Federal Contractors Must Address New Executive Order on DEI to Avoid Liability

Executive Order Overview

The January 21, 2025 Executive Order (EO), titled “Ending Illegal Discrimination And Restoring Merit-Based Opportunity” was released and carries significant implications for federal contractors. Some of the implications for federal contractors include:

• Pay applications will now require certification that the general contractor does not operate DEI programs that violate federal anti-discrimination laws.
• Rescission of the long-standing Executive Order 11246 of 1965, which mandated affirmative action programs for federal contractors and created much of the DEI requirements in current federal contracts. The affirmative action requirements and reports are expected to no longer be required in the next 90 days, absent court action.
• The Office of Federal Contract Compliance Programs (OFCCP) has been directed to stop enforcing diversity promotion and affirmative action requirements in federal contracts. This is consistent with other directives across other federal agencies.
• Federal agency heads are directed to include in every contract or grant award the following:
  • “A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code.”
  • “A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.”
  • Most importantly, Federal contractors have a safe harbor to adapt to these new requirements until April 21, 2025, when enforcement begins. However, the process for federal contractors to assess if existing policies are in compliance with this Executive Order should begin now.

Implications for Contractors Performing Federal Work

All federal contractors and subcontractors should consider the following immediate actions:

• Identify Diversity Equity and Inclusion (DEI), affirmative action, and similar policies that may not align with the letter or spirit of this new Executive Order.
• Consider that women-owned and minority-owned business status may be rendered immaterial in the near future. This has not been explicitly stated to date, but it is a reasonable inference from this Executive Order. Additional Executive Orders are expected to follow in the coming weeks expanding on this issue.
• Pay applications will require compliance with the Executive Order, opening the door to potential claims of fraudulent certification against federal contractors, subcontractors, and their owners who are found not measuring up to the new standards. The Executive Order also allows for whistleblowers to file lawsuits seeking recovery for illegal or fraudulent activities in federal projects under the False Claims Act. For this reason, all federal contractors and subcontractors should consult their insurance broker or agent to determine whether such claims are or can be covered under existing or available insurance.
• Certification of compliance with this Executive Order will be required as a condition to perform federal work across all federal programs.
• The Executive Order contains exceptions for the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA) or the Rehabilitation Act so those obligations remain.
• Compliance guidance is expected within 120 days from various federal agencies, including the US Attorney General and Secretary of Education.

Implications for Contractors Without Federal Work

• The Executive Order does not directly impact private or state/local government funded projects.
• Contractors engaged in jointly trusteed apprenticeship programs (JATCs) should be aware that 29 CFR Part 30, which enforces equal employment in apprenticeships, has not been addressed in the Executive Order. Obligations under the Employment and Training Administration (ETA) remain intact for now.
• The Executive Order highlights a federal policy change that presumes many private-sector DEI preferences, mandates, policies, programs, and activities are essentially “illegal” under existing federal civil rights laws.
• The Executive Order adopts arguments made by some advocacy groups and litigants that have asserted claims in recent years to eliminate corporate DEI efforts on the basis of federal civil rights laws preventing any type of discrimination.
• There is a higher likelihood that the U.S. Equal Employment Opportunity Commission (EEOC), Department of Justice, and other federal agencies will aggressively investigate so-called “reverse” discrimination and other discrimination claims regarding employer DEI activity, even if contractors believe DEI policies promote their business goals. For example, Costco’s well-publicized DEI program is currently under heavy scrutiny, even though supported by the company and its unionized Costco workers. Private lawsuits against company DEI programs, including conservative activist Robby Starbuck, are expected to continue and expand.
• Contractors will have to carefully navigate the incongruent requirements now existing between various local, state and federal agencies and their laws. Conferring with legal counsel while the legal landscape shifts is advised.

Unresolved Questions and Legal Challenges

• State Contracts: Some states (e.g., California, Minnesota) have affirmative action and DEI requirements that may conflict with this Executive Order. Federal contractors working in such states should assess potential compliance risks, and carefully determine the applicable requirements at the state versus federal levels.
• Private Sector Clients: If private companies still require affirmative action plans for contractors, a contractor may need to separate its federal and private work through distinct entities or new subsidiaries to maintain compliance.
• Vendor Compliance: It is unclear whether using materials from vendors with their own DEI initiatives could impact federal project eligibility. Further guidance from the federal government is needed on this issue. For now, vendor compliance with the Executive Order versus contractor and vendor’s own DEI initiatives should be reviewed on a contract-by-contract basis.
• Impact on Apprenticeships: The Executive Order does not explicitly address JATCs, leaving questions about the enforcement of affirmative action obligations in limbo until further guidance is forthcoming.
• Pending Court Cases: As with other Executive Orders, lawsuits have already been filed against enforcement of the new requirements. Either further federal agency information or the lawsuits themselves will likely provide guidance as to what extent the Executive Order is enforceable.
• Trade Groups: Industry trade groups such as FSA, AGC, and ASA are providing valuable guidance to its members on how to navigate these troubled waters.

The key takeaways for all contractors—but particularly federal contractors and subcontractors—is to remain vigilant about these new requirements, staying abreast of the guidance coming from federal agencies and the courts about best practices. Consulting with your legal professional about specific programs and contracts is recommended to address compliance questions. Finally, be prepared to defend existing DEI and affirmative action policies as being compliant with not only the letter of the law but the spirit of the regulators that are now enforcing the new requirements.