New Administration Takes Aim at DEI
On January 21, 2025, President Trump signed Executive Order (EO) 14173, titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which, as expected, reshapes federal employment and contracting priorities. Aimed at protecting Americans from discrimination based on race, color, religion, sex, or national origin, the EO directs all federal agencies to terminate “all discriminatory and illegal preferences, mandates, policies, programs, activities, guidance, regulations, enforcement actions, consent orders, and requirements” and to “enforce our longstanding civil-rights laws and to combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.” The EO will have several significant effects on federal contractors and grant recipients.
In addition to revoking EO 11246, which was signed by President Lyndon B. Johnson and has been in effect for nearly sixty years, the EO directs the Office of Federal Contract Compliance Programs to “immediately cease promoting diversity, enforcing affirmative action requirements, and allowing or encouraging federal contractors or subcontractors from considering race, color, sex, sexual preference, religion, or national origin in employment, procurement, or contracting practices.” Along these same lines, federal contractors and grant recipients must now certify that they do not operate “any programs promoting DEI” that violate federal anti-discrimination laws. Under the EO, this required certification of compliance with all applicable federal anti-discrimination laws will be considered “material to the government’s payment decisions” under the False Claims Act (FCA). This creates significant exposure for contractors and grantees, including through whistleblower complaints.
The EO also requires that within 120 days, the Attorney General, in consultation with relevant agencies and the Office of Management and Budget (OMB), must submit a report to the Assistant to the President for Domestic Policy containing “recommendations for enforcing Federal civil-rights laws and taking other appropriate measures to encourage the private sector to end illegal discrimination and preferences,” which, according to the EO, includes anything related to DEI.
Temporary Funding Pause Lifted
Relatedly, on January 27, 2025, OMB issued Memorandum M-25-13, which temporarily paused federal grant, loan or federal financial assistance programs implicated by the DEI-focused EO and others issued in the early days of the new administration. This memorandum was later rescinded on January 29 through OMB issued Memorandum M-25-14.
The latest guidance instructs agencies to consult with their respective General Counsel regarding “questions about implementing the President’s Executive Orders”, likely because OMB’s recission comes on the heels of a federal district court ordering an administrative stay of portions of the memorandum. The district court’s order, which is effective through February 3, made clear that it “does not affect OMB’s memorandum as it pertains to ‘issuance of new awards,’ or ‘other relevant agency actions that may be implicated by executive orders.’” It further states that OMB “shall refrain from implementing OMB Memorandum M-25-13 with respect to the disbursement of Federal funds under all open awards.” Although the recission memo—and court order—lifted the blanket stay on federal assistance funds distributions, agencies may nevertheless review and pause funding on assistance programs and activities on a case-by-case basis.
Next Steps for Federal Contractors and Grantees
The EO will likely continue to attract legal challenges, but the landscape of federal policies around DEI priorities is clearly evolving. Before these new restrictions take effect, federal contractors and grant recipients, as well as their subcontractors and subrecipients at all tiers, should consult with their legal counsel to assess and document their current DEI policies before the EO takes effect 90 days from its issue date, on April 21. This review will help determine whether any adjustments are necessary to align with the EO, as well as federal nondiscrimination laws as interpreted by the courts, and applicable regulations. Agency-specific guidance will likely follow the EO in the coming weeks to provide specific details on how contractors and grantees can ensure compliance. And additional rulemaking will almost certainly be necessary for full implementation.
Federal agencies may also seek to modify existing contracts and grant agreements to remove or revise relevant provisions. It is also possible that certain contracts and agreements—depending on the nature of the work involved—could be terminated for the convenience of the government, whether partially or in whole. And given the heightened risk of FCA liability under the EO, federal contractors and grant recipients should make sure to have strong compliance programs in place, including employee training.
Reed Smith’s Government Contracts and Grants practice will continue to monitor developments related to this EO and the OMB memo—and the actions that follow—and stands ready to assist with navigating these and any other executive branch actions that may impact entities doing business with the federal government.
Client Alert 2025-034