New EO tightens DEI rules for contractors

Federal contractors now have to accept a new contract clause barring what President Donald Trump’s March 26, 2026 executive order calls “racially discriminatory” diversity, equity, and inclusion activity. (federalregister.gov) Executive Order 14398 says agencies must add that clause within 30 days to contracts and “contract-like instruments,” including subcontracts and lower-tier subcontracts. The order was published in the Federal Register on March 31, 2026 as 91 Federal Register 16147. (whitehouse.gov) The order defines the targeted conduct as “disparate treatment based on race or ethnicity” in recruiting, hiring, promotions, vendor agreements, program participation, or the allocation of resources. It separately says “program participation” includes access to training, mentoring, leadership development, clubs, associations, and similar opportunities sponsored by a contractor or subcontractor. (whitehouse.gov) The clause also gives agencies audit-style access to books, records, and accounts to check compliance. It requires prime contractors to report known or reasonably knowable subcontractor conduct that may violate the clause and to take remedial steps directed by the agency. (govinfo.gov) If an agency finds noncompliance, the order says a contract may be canceled, terminated, or suspended, and a contractor or subcontractor may be declared ineligible for future federal work. The clause also states that compliance is material to payment decisions, a formulation lawyers said raises False Claims Act exposure. (govinfo.gov) (wiley.law) This is the second Trump executive order aimed at diversity, equity, and inclusion in federal contracting since January 2025. Dentons said Executive Order 14398 does not replace Executive Order 14173, which already tied compliance with federal antidiscrimination law to payment decisions and certification language in contracts and grants. (dentons.com) (federalregister.gov) Executive Order 14173 also revoked Executive Order 11246, the 1965 order that underpinned affirmative-action obligations for federal contractors for decades. The Labor Department says contractors were told to wind down that regulatory scheme by April 21, 2025. (dol.gov) Law firms reviewing the new order said contractors should recheck hiring criteria, mentoring and leadership programs, supplier initiatives, recordkeeping systems, and subcontractor oversight. Several noted that the order is written around race and ethnicity, while leaving agencies room to decide how broadly to read terms such as “program participation” and “allocation or deployment of resources.” (skadden.com) (mayerbrown.com) (wiley.law) The White House framed the order as a measure to promote “economy and efficiency” in procurement by preventing racial discrimination in contractor programs. Contractors now face a faster compliance timetable, broader flow-down obligations, and a new federal contract term that reaches well beyond the label “diversity, equity, and inclusion.” (whitehouse.gov)