Within the first week of taking office, President Trump issued Executive Orders regarding diversity, equity, and inclusion (DEI) policies, affecting federal government agencies as well as private companies. Multinational companies with business in the United States and the EU now face shifting DEI dynamics in the United States while also being subject to EU sustainability regulations and the DEI requirements. Understanding this new risk environment is crucial for managing divergent compliance obligations. This blog post examines the implications of potentially contradictory regulatory regimes and offers guidance on how to navigate adherence with both.
I. New Executive Orders signal scrutiny of private sector DEI programs and potential for liability
On January 21, 2025, President Trump issued three Executive Orders regarding federal DEI policies, including terminating DEI-related programs in the federal government (“Ending Radical and Wasteful Government DEI Programs and Preferencing”); prohibiting the influence of race, gender, and other factors in federal employment decisions (“Reforming the Federal Hiring Process and Restoring Merit to Government Service”); and directing every federal agency to develop strategies to deter unlawful DEI practices in the private sector (“Ending Illegal Discrimination and Restoring Merit-Based Opportunity”).
In particular, one Executive Order mandates several steps that will affect companies with exposure to the United States.
- First, the Order directs every federal agency to identify “up to” nine private entities for investigation for operating “illegal” DEI programs.
- It also requires every federal agency to name the most “egregious and discriminatory DEI practitioners in each sector of concern and a plan of specific steps or measures to deter DEI programs or principles”.
- In an order implementing the Executive Order, the new Attorney General directed the Department of Justice to consider criminal charges among the potential actions to take.
- Second, it requires U.S. departments and agencies to ensure that the employment, procurement, and contracting practices of their contractors and subcontractors do not unlawfully consider race, color, sex, sexual preference, religion, or national origin for procurement decisions.
- When entering into a contract with a U.S. government agency, companies will need to formally certify that they do not operate any programs “promoting DEI that violate any applicable Federal anti-discrimination laws”.
- The Executive Order directs that these contract terms are “material,” which could become a basis for False Claims Act (FCA) actions in the United States. The FCA—which can be enforced by the federal government or private whistleblowers—imposes treble damages and civil monetary penalties on individuals and companies that knowingly submit false claims for payment to the government, which can include misrepresentations regarding compliance with statutory or regulatory rules (so-called “false certification” cases).
Although the Executive Orders do not change U.S. federal anti-discrimination statutes, they reflect the new Administration’s desire to pressure companies to change their practices and identify potential legal actions to change the law through litigation. Moreover, the directive to name “egregious” practitioners of DEI suggests companies will elicit parallel actions and even coordination among federal agencies, the U.S. Congress, U.S. state attorneys general, and private plaintiffs. The anti-ESG efforts of recent years present a clear model.
Given this increased level of scrutiny, companies doing business in the United States, particularly those seeking federal contracts, should consider taking steps to coordinate legal and policy experts across divisions and jurisdictions to assess their DEI policies, and how they are communicated. Each company will need to make these assessments based on their own circumstances and their specific risks. In the United States, some companies have announced significant changes to their workforce policies, while others have asserted they intend to maintain their lawful initiatives.
II. Conflicting requirements under EU law
One significant factor for any company considering changes to its workforce policies will be its regulatory requirements under EU law and the law of EU Member States.
Several EU Member States have adopted laws requiring DEI measures. German corporate law, for example, expressly mandates gender diversity quotas for supervisory boards and requires establishing gender diversity targets for executive boards and management levels below the executive board (sec. 96, 76 Stock Corporations Act/Aktiengesetz). Moreover, companies may be required to take measures to eliminate existing gender pay gaps under the EU Pay Transparency Directive (as transposed into national law). In addition, remuneration reports on board compensation, which are mandatory under EU law, have to present the degree to which sustainability targets, which can include diversity, impact variable compensation plans.
Specifics will matter, but it is possible that programs designed to comply with EU laws will be in tension with U.S. laws or guidance, especially as the latter evolve. Thus, companies subject to EU law with U.S operations or subsidiaries should consider the impact of these regulatory obligations on their risk and compliance in the United States. For example, a company applying for government-contracting in the United States should carefully analyze whether the contracting entity can certify that they do not operate any programs promoting DEI “that violate any applicable Federal anti-discrimination laws,” as required by President Trump’s Executive Order. Companies should consider whether their websites or other public reporting include contradictory statements, or statements that could be misconstrued as contradictory. In addition, companies should make clear when disclosing this information that they are doing so in compliance with specific laws and regulations.
It is not yet clear how broadly U.S. federal agencies will apply the Executive Order vis-à-vis different corporate structures, including group members outside of the United States. They may interpret it to require certifications beyond contracting entities, to mandate companies certify that none of their subsidiaries/group companies operate unlawful DEI programs. This scenario, in which a U.S. company could be required to certify that its EU affiliates do not operate DEI programs that would be unlawful in the U.S., would certainly lead to challenges regarding global, group-wide compliance/sustainability programs. In the extreme, companies might be required to take sides between conflicting laws.
Upcoming reporting obligations may highlight potential conflicts. Companies that fall under the scope of the EU Corporate Sustainability Reporting Directive (CSRD) (as transposed into national law) are, for example, required to report (if considered material):
- whether they have specific policies aimed at the elimination of discrimination, including harassment, promoting equal opportunities and other ways to advance diversity and inclusion (i.e. DEI policies),
- whether these grounds for discrimination are specifically covered in the policy: racial and ethnic origin, color, sex, sexual orientation, gender identity, disability, age, religion, political opinion, national extraction or social origin, or other forms of discrimination covered by Union regulation and national law,
- whether the undertaking has specific policy commitments related to inclusion or positive action for people from groups at particular risk of vulnerability, and
- whether and how these policies are implemented.
Complying with these requirements may invite unintended attention from U.S. government agencies or Congress. Notably, the reporting boundaries under the CSRD are not limited to EU companies; it usually also includes reporting on U.S. subsidiaries or U.S. parent companies. Companies should consider inviting their U.S. colleagues to review their CSRD or other disclosures and retaining counsel to navigate any risks or tensions.
III. Strategies for navigating the new regulatory landscape
There is no single solution for a company to navigate the changing circumstances in the United States while respecting global regulatory regimes. Each company will need to assess its risk exposure and, once understood, determine whether changes are required to achieve compliance or mitigate unwanted risks. The new Executive Orders in the United States mandate federal agencies to take steps by May 21, 2025. Accordingly, companies should undertake risk assessments and stakeholder coordination now. Specifically, companies may want to adopt the following strategies to minimize legal risks:
- Bringing together stakeholders and experts in the United States and in Europe to properly analyze DEI requirements to avoid operating in silos;
- Stocktaking of any jurisdictional links to the United States and (potential) legal enforcement risks;
- Assessing reporting obligations under CSRD and other EU reporting regulations (e.g. the EU Pay Transparency Directive), as well as other global reporting obligations the company may face;
- Reviewing drafts of sustainability reports, security prospectuses, investor presentations, websites, and published materials for potential conflicts with the new presidential DEI actions; and
- Exploring whether it is possible and advisable to adjust global, group-wide policies in favor of regional governance structures specifically tailored to locally applicable regulatory requirements (i.e. careful governance carve-outs, while keeping best efficiency of group-wide compliance to the largest extent).
Freshfields has a cross-disciplinary, global team that is available to advise on solutions to assess exposure to shifting U.S. dynamics to ensure our clients’ commitments—and how they are communicated—match their global business and legal needs.