2025 marked a watershed moment for Diversity, Equity, and Inclusion (DEI) programs, with President Trump and his administration quickly committing to use federal authority to deter “illegal DEI” policies in the private sector. The reaction across the private sector was swift; many companies scaled back disclosures and policies.
While formal federal action against the private sector has lagged, 2026 may very well be a year of increased enforcement. Indeed, it is unlikely the DEI moment has passed. Rather, companies should remain vigilant to developments, and in particular, should prepare for a related paradigm shift in the use of the False Claims Act (FCA) as a tool to police compliance with antidiscrimination laws.
Companies with federal contracts are no strangers to the FCA, but its use against DEI is novel. Historically, the FCA was not a “civil rights” or “anti-discrimination” statute. Its primary use was to target financial and contract fraud by those supplying goods and services to the federal government, including healthcare providers, defense contractors, and other recipients of federal funds. Meanwhile, contractors’ DEI programs were guided by longstanding legal and contractual frameworks that often required or encouraged contractors to maintain affirmative action and equal employment policies. The Trump administration’s recent efforts to leverage the FCA as a compliance tool for its anti-DEI agenda have turned this paradigm on its head.
Executive Order 14173, issued on President Trump’s first day in office, directed every federal agency to identify ways to “deter” DEI in the private sector and specifically called for using the FCA against contractors and grantees. In May 2025, the Department of Justice (DOJ) put this order into motion through the announcement of its “Civil Rights Fraud Initiative,” which aims to “utilize the False Claims Act to investigate and, as appropriate, pursue claims against any recipient of federal funds that knowingly violates federal civil rights laws.” The DOJ expressly encouraged whistleblowers to use the FCA’s qui tam provisions to shine a light on allegedly unlawful DEI programs.
Under the FCA, a contractor is liable if the government can prove that they made a false statement, that they knew or should have known it was false, and that the statement was material to the government’s payment decisions. In the DEI context, this framework theoretically empowers the government to pursue enforcement against contractors that certify compliance with federal law but engage in practices the administration considers to be “illegal DEI.”
From a compliance perspective, this development means companies that receive federal funds should ensure that legal, contracting, and HR or employment teams are coordinated. Among other things, recipients of federal funds may face information demands or audits of DEI programs, raising the potential for both Title VII and FCA risk.
However, the true extent of contractors’ legal risk under the FCA remains unclear, as there is no comprehensive definition of what it means to engage in “illegal DEI.”
Recent DOJ and EEOC publications indicate that the federal government will scrutinize employment actions motivated, even in part, by race, sex, or other protected traits, including mentorship or networking groups for specific demographics, quota-based hiring, or facially neutral practices that function as proxies for protected status (such as seeking job applicants who have overcome “obstacles”). The EEOC recently reestablished a quorum, meaning it can formally rescind and modify longstanding guidance under Title VII and other antidiscrimination laws. Accordingly, companies should pay close attention to changes even if they have already reviewed their DEI programs this year.
But this uncertainty about which DEI programs might be alleged to be unlawful has implications under the FCA. Courts have repeatedly underscored that ambiguity regarding a federal contractor’s legal obligations favors the defense in an FCA matter. Indeed, in litigation defending the legality of the DEI executive order, DOJ itself underscored that the FCA does not reach innocent, good-faith mistakes about the meaning of an applicable rule.
These developments counsel in favor of companies taking steps both to ensure that their DEI programs remain lawful under antidiscrimination laws and developing good faith defenses to potential FCA actions.
Of course, the reputational and operational risks of an FCA investigation remain substantial, even if ultimate liability is unlikely. These new risks mean that federal contractors must remain vigilant, flexible, and strategic in navigating the changing intersection of DEI and FCA enforcement. This requires reassessing DEI programs and certifications, tracking regulatory and litigation developments, and ensuring that internal and external narratives about DEI align.
