On March 26, 2026, President Trump signed Executive Order 14398, “Addressing DEI Discrimination by Federal Contractors,” the latest in a series of executive actions targeting DEI practices in the federal contracting space. This latest Executive Order requires federal contractors and subcontractors to affirmatively agree to not participate in “racially discriminatory” activities or risk legal and financial consequences.

New Mandatory Contract Clause—Effective April 25, 2026

The EO directs all executive departments and agencies to incorporate a new compliance clause into federal contracts—including subcontracts and lower-tier subcontracts—by April 25, 2026. The clause, the text of which is set forth in the EO itself, requires contractors to: (1) refrain from engaging in “racially discriminatory DEI activities (as defined in the EO); (2) provide agencies access to books, records, and accounts to verify compliance; (3) acknowledge that noncompliance may result in contract termination, suspension, or debarment from future government work; and (4) monitor and report subcontractors known or reasonably knowable violations of the clause. The Federal Acquisition Regulatory Council is also directed to issue deviation and interim guidance within 60 days—by May 25, 2026—and to amend the Federal Acquisition Regulation (FAR) to incorporate the clause and remove any conflicting provisions.

Defining “Racially Discriminatory DEI Activities”

The EO broadly 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.”

“Program participation” is defined broadly to include access to training, mentoring or leadership development programs, educational opportunities, clubs, associations, and similar opportunities sponsored or established by the contractor. The term “disparate treatment” is not defined in the EO, but under federal anti-discrimination law it refers to intentional, differential treatment on the basis of a protected characteristic.

Critically, the EO explicitly states that contractor compliance with the new clause is “material to the Government’s payment decisions” under the False Claims Act (FCA).

What This Means for Employers

EO 14398 creates binding contract terms for contractors and potential liability under the FCA. But, the EO’s scope is limited—focused strictly on race and ethnicity based disparate treatment. Programs addressing other diversity categories (e.g. gender, veteran status, or disability) fall outside the order’s express coverage.

Federal contractors and subcontractors face a tight compliance window. Organizations with formal DEI goals, race-based program participation criteria, or diversity-focused hiring practices should conduct a comprehensive, enterprise-wide review of their employment and contracting practices now and consult legal counsel on FCA compliance to mitigate exposure.