New Executive Order Introduces Closer Scrutiny of Federal Contractors’ DEI Activities

On March 26, the White House published a new executive order (EO), “Addressing DEI Discrimination By Federal Contractors,” targeting DEI activities by federal contractors in which individuals are treated unequally because of their race or ethnicity.   In particular, the EO imposes a new clause demanding strict anti-DEI compliance measures on all federal contracts and subcontracts.

Unlike other DEI executive orders previously issued under this administration, the EO is focused entirely on race rather than sex or other protected characteristics.  The EO does not prohibit all DEI activities. Its prohibitions are limited on their face to “racially discriminatory DEI activities,” which it 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.”  “Program participation” is broadly defined to include training, mentoring, leadership development programs, educational opportunities, clubs, associations, and similar opportunities sponsored by the contractor or subcontractor.

The EO and its accompanying fact sheet outline steps required of certain executive agencies. Within thirty days, the impacted executive departments and federal agencies must include a specific clause in their contracts, contract-like instruments, and subcontracts at all tiers that:

• Prohibits contractors and their subcontractors from engaging in racially discriminatory DEI activities;
• Requires contractors to provide “all information and reports” the contracting agency requires for the purposes of ascertaining compliance with the clause;
• Threatens the cancellation, termination, or suspension of the contract or debarment if the contractor is found noncompliant with the clause;
• Requires contractors to report to the contracting agency known or “reasonably knowable” potential violations of the clause by their subcontractors, or any legal action taken by a subcontractor that puts at issue the validity of the clause; and
• Makes compliance with the requirements of the clause material to the Government’s payment decisions for the purposes of the False Claims Act.

Federal contractors and subcontractors should closely examine whether their programs or policies introduce any potential legal concerns or contain any practices that may be impermissible in a continually more closely monitored regulatory landscape. When crafted and executed appropriately, DEI initiatives continue to be permissible under both existing employment laws and the EO. However, as the EO has made clear, federal contractors should be prepared for heightened review of their programs.  Subcontractor oversight is also a unique aspect of the EO, as contractors are obligated to monitor subcontractor compliance and report known or “reasonably knowable” potential violations.  Further guidance will be forthcoming identifying high risk sectors and possibly additional compliance requirements to certain industries.

Miller Johnson will continue to closely monitor this administration’s actions regarding DEI initiatives and will keep you updated of significant developments. For guidance navigating an ever-changing employment landscape, or if you have questions about how this new guidance could impact your business or organization, contact one of the authors or your Miller Johnson employment attorney.