Executive Order Establishes New Diversity Restrictions and Requirements for Federal Contractors and Subcontractors

On March 26, 2026, President Donald Trump issued Executive Order 14398, Addressing DEI Discrimination by Federal Contractors (hereinafter, the order or EO) — the latest executive order targeting diversity, equity, and inclusion (DEI) practices in the U.S. government and federal government contracting. The EO targets “racially discriminatory DEI activities” by requiring new contract terms that appear intended to strengthen government enforcement mechanisms.

The order is part of the administration’s broader efforts to limit (or eliminate) DEI initiatives in federal government and procurement, including by federal contractors and subcontractors in all aspects of their operations. On January 21, 2025, President Trump issued a similar order rescinding previous executive actions relating to equal employment opportunity and affirmative action based on race and sex in federal employment and government contracting.

Applicability

The EO applies to “contracts and contract-like instruments” issued by “executive departments and agencies, including independent establishments subject to” the Federal Property and Administrative Services Act (FPASA). FPASA is a federal statute which grants the president certain powers to establish federal contracting requirements. The phrase “contracts and contract-like instruments” covers procurement contracts and potentially other types of agreements, such as other transaction agreements (OTAs) and concession contracts; while it might also be construed as applying to grants, they are not subject to the FPASA and thus are arguably outside the scope of the EO.

The EO’s Requirements

The EO requires that within 30 days (i.e., by April 25, 2026) covered agencies must amend existing contracts and ensure new contracts include provisions prohibiting prime contractors and subcontractors from engaging in “racially discriminatory DEI activities,” which the order broadly defines 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.” The order defines “program participation” 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.”

The new EO’s prohibitions appear to extend beyond contractors’ existing legal obligations. Title VII of the Civil Rights Act of 1964 already prohibits employers from engaging in racially discriminatory employment policies and practices, and 42 U.S.C § 1981 prohibits intentional race discrimination in connection with contracts. However, the new EO does not reference current federal anti-discrimination laws, and its broad scope suggests it might intend to discourage or prohibit even lawful DEI activities. For example, the EO (and subsequent contract clauses implementing the EO)  could be construed to prohibit a contractor’s donations to a race-specific nonprofit, offer of a race-specific scholarship, or engagement in other activities that might not give rise to an actionable legal discrimination claim but are nevertheless intentionally directing resources or benefits to individuals, groups, or companies based on race or ethnicity. The wide reach of “racially discriminatory DEI activities” to include “allocation or deployment of an entity’s resources” could conceivably cover any contractor activity or expenditure.

Under Section 3 of the order, contractors must certify that they do not engage in racially discriminatory DEI activities and give the government relatively broad audit and investigation rights, including requiring contractors to “furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the [EO], for purposes of ascertaining compliance with this clause.” Compliance is expressly identified as “material to the Government’s payment decisions for purposes of” the False Claims Act (FCA).

The EO provides new enforcement mechanisms and consequences for noncompliance, including contract cancellation or termination and suspension and debarment, in addition to more traditional FCA remedies (such as treble damages). Although the order states that agencies “may” take any of those actions, Section 4 of the EO appears to make those enforcement actions mandatory, stating that “contracting agencies shall … cancel, terminate, suspend, or cause to be cancelled, terminated, or suspended, any contract or contract-like instrument, or any portion or portions thereof, for failure of the contractor or subcontractor to comply with the clause”¹ and “take appropriate action to suspend and debar contractors or subcontractors” who do not comply.

Additionally, the EO requires prime contractors and subcontractors to report “known or reasonably knowable conduct [by lower tier subcontractors] that may violate” the prohibition on “racially discriminatory DEI activities.” This can be read to increase the prime contractor’s obligation to oversee subcontractor compliance. Further, the EO requires contractors to “inform the contracting department or agency if a subcontractor sues the contractor and the suit puts at issue, in any way, the validity of this clause.”

The order vests the Office of Management and Budget with the responsibility for issuing additional guidance to contracting agencies. The order requires agencies to review their implementation of Section 3 within 120 days and provide their findings to the Assistant to the President for Domestic Policy. Additionally, the Federal Acquisition Regulatory Council (hereinafter, FAR Council) must, within 60 days, amend the FAR to include Section 3’s requirements in federal procurement, solicitations, and contracts and remove any provisions that “conflict or are inconsistent with” Section 3 and publish “deviation and interim guidance” under FAR subpart 1.4.

Takeaways

The EO focuses on exclusively “racially discriminatory DEI activities” and does not address discrimination based on sex, disability status, or veteran status. While the Equal Employment Opportunity Commission has recently taken action to limit women’s initiatives at commercial companies, the order focuses on race and ethnicity and not on programs that favor women-owned businesses.

Government contractors should be mindful of the employment-related implications of the EO. The order explicitly calls out disparate treatment based on race and ethnicity in recruitment, hiring, promotions, allocation of resources, and program participation as “racially discriminatory DEI activities.” The order further specifies that violative “program participation” by employer-contractors is wide ranging, from access to training and mentoring to participation in clubs and associations. This means that activities such as policies encouraging interviewers to hire racially diverse candidates, seeking to maintain a set proportion of diverse personnel at varying levels of management, and even hosting company clubs or mentorship programs with participation premised in any way on race or ethnicity, could be seen as violative conduct. According to the EO, violators risk not only contract suspension or termination, but also potential further enforcement action such as an FCA action brought by the Attorney General.

Given this risk landscape, government contractors can undertake several preliminary actions to understand their enforcement risk. Specifically, contractors should:

• Identify and maintain continuous oversight of affirmative action, DEI, and related policies and programs to determine whether they violate the order’s prohibition on disparate treatment based on race or ethnicity
• Review subcontractor agreements and subcontractor oversight procedures to enable early detection of noncompliance at any subcontractor tier, including adding necessary flow down terms in subcontracts
• Identify any state or local government-mandated contracting diversity requirements that may conflict with the EO’s prohibitions
• Address any noncompliant policies, which may require revising or revoking such policies, while considering the risks of noncompliance with provisions in existing contracts
• Engage with contracting officers to understand how the order will be implemented in existing contracts

President Trump’s executive order is also subject to litigation risks. Federal appellate courts have upheld a narrow view of the authority FPASA grants to the president, and the order’s justification that DEI policies “cause inefficiencies, waste, and abuse within entities that engage in such practices” may not withstand judicial scrutiny. Further, the FAR Council is in the midst of efforts to overhaul the FAR, which indicates further regulatory changes are on the horizon. Each individual agency may have its own FAR deviations, so there may be inconsistencies among the agencies, as well.

Arnold & Porter will continue to monitor developments in this area. For questions about the executive order or other government contracting or labor and employment issues, please contact the authors or any of their colleagues in Arnold & Porter’s Government Contracts or Labor & Employment practice groups.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.