities;

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The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency…, for purposes of ascertaining compliance;

An acknowledgement that the contract may be canceled, terminated, or suspended, and that the contractor may be declared ineligible for further government contracts for noncompliance;

An obligation of the contractor to report a subcontractor’s known or reasonably knowable conduct that may violate the EO or to take remedial action.

Notice to the contracting agency if a subcontractor sues the contractor over the validity of the EO; and

Recognition that compliance with the EO and corresponding contract clause is material to the government’s payment decisions for purposes of the False Claims Act.

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Implications for Federal Contractors and Subcontractors

The EO signals an additional and broader enforcement ramp-up for federal contractors. This is not the first time the administration has imposed a DEI-related certification requirement for federal contractors. EO 14173, which revoked EO 11246 of 1965 (the genesis of women and minority affirmative action plans and equal employment opportunity clauses), required contractors to certify that they do “not operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.” Arguably, EO 14398 goes farther as nowhere in the definition of “racially discriminatory DEI activities” does it refer to existing federal employment equal employment opportunity or nondiscrimination laws, such as Title VII or Section 1981. The definition of “racially discriminatory DEI activities” includes “allocation or deployment of an entity’s resources”, which is not defined in the EO or accompanying Fact Sheet, creating uncertainty regarding how agencies will interpret and enforce that provision, particularly with respect to recruitment efforts, internal programs, and vendor or supplier initiatives.

Additionally, in the “Policy and Purpose” section of the EO, President Trump expresses dislike for DEI activities generally, regardless of whether some are legally compliant (e.g., “DEI activities are not only unethical and often illegal”).&nbsp;&nbsp;&nbsp;

Federal contractors and subcontractors should expect increased scrutiny of employment, recruiting, training, mentoring, leadership development, and supplier‑related programs, as well as expanded audit and reporting obligations.

This EO embeds DEI compliance directly into federal contracts, an approach that reflects a broader enforcement strategy discussed in Michael Best’s prior client alerts addressing recent DEI‑focused executive actions.<a href="#_ftn1" id="_ftnref1">[1]</a>

In preparation for compliance and assessment of the EO, federal contractors and subcontractors should:

Be vigilant in assessing the inclusion of this new language in contracts and assess if and when it needs to be incorporated into subcontracts;

Review DEI‑related policies, programs, and practices for potential exposure under the EO, paying particular attention to recruitment practices, leadership or mentoring programs, training initiatives, and supplier or subcontractor arrangements, and resource allocation.

Assess their ability to make the required certifications and identify any programs or practices that might need to be revised.

Consult with legal counsel to evaluate (a) what an agency might request be submitted to determine compliance with the EO; and (b) how the EO interacts with existing federal, state, and local anti‑discrimination laws, including Title VII of the Civil Rights Act of 1964.

Monitor forthcoming guidance from the Office of Management and Budget and the Federal Acquisition Regulatory Council, as well as any litigation challenging the EO, which might further shape compliance obligations.

We will continue to monitor developments related to the EO and the implementing regulations. Please do not hesitate to reach out to any member of the firm's Labor and Employment practice group with questions about how these developments might affect your organization.

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<a href="#_ftnref1" id="_ftn1">[1]</a> <a href="https://www.michaelbest.com/insights/president-trump-revokes-civil-rights-era-federal-contractor-equal-employment-affirmative-action-executive-order-11246-and-warns-government-agencies-and-private-employers-against-maintaining-illegal-di/">President Trump Revokes Civil Rights Era Federal Contractor Equal Employment/Affirmative Action Executive Order 11246 and Warns Government Agencies and Private Employers Against Maintaining Illegal Diversity, Equity, and Inclusion Practices – Part I</a>

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Farrah N.W. Rifelj

Carrie E. Byrnes

Daniel A. Kaufman

Emi M. Passini

Malin A. Ehrsam

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