While much attention has been paid to President Trump’s Executive Order on Ending Illegal Discrimination and Restoring Merit-Based Opportunity (the “EO”) due to its removal of race and sex-based affirmative action requirements for federal contractors, another aspect of the EO may have even more far-reaching consequences. The EO also introduces new obligations regarding diversity, equity, and inclusion (“DEI”) initiatives for contractors, signaling an intent to use the False Claims Act (FCA) as a means to target government contractors over what it deems “illegal” DEI programs. This could potentially expose these companies to substantial financial penalties or even criminal charges.
Federal contractors are no strangers to being the testing ground for executive policies. Previous administrations have utilized the federal government’s vast purchasing power to enforce policies that have struggled to gain traction in Congress. From mandates on paid leave and minimum wage increases to COVID-19-related requirements, contractors have long been subject to obligations and consequences that do not affect their non-contractor counterparts. This pattern is continuing with the current EO.
While specific details of the new contractual requirements are still to be finalized, government contractors are encouraged to begin taking preparatory steps now to mitigate any potential disruptions and minimize liability risks. Below is a Q&A designed to clarify these emerging changes.
Q: What exactly does this new contractual requirement entail?
A: The EO includes a provision that states, “[t]he head of each agency shall include in every contract or grant award:
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(A) A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and
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(B) A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.”
This means there are two key components to the new requirement. First, contractors must certify that they do not operate any “DEI-promoting” programs that are in violation of federal anti-discrimination laws.
Second, contractors must agree in their contracts (either for new contracts or possibly modifications to existing ones) that their full compliance with all relevant anti-discrimination laws is a “material” factor in the government’s decision to award payments.
In essence, contractors must ensure their DEI programs comply with federal anti-discrimination laws to qualify for federal funding.
Q: Why is this such a significant change?
A: The reference to the U.S. Code in the EO pertains to the False Claims Act (“FCA”), which imposes liability on anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” (emphasis added).
By requiring contractors to affirm that compliance with federal anti-discrimination laws is material to the government’s payment decisions, the EO suggests that submitting a false certification related to DEI efforts could be considered a violation of the FCA, exposing contractors to the penalties outlined in the Act.
Q: Could anyone other than the contractor be held liable for FCA violations?
A: Yes. Besides the contractor, any individual (such as an employee) who makes a false certification, statement, or record could be held personally liable under the FCA.
Q: What penalties could be imposed?
A: Under the FCA, individuals or businesses found to have submitted false statements may face civil fines ranging from $14,308 to $28,619 per violation, in addition to paying up to three times the government’s damages caused by the false claim.
In some cases, individuals and businesses could face criminal penalties under the FCA, including prison sentences of up to 5 years and fines of up to $250,000 for individuals and $500,000 for businesses for each felony offense. Misdemeanors carry fines ranging from $100,000 to $200,000.
Furthermore, contractors could face suspension or debarment from federal contract awards due to an FCA violation.
Q: What kind of damages could the government incur from inaccurate statements about a contractor’s DEI efforts?
A: The current administration seems to view any federal payment to a contractor as “influenced” (as defined by the FCA’s term “material”) by the contractor’s compliance with federal anti-discrimination laws. As one GSA memorandum put it, “compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code.” The EO requires contractors to agree that such compliance is material to all payments made.
It is possible that the government will argue that damages should be calculated based on the total value of the contract, on the grounds that the government was fraudulently induced into entering or continuing the contract due to misrepresentations regarding DEI efforts or compliance with anti-discrimination laws.
Q: How much risk is there here, and how does the government determine if a certification is false?
A: The FCA includes a whistleblower provision that incentivizes individuals to bring “qui tam” actions on behalf of the government. A whistleblower, or “relator,” can file a sealed complaint, and within 60 days, the government must decide whether to intervene or pursue an alternative remedy. If the government declines, the relator may proceed with the lawsuit.
Whistleblowers can receive up to 30% of any recovery the government makes, which incentivizes employees or others with knowledge of discriminatory DEI practices to file claims against contractors.
Q: What exactly will contractors be certifying?
A: This is still unclear, as the EO does not fully define what constitutes “programs promoting DEI.” However, the EO does specify that “preferences,” “mandates,” and “workforce balancing” are prohibited activities.
Other statements from the Administration have provided additional clarity. For example, a different Executive Order defined “Discriminatory equity ideology” as treating individuals as members of preferred or disfavored groups based on race, sex, color, or ethnicity, while another defined a “DEI office” as one established to influence hiring based on protected characteristics.
Given the EO’s call for agencies to submit plans for regulatory actions, contractors can expect further guidance in the coming months to clarify what constitutes “illegal DEI.”
Q: How will contractors actually make this certification?
A: The process has not yet been announced. In the past, contractors have used the OFCCP’s Contractor Portal to certify compliance with various requirements, but they also submit separate certifications through the government’s SAM system.
Q: Have these changes already been implemented?
A: Not yet. Agency heads are directed to include these new terms in contracts and grant awards, but these provisions have not yet been fully developed. The Federal Acquisition Regulatory Council typically finalizes such provisions.
It’s also unclear whether these new terms will apply only to new contracts or whether modifications will be issued for existing contracts as well.
Q: Are there other risks posed by this EO?
A: Yes. Employees can file claims under the FCA if they believe they’ve been “discharged, demoted, suspended, threatened, harassed, or discriminated against” for engaging in protected activities under the FCA, which includes reporting violations.
Successful claimants can receive remedies such as reinstatement, back pay, and compensation for damages, litigation costs, and attorney fees.
Therefore, contractors must be mindful of employee concerns about DEI efforts, as these concerns may qualify as protected activity under the FCA, creating additional risk.
Q: What should contractors do now?
A: Contractors should begin preparing now. At a minimum, they should review and evaluate their DEI programs to ensure they comply with anti-discrimination laws. It’s advisable for contractors to conduct these assessments with legal counsel to protect privileged information during the review.
Our DC employment attorneys recommend contractors should also notify relevant personnel involved in government contracting to stay informed of potential modifications to contracts, ensuring they fully understand the new requirements and avoid compliance issues.