In July, the DOJ released updated guidance on what might constitute “illegal DEI” by government contractors under an executive order issued in January. As a result, contractors must now move beyond compliance checklists and toward a strategic, principled and legally sound approach to workforce management, says Constangy partner Cara Crotty, who breaks down the latest developments.
In January, President Donald Trump signed Executive Order 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.” This action rescinded Executive Order 11246, signed in 1965 to provide equal opportunity for women and minorities in hiring by government contractors. The practical implications of this significant shift are just beginning to unfold.
Contractors must now recalibrate their compliance practices, understand their remaining legal obligations and prepare for a new era of federal scrutiny, one that targets DEI programs as potential sources of unlawful discrimination.
Executive Order 14173: What it says and what it changes
The new executive order directs all federal agencies to terminate “illegal preferences” in hiring and employment. Specifically, it requires:
- Removal of DEI mandates and references from federal regulations, policies and enforcement tools.
- Immediate cessation of affirmative action enforcement by the Office of Federal Contract Compliance Programs (OFCCP).
- Two new contract statements: contractors must (1) certify that they do not maintain unlawful DEI programs and (2) acknowledge that compliance with antidiscrimination laws is material to the government’s payment decisions.
Critically, the executive order does not define “illegal DEI,” creating uncertainty for contractors that want to continue promoting diversity in hiring while still complying with the law.
Historical context
President Lyndon B. Johnson signed Executive Order 11246 in 1965 as part of the federal government’s broader civil rights agenda. It required federal contractors to:
- Prohibit employment discrimination based on race, color, religion, sex or national origin (with later amendments adding sexual orientation and gender identity).
- Develop and maintain written affirmative action programs (AAPs) to actively promote diverse workforces.
- Analyze workforce demographics, set placement goals and adopt action-oriented programs where underrepresentation existed.
While the order explicitly prohibited quotas or hiring preferences based on protected characteristics, critics claimed that its structure created de facto pressures to use the identity categories in making hiring decisions. Trump’s order reflects those concerns and addresses those pressures.
What remains: Section 503 and VEVRAA
Importantly, Section 503 of the Rehabilitation Act and VEVRAA (Vietnam Era Veterans’ Readjustment Assistance Act) remain in full effect. These statutes, enacted by Congress, cannot be revoked by executive order and carry their own affirmative action mandates. Among other things, contractors must:
- Maintain written AAPs for individuals with disabilities and protected veterans.
- Conduct utilization analyses and set hiring benchmarks.
- Collect self-identification data.
- Provide reasonable accommodations.
- Track employment activity (applicants, hires, promotions and terminations).
- Notify state employment agencies of job openings.
The OFCCP currently retains enforcement authority under these statutes, even as its role under EO 11246 was eliminated.
The current landscape
The new requirement that contractors affirm they are not engaged in unlawful DEI creates legal exposure under the False Claims Act, which prohibits making false certifications tied to federal payments. This can lead to significant monetary liability if the government determines that a contractor’s DEI policies are discriminatory, yet the contractor certified compliance with anti-discrimination laws.
In late July, the DOJ issued guidance clarifying when DEI initiatives become discrimination under federal law. While the DOJ presents the guidance as nonbinding best practices, it helps identify which DEI measures could trigger enforcement actions or jeopardize federal funding.
The guidance targets specific practices: granting preferences or advantages based on protected characteristics, such as race-specific scholarships or hiring programs; using neutral-sounding criteria that function as proxies for protected traits; and segregating individuals based on protected classifications. It also cautions against considering protected characteristics, whether explicitly or implicitly, in decision-making.
Another focus of the DOJ’s memo is training and education programs that stereotype, exclude or marginalize individuals based on protected traits. Examples include mandatory training that uses concepts like white privilege or toxic masculinity in a way that assigns blame or stereotypes. According to the DOJ, such training may violate federal antidiscrimination law if it creates a hostile environment.
Although the DOJ guidance does not prohibit diversity efforts altogether, it emphasizes that those programs cannot give preference or create disadvantages based on race, sex or other protected characteristics.
Practical steps
1. Conduct a DEI audit
Review all DEI-related policies, programs and public statements. Pay close attention to:
- Eligibility restrictions based on race, gender or identity (e.g., scholarships, mentorships, training programs).
- Incentive structures tied to hiring or promotion of underrepresented groups.
- Language in marketing materials or internal policies that implies quotas or mandates.
Ensure that programs do not create a preference or advantage based on protected characteristics unless narrowly tailored and legally defensible.
2. Update compliance language
Remove references to EO 11246 in:
- Equal opportunity statements
- Affirmative action plan documents
- Supplier and subcontractor agreements
- Job postings and policy manuals
Clarify that “affirmative action” now refers only to Section 503 and VEVRAA unless state or local laws impose broader mandates.
3. Reevaluate use of the term “DEI”
While many companies will choose to continue DEI work, consider renaming initiatives to focus on workplace inclusion, equity and opportunity. Avoid framing programs as exclusively benefiting particular demographics.
However, relabeling alone is insufficient — substance matters. A facially neutral program that results in race- or gender-based exclusion still carries legal risk.
4. Continue lawful analyses — strategically
Many compliance practices remain legal and useful:
- Collecting voluntary applicant and employee demographic data.
- Conducting adverse impact analyses.
- Comparing workforce demographics to available labor market data.
- Performing pay equity audits.
These should now be conducted under legal privilege wherever possible to reduce discoverability in litigation.
5. Track state and local laws
Contractors working with state or municipal governments may still be subject to affirmative action or DEI mandates. For instance, states like California, Minnesota and New York have procurement policies requiring diverse supplier engagement and/or demographic reporting. Don’t assume the federal rollback applies universally.
A time to recalibrate
The rescission of EO 11246 marks a pivotal shift — but not the end — of compliance for government contractors. Legal obligations remain under Section 503, VEVRAA, Title VII and numerous state laws. Public expectations for workplace fairness and inclusion have not waned. And the reputational risks of failing to navigate these changes thoughtfully can be severe.
Contractors must now move beyond compliance checklists and toward a strategic, principled and legally sound approach to workforce management. This requires:
- A renewed focus on nondiscrimination.
- A deeper understanding of what constitutes legal and illegal DEI.
- Proactive engagement with legal counsel, procurement teams and executive leadership.
In this time of shifting ideologies and enforcement, employers who stay informed, adapt quickly, and make principled decisions will be best positioned to thrive, despite this uncertain environment.
Cara Crotty is a partner at law firm Constangy, Brooks, Smith & Prophete and co-chair of the firm’s EEO/contractor compliance, reporting & analytics and diversity, equity & inclusion practice groups. She advises employers on avoiding litigation and has defended them in cases involving virtually every aspect of the employment relationship. She previously worked as an attorney-adviser in the US Department of Labor’s Office of Administrative Law Judges. 
