Executive Order 14173 reshaped the compliance landscape for federal contractors and employers more broadly. The order revoked EO 11246 on contractor affirmative action, directed a 90 day wind-down period with agencies operating under class deviations until the FAR Council takes action, and introduced new False Claims Act exposure by requiring contractors and grantees to certify nondiscrimination compliance. It also placed DEI-related practices across all employers under increased scrutiny through the lens of Title VII and other applicable laws.

Diversity, Equity and Inclusion (DEI) is a relatively new term for employer programs since the George Floyd murder.  The focus of DEI was not diversity or inclusion but equity and exclusion, such as setting quotas for hiring and promotions, for example, by Microsoft and Wells Fargo at the executive level, which the first Trump administration quickly shutdown.  By promoting equity, diversity was waylaid, and everything, including programs to help disadvantaged and economically shunted communities were considered taboo.  For federal contractors, affirmative action has long been about opening doors, creating a level playing field, and building a skilled workforce, not about quotas or preferential treatment. Yet it became conflated with the Harvard admissions case, which involved a misguided approach to equity and was, in fact, a Title VII equal employment opportunity matter centered on quotas, not an affirmative action case, despite how it was repeatedly characterized in the media.

Now the administration is focusing on a new tactic to go after employers who have a semblance of “DEI” in their diversity programs.  The government is focusing on EO14173 FCA exposure.  What does that mean?  The Justice Department will pursue a theory that holding a federal contract while still considering diversity when hiring is, in effect, fraud against the government that entitles it to recapture contract monies, potentially millions of dollars.  This “considering diversity” not only applies to the end result of hiring, but the building of pipelines to be considered for hiring.

Not only that, but the theory could also be applied to the internal movement of employees, which brings tension between Title VII and internal “equity” reviews.  For example, in many organizations anecdotally, promotions of men and women in similar or equal jobs will likely favor males and nonminorities over minorities.  If discovered and proved, it could lead to a Title VII lawsuit.  These cases would likely fall under a disparate impact type of case, which President Trump in EO 14281 eliminated. Officially, the EO stated that it would “eliminate the use of disparate-impact liability in all contexts to the maximum degree possible to avoid violating the Constitution, Federal civil rights laws, and basic American ideals.”

Disparate impact is a theory the relies on statistical analysis to prove something is off, not intent (which is disparate treatment theory, i.e. I lost a promotion because I am female and more qualified than a male who got the promotion).  Disparate impact is an important theory for discrimination.  For employers it relies on a neutral policy that has an adverse impact on a class.  For example, in the past, a new hire salary was often impacted by their prior salary, and it resulted in women making less when hired into a new job compared to a male also hired into the same job, leading to pay disparity.  Prohibiting the use of prior salary to set new hire pay has been shown to reduce pay disparities and support more equitable compensation practices.

Another key contributor to pay disparities has been employer promotion policies, which often limited increases to a step up from one salary level to the next, plus merit. As a result, employees receiving promotions could still earn significantly less than new hires in the same roles. Currently, the Department of Justice is investigating several prominent employers, requesting documents and information about their workplace programs, with companies like Google and Verizon under particular scrutiny.

As a general rule, FCA claims are commonly initiated after a whistleblower or an internal government watchdog has reported the alleged fraud to the Department of Justice, who can either pursue the case or let the whistleblower do so.  These types of cases generally arise in healthcare settings, payment frauds, etc.  However, these new investigations are taken on by politically appointed officials in the department who believe companies with contracts aren’t abiding by their obligations to the government if they still embrace diversity, equity, and inclusion programs.  These cases may be hard to prove by the government, but it could cost employers greatly to defend the claims, especially if their business insurance does not cover the defense (HR needs to find out the limits of the policy). 

Celebrating diversity, such as recognizing Black or Hispanic Heritage Months or offering foods from different cultures, does not appear to be prohibited – at least not yet. However, the extent of the shift is still uncertain. Employers may need to tread carefully, balancing these initiatives with evolving scrutiny, but if employees advocate for such recognitions, it could help redefine the boundaries.

Source: Wall Street Journal 12/28/25