New Administration Outlook: What Should Federal Contractors Do With Their DEI Programs?

Key Takeaways

• Recipients of federal funding now have broad mandates but little guidance from the Trump Administration about employer DEI programs.
• Trump's new Executive Order "Ending Illegal Discrimination and Restoring Merit-Based Opportunity" links False Claims Act liability to DEI programs, reversing federal actions promoting diversity and inclusion since 1965.
• Contractors should review their HR and DEI-related policies to ensure compliance with federal anti-discrimination laws while remaining informed about any new rulemaking in this area.

In the wake of the unprecedented number of Executive Orders issued by President Trump during his initial days in office, recipients of federal funding have been given broad mandates with minimal guidance. This comes as the new administration begins to dismantle decades of policy related to race-based initiatives and DEI (diversity, equity, and inclusion) programs.

While recent news has focused on the pause in federal grant funding, many federal contractors are now assessing the new connection between False Claims Act liability and DEI programs, as outlined in the Executive Order ("EO") titled "Ending Illegal Discrimination and Restoring Merit-Based Opportunity." This EO not only reverses federal actions and initiatives aimed at promoting diversity and inclusion, such as EO 11246, which has supported these efforts since 1965, but also mandates that agencies include the following terms in every contract or grant award:

(A) A clause requiring the contractual counterparty or grant recipient to agree that compliance with all applicable federal anti-discrimination laws is material to the government's payment decisions, as per section 3729(b)(4) of title 31, United States Code; and

(B) A clause requiring the counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable federal anti-discrimination laws.

The intent of these provisions is to establish False Claims Act liability for contractors who maintain DEI programs in order to bolster the new administration's stance that all such programs in both the public and private sectors should be eliminated.

The False Claims Act and Trump's New EO

Under the False Claims Act, a Civil War-era law aimed at curbing fraud in contracts with the federal government, contractors may face civil penalties or, in extreme cases, criminal liability for seeking payment from the government under false pretenses. In relation to the new EO, this includes certifying that the company is not seeking payment while violating "Federal anti-discrimination laws." The enforceability of such contract clauses under the law remains a matter of debate. For instance, case law suggests that a contractor's agreement that a certain requirement is "material" to the government's payment decisions is not necessarily determinative of materiality. See Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176, 192 (2016). Similarly, whether a contractor's internal programs violate anti-discrimination laws would need to be evaluated on a case-by-case basis.

Undoubtedly, the new administration hopes the EO will create a chilling effect among contractors, especially considering the whistleblower provisions under the FCA, which allow private citizens to file suit on behalf of the government. Consequently, a company's own employees might claim the right to FCA enforcement based on internal policies related to DEI. For example, an individual employee could file a whistleblower claim alleging that his or her employer's DEI programs are unlawful. Whether the DEI program is actually unlawful would be determined under Title VII and similar statutes governing employment discrimination. To date, employment discrimination caselaw does not support a sweeping conclusion that DEI programs are discriminatory; on the contrary, many aspects of DEI programs are viewed as appropriate and necessary measures to combat workplace discrimination. Even if employer DEI programs are ultimately found to be lawful, however, the cost of litigation and defense could still produce a chilling effect on private companies, who could choose to jettison the programs rather than bear the cost of defending them.

Next Steps

In the meantime, federal contractors should review their current human resources policies, including any DEI-related policies, to determine if they could potentially be construed as violating federal anti-discrimination laws. As we have already noted, however, if a federal contractor's policies were legal before these executive orders, they remain so today. Moreover, contractors remain bound by federal law, including Title VII, prohibiting workplace harassment and discrimination. While the impact of these EO's remains speculative, liability for illegal harassment is a known threat. As a result, companies should engage in careful risk-assessment before removing the trainings and policies that have historically insulated them from claims under Title VII. The requirements of the EO have not yet been codified into regulations or contract clauses and, therefore, are not currently binding on any federal contractors. As we anticipate further regulations to provide additional information and guidance, contractors should remain informed about new developments as these rules are formalized.