The Broader Context: Escalating Federal Scrutiny of DEI

Since returning to office in January 2025, President Donald Trump has made scrutinizing DEI programs a central policy priority, including through the following pronouncements:

• On January 21, 2025, Trump issued Executive Order 14173, requiring all federal agencies to include anti-DEI certifications in federal contracts and grants.
• On February 5, 2025, Bondi issued a memorandum directing DOJ components to prioritize investigation and prosecution of “illegal DEI” programs in the private sector, including through potential criminal charges.
• On May 19, 2025, the deputy attorney general issued a memorandum launching the “Civil Rights Fraud Initiative,” co-led by DOJ’s Civil Rights Division and its Civil Division’s Fraud Section, to pursue False Claims Act cases tied to DEI-based misrepresentations in grants and contracts.

AG Bondi’s Guidance Regarding ‘Illegal Discrimination’

The July 29, 2025, DOJ memorandum:

• Declares unlawful many common DEI practices, including race-based scholarships, hiring preferences for candidates from “underrepresented groups,” and training programs that rely on race- or sex-based classifications.
• Extends potential liability to so-called “proxy” discrimination, where facially neutral criteria (like “lived experiences” or “geographic preferences”) are used to achieve outcomes without direct reference to prohibited characteristics.
• Targets the use of race or ethnicity to determine access to facilities or resources, including “safe spaces,” race-specific lounges, or other forms of “segregation” based on protected characteristics.
• Prohibits program or participation eligibility criteria based on protected characteristics, such as requiring applicants to identify with a specific racial or ethnic group or limiting access based on sex.
• Requires oversight of third-party recipients, making grant recipients and prime contractors responsible for the practices of sub-awardees and subcontractors.
• Encourages internal reporting and creates legal protection for employees who object to DEI practices on anti-discrimination grounds.

The memorandum also outlines nine best practices, including:

• Ensuring inclusive access for all regardless of race, sex, or other protected characteristics
• Focusing on skills and qualifications for employment, grant, and other selection decisions
• Prohibiting demographic-driven criteria
• Documenting legitimate rationales for decisions (i.e., not based on race, sex, or other protected characteristics)
• Scrutinizing neutral criteria for proxy effects
• Eliminating diversity quotas and mandates for representation
• Avoiding exclusionary training programs
• Including non-discrimination clauses in contracts with third parties and monitoring compliance
• Establishing clear anti-retaliation policies and safe reporting mechanisms

Federal Contractors and Subcontractors: Special Risks

For federal contractors and their subs, the stakes are particularly high:

• Certification Risk: as agencies adopt representation requirements under the EO 14173 directive, contractors must affirm they don’t operate unlawful DEI programs. Inaccurate certifications can create False Claims Act exposure.

• Flow-Down Responsibility: DOJ makes clear that prime contractors are responsible for subcontractor and vendor compliance with federal anti-discrimination laws. Violations by a sub may result in prime liability or loss of funding.

• Bid and Performance Risk: DEI-based preferences in proposal scoring, staffing, or outreach strategies may be challenged as discriminatory under the Guidance.

5 Things to Do Now:

1. Audit DEI Policies and Training
   Identify any race- or sex-conscious programs (including scholarships, hiring policies, or mentorships) and assess risk under the DOJ’s rubric.
2. Scrutinize "Neutral" Criteria for Proxy Use
   Examine how you use terms like “cultural fit,” “first-generation,” or “underserved geography,” especially if selected with a demographic goal in mind.
3. Review Subcontractor and Partner Oversight
   Ensure sub awards and third-party vendors are contractually bound to anti-discrimination compliance. Monitor for issues proactively.
4. Update Internal Reporting Channels
   Provide safe, anonymous pathways for employees to report DEI-related concerns without retaliation, and review those reports promptly.
5. Revise Contracts and Grant Proposals for DOJ Compliance
   Remove demographic benchmarks, DEI certifications not strictly required, or any language that could imply preference based on protected traits.

What’s Next: Whistleblowers

DOJ’s new Guidance is already influencing enforcement strategy, and will likely serve as a template for False Claims Act whistleblowers. Companies that directly or indirectly interact with federal funds should review their practices immediately.