President Trump’s DEI Executive Order: Implications for Federal Contractors Under the False Claims Act

In a significant policy shift, companies with federal contracts or grants are facing heightened scrutiny of their diversity, equity, and inclusion (DEI) programs under President Trump’s recent executive order on “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.”

The executive order positions the False Claims Act (FCA) as a key enforcement tool against what the administration characterizes as “illegal,” “demeaning,” and “immoral” DEI initiatives. This strategic move creates new legal vulnerabilities for federal contractors and grant recipients operating DEI programs that could be deemed discriminatory.

The FCA, a longstanding whistleblower statute designed to combat fraud against the government, carries substantial penalties for non-compliance. Companies found liable face mandatory treble damages and penalties up to $27,894 per violation. In 2024 alone, the Department of Justice recovered approximately $2.9 billion through FCA settlements and judgments.

What makes the FCA particularly potent is its qui tam provision, which allows private individuals to file lawsuits on behalf of the government and receive up to 30 percent of any financial recovery. These whistleblowers need only possess non-public, original information about alleged fraudulent activity – no special relationship with the targeted company is required. Even if the government declines to intervene, whistleblowers can independently pursue claims.

The scope of liability extends beyond corporate entities to individual officers, who may face personal fines and, in some instances, criminal penalties.

Under the executive order, all new federal contracts and grants must include two specific provisions. First, companies must acknowledge that compliance with federal anti-discrimination laws is material to government payment decisions under the FCA. Second, they must certify that none of their DEI programs violate applicable federal anti-discrimination laws.

Legal experts note that questions remain about the practical impact of these provisions. The Supreme Court established in Universal Health Services v. United States ex rel. Escobar (2016) that materiality under the FCA is a “demanding” standard that cannot be established merely through government declaration. This suggests the administration’s assertion of materiality may not be definitive in court.

Nevertheless, the executive order significantly increases potential scrutiny of corporate DEI practices from multiple angles. Employees who disagree with their company’s DEI approach may feel emboldened to file FCA claims alleging non-compliance. Traditional discrimination claims could now be accompanied by separate FCA allegations. Outside activists might report companies to the DOJ in hopes of triggering investigations.

These concerns present federal contractors and grant recipients with compelling reasons to thoroughly review their DEI programs to ensure compliance before making the certifications required in new or modified federal contracts and grants.

Complicating matters, the executive order provides little clarity on which specific DEI practices might be considered “illegal,” though it indicates further guidance is forthcoming. Until then, businesses must navigate considerable uncertainty.

The impact extends beyond federal contractors. Newly-confirmed Attorney General Pamela Bondi recently announced that the Department of Justice will target private sector DEI initiatives for criminal investigation, signaling a broader enforcement approach.

This policy shift represents a fundamental change in the government’s stance toward DEI programs, creating significant compliance challenges for businesses. The resulting legal uncertainty is likely to persist until either the administration provides clearer guidelines or the courts establish definitive interpretations of these new requirements.