DEI Compliance for Federal Contractors in 2026

Since the issuance of Executive Order 14173 (“Ending Illegal Discrimination and Restoring Merit-Based Opportunity”) in January 2025, the regulatory and enforcement landscape surrounding diversity, equity, and inclusion (DEI) for federal contractors has continued to shift. 

2026 has brought federal contractors into a DEI space beyond mere regulatory uncertainty, but into active enforcement, new contractual obligations, and increasing False Claims Act (FCA) exposure tied to “illegal DEI” practices. 

This article summarizes the current state of DEI compliance, key enforcement developments, and practical steps federal contractors should take now.

The Current State of DEI Post-Executive Order 14173

As detailed in BDO’s article last year, this 2025 Executive Order did three foundational things: 

1. Eliminated the long-standing Executive Order 11246 focusing on the protected  statuses of women and minorities;
2. Shifted enforcement emphasis to statutory anti-discrimination laws; and
3. Introduced financial risk by making compliance with those laws a material condition of payment. 

At the same time, the Office of Federal Contract Compliance Programs (OFCCP) paused or significantly reduced enforcement of historical affirmative action plan (AAP) obligations. In July of 2025, the abeyance for enforcement under the Vietnam Era Veterans’ Readjustment Act of 1974 (VEVRAA) and Section 503 of the Rehabilitation Act of 1973 (Section 503) was partially lifted to allow investigations for complaints but they are still not auditing AAPs despite federal contractors still being subject to these requirements. 

The Rise of “Illegal DEI” Enforcement

Federal contractors’ responses throughout 2025 to the prior Executive Order 14173, and subsequent agency deviations, were highly divergent. In a certain respect, that is because there are varied interpretations of what “Illegal DEI” means still. Some companies have been extremely conservative in their approach and have audited benefits plans, policies and procedures, training programs, affinity groups, procurement practices, and more to ensure   they comply. Others dug their heels in and kept their DEI practices as is despite these regulatory changes. However, in 2026, we are now getting a clearer message from various enforcement agencies that failure to comply can lead to significant penalties. 

Coca-Cola Related Litigation

 In February of 2026, the U.S. Equal Employment Opportunity Commission (EEOC) sued Coca-Cola Beverages Northeast, Inc. because they held a two-day employer-sponsored trip in September of 2024 where only female employees were invited, excused from normal work duties, and were still paid without requiring them to use vacation or other paid time off. The EEOC has stated that “excluding men from an employer-sponsored event is a Title VII violation…”. 

International Business Machines Corporation (IBM) Settlement

In April of 2026, the Department of Justice (DOJ) announced the first FCA resolution under the Civil Rights Fraud initiative. IBM agreed to pay the United States over $17 million dollars to resolve all allegations that it violated the FCA by failing to comply with anti-discrimination requirements.

The United States alleged that IBM took race, color, national origin, or sex into account when making employment decisions, including by using a diversity modifier that tied bonus compensation to achieving demographic targets.  The government further alleged that IBM altered interview criteria based on race or sex through the use of “diverse interview slates” and other related employment practices in connection with identifying “diverse” candidates for hiring, transfer, or promotion.  Additionally, the government alleged that IBM developed race and sex demographic goals for business units and took race and sex into account when making employment decisions to achieve progress towards those demographic goals.  Finally, the United States alleged that IBM offered certain training, partnerships, mentoring, leadership development programs and educational opportunities only to certain employees, with eligibility, participation, access or admission limited on the basis of race or sex.   

Expansion of DEI Requirements on Federal Contractors

In March of 2026, a new Executive Order 14398 (“Addressing DEI Discrimination by Federal Contractors”) was issued. This order focuses on the following: 

1. Prohibition of racially discriminatory DEI: This is a narrower scope than prior executive orders which focused on various protected statuses. Contractors must not use employment, contracting, or program participation practices that favor or limit access based on race, color, national origin, or sex. This specifically targets diversity modifiers for compensation, diverse interview slates, and restricted training programs.
2. Mandatory Contract Clause: The order required executive departments and agencies to ensure  contracts and contract-like instruments (including subcontracts and all lower-tier subcontracts) include new clause language. On April 17, 2026, the Federal Acquisition Regulatory Council (FAR Council) issued a new model deviation, Revolutionary FAR Overhaul (RFO) FAR 52.222-90, Addressing DEI Discrimination by Federal Contractors. Agencies are being told to modify existing contracts to include this new clause by July 24, 2026, and if a contractor refuses, agencies are told to consider whether to terminate the contract for convenience. 
3. Audit and Reporting Obligations: Contractors must furnish records, access to files, and reports upon request to demonstrate compliance with these requirements. 
4. Subcontractor Accountability: Prime contractors are responsible for ensuring subcontractors comply with the order and must report any known “reasonably knowable” violations to the government. 
5. Enforcement Mechanisms: Violations may lead to contract cancellation, termination, suspension, or debarment. The order expressly links compliance to the FCA, allowing the DOJ to pursue penalties.