Six months ago, our Back‑to‑School Guide on Recent Developments in Workplace DEI examined how the 2025 executive orders—and early guidance from the Equal Employment Opportunity Commission (EEOC) and the Department of Justice (DOJ)—led many US-based employers to recalibrate DEI-related risk, conduct DEI health checks, and fine-tune specific initiatives and practices.

In 2026, the risk is not coming from landmark court rulings declaring DEI unlawful. Instead, it is coming from enforcement tools: investigations, subpoenas, contract terms and leverage applied across multiple fronts—often before any litigation is filed.

That reality came into sharper focus on March 26, with the issuance of a new executive order further targeting “DEI discrimination” by federal contractors.

Workplace DEI remains lawful. But employers should expect heightened scrutiny of how programs are structured, incentivized, documented, and defended—through EEOC inquiries, administrative subpoenas, FCA theories tied to certifications, and discovery-driven litigation.

The New Executive Order Enhances DEI Risk for Federal Contractors

The White House’s new executive order—“Addressing DEI Discrimination by Federal Contractors”—creates new contractual obligations for federal contractors and subcontractors. Potential consequences include termination, debarment, and potential False Claims Act (FCA) exposure. The order (and the accompanying Fact Sheet) is operationally consequential: it ties compliance to federal contracting, expands agency access to contractor information, and more explicitly links compliance with these contractual obligations to FCA theories.

Required contract clause (in full)

Within 30 days, federal agencies are directed to ensure all covered federal contracts (including subcontracts) include a clause requiring contractors to certify that they did “not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws,” and to agree that “compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of” the FCA.

Here is the entirety of the required language:

In connection with the performance of work under this contract, [the contractor/appropriate party (contractor)] agrees as follows:

1. The contractor will not engage in any racially discriminatory DEI activities, as defined in section 2 of the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors);
2. The contractor will furnish all information and reports, including providing access to books, records, and accounts, as required by the contracting agency pursuant to the Executive Order of March 26, 2026 (Addressing DEI Discrimination by Federal Contractors), for purposes of ascertaining compliance with this clause;
3. In the event of the contractor’s or a subcontractor’s noncompliance with this clause, this contract may be canceled, terminated, or suspended in whole or in part, and the contractor or subcontractor may be declared ineligible for further Government contracts;
4. The contractor will report any subcontractor’s known or reasonably knowable conduct that may violate this clause to the contracting department or agency and take any appropriate remedial actions directed by the contracting department or agency;
5. The contractor will 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; and
6. The contractor recognizes that compliance with the requirements of this clause are material to the Government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code (False Claims Act).

This language does more than restate existing law. It exposes DEI program design to enforcement by tying it to payment eligibility, audit rights, and FCA exposure.

Key provisions

• Covered Contracts | The order applies to contracts subject to the Federal Property and Administrative Services Act of 1949 (FPASA), a core statutory authority for federal procurement. FPASA authorizes the president to prescribe policies he considers necessary for an “economical and efficient” procurement system. The order’s reliance on FPASA may draw litigation challenges, particularly in jurisdictions that construe the statute narrowly.

• ‘Racially Discriminatory DEI Activities’ Defined | “[D]isparate treatment based on race or ethnicity in recruitment; employment (e.g., hiring, promotions); contracting (e.g., vendor agreements); program participation; or the allocation or deployment of an entity’s resources.” This definition should be considered in conjunction with the definition of “unlawful discrimination” in the July 2025 DOJ memorandum to federal agencies entitled “Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination.”
• Limited Scope | The order should not be viewed as a broad ban on all DEI programs. It is limited to race‑based disparate treatment and does not reach programs based on gender, veteran status, or disability—areas where federal law continues to require affirmative action or preferential treatment based on both topics covered by the order (e.g. certain disadvantaged business programs) and noncovered topics (e.g. disability and veteran status).
• “Program participation” Defined |”[M]embership in, participation in, or access to training, mentoring, or leadership development programs; educational opportunities; clubs; associations; and similar contractor-sponsored opportunities. The definition appears broad enough to reach both employment-related programs and certain vendor-facing initiatives.
• New Records, Reporting, and Oversight Obligations | The clause introduces expansive record‑production requirements, mandatory reporting of subcontractor conduct, and audit‑style access to internal DEI materials upon agency request.
• Materiality and the FCA | The clause requires contractors to acknowledge that DEI compliance is “material” to government payment decisions under the False Claims Act. That designation matters—but it is not automatically dispositive. In Universal Health Services v. United States, the Supreme Court made clear that FCA materiality is a demanding, fact‑intensive inquiry. Contractual labels alone do not end the analysis. Still, in practice, this language lowers the friction for DOJ investigations and raises the stakes of routine compliance assessments.

Next steps

While federal agencies are given 30 days to include the new clause, the order provides additional time for regulatory action. The order gives agencies 120 days to review their implementation of the contract clause and report their results to the Assistant to the President for Domestic Policy. The order instructs the Federal Acquisition Regulatory Council to issue guidance and to amend the Federal Acquisition Regulation within 60 days (by May 25, 2026).

Though many companies likely audited and reviewed government contracts in privileged DEI Health Checks with counsel last year, we recommend revisiting these assessments in view of the new order. Given the broad scope of covered activities, a close review of any program or practice of disparate treatment in recruitment, hiring, promotions, contracting, and program participation is warranted. Further, with the potential for new reporting and disclosures, adopting best practices for documenting and showing compliance is paramount.

The EEOC’s Strategic Pivot is Real—and It’s Driving Risk

Federal contracting enforcement does not exist in a vacuum. Changes at the EEOC impact both federal contractors and private employers.

The EEOC has undergone a clear shift in tone and enforcement posture, led by Chair Andrea Lucas. In February, Lucas publicly warned Fortune 500 employers that modern DEI initiatives threaten the “bedrock American principle” of equal treatment—and pledged that the agency would use “every available resource” to address race‑ or sex‑based decision‑making.

Since then, the EEOC has:

• Centralized litigation authority (more here)
• Tightened control over case selection (more here)
• Reframed Title VII as explicitly “colorblind” (more here)
• Actively encouraged White men to file discrimination charges (more here)

The agency is also advancing a new theory of “anti‑American” national origin discrimination—warning employers against hiring practices that allegedly disadvantage US citizens in favor of foreign nationals or visa holders.

Takeaway: Expect more EEOC investigations, including Commissioner‑initiated charges that do not depend on employee complaints. Reverse discrimination theories are no longer fringe—they are now mainstream enforcement tools backed by the federal government.

Investigations and Subpoenas are the New Front Line for Contractors and Private Employers

The EEOC is aggressively using its subpoena power to test DEI programs themselves—not just individual employment decisions. Recent enforcement actions targeting several major US companies illustrate the playbook with requests for:

• DEI goals and demographic targets
• Executive compensation tied to diversity metrics
• Layoff and promotion data
• Internal DEI dashboards and leadership communications

These matters are often framed as “pattern or practice” cases, with the design of DEI programs—rather than isolated acts—at the center of the inquiry.

Takeaway: Even without litigation, the cost and disruption of compliance can be substantial.

Litigation is Quietly Lowering the Bar

Recent Supreme Court and appellate decisions have reshaped the litigation landscape without declaring DEI unlawful:

• Muldrow lowered the harm threshold to “some harm”
• Ames eliminated heightened pleading standards for reverse discrimination claims

The result is easier access to discovery, even where employers ultimately prevail. Discovery has reached deeply into:

• DEI metrics and dashboards
• Executive incentive structures
• ERG eligibility rules
• Internal messaging around DEI goals

Bottom line: Winning on the merits may come only after expensive, intrusive discovery.

DOJ, State Attorneys General and External Groups are Compounding Pressure

In 2025, the DOJ created a Civil Rights Fraud Initiative to “aggressively pursue” FCA enforcement against “any recipient of federal funds that knowingly violates federal civil rights laws,” and began issuing civil investigative demands (CIDs) to federal contractors and grantees seeking information and documents related to DEI programs. In January, DOJ announced it had recovered more than $6.8 billion in FCA settlements and judgements in FY 2025– the highest in any single year. Last month, DOJ confirmed that DEI matters are receiving expedited priority under the Civil Rights Fraud Initiative—particularly for federal contractors and grant recipients.

At the same time:

• States are narrowing affirmative action requirements and expanding standing
• State AGs and private advocacy groups are filing charges to force discovery
• Reputational pressure often precedes legal resolution

In many cases, the process itself becomes the punishment.

Cross-Border Tension

Multinational employers face a growing cross-border compliance squeeze: DEI and equality measures are not uniform, and in some countries (e.g. Germany, France and the UK) they are embedded in statute or regulatory guidance in ways that can be difficult to reconcile with the current US enforcement posture—especially for US federal contractors. The practical result is that US-based multinational employers might consider an updated approach to global DEI-related policies and programs that were once more US-centric in favor of carving out certain jurisdictions to comply with locally applicable regulatory requirements. Working with counsel with a global footprint is recommended to assess risk exposure and how the shifting US dynamics impact business operations outside of the US.

The Safest Posture for 2026

US employers and federal contractors should assume increased enforcement activity and prepare accordingly. The most defensible posture going forward:

• Precision in program design (shift focus and consider targeted refinements in discrete, high‑risk areas like stated diversity goals, ERG governance and employer sponsorship, content in anti-harassment / anti-discrimination training materials, hiring practices etc.)
• Neutrality in eligibility criteria
• Documentation that supports lawful intent and execution
• Readiness for investigation, not just litigation

Now is a good time to reassess certain contracts, policies, and programs (including how they operate in practice) in discrete, high‑risk areas to ensure they can withstand heightened scrutiny from regulators, contracting agencies, and courts. Common steps include reviewing DEI-related training, ensuring leadership and development programs are open based on race-neutral criteria, revisiting access controls around demographic data, and refreshing investigation and documentation practices.

Please reach out to your Baker McKenzie employment lawyer for more.