Attention Investors:

Investor Perspective: The Changing Landscape of DEI in 2025

 

One of the silver linings of the COVID-19 pandemic playbook was that it taught employers how to operate in uncertainty and navigate swiftly changing legal waters.  Those keen navigational skills are once more in high demand as employers plot a course through the legal minefield of DEI in 2025.

Overview

Since taking office, President Trump has taken aim at DEI programs – both in the federal government and in the private sector. He issued three Executive Orders in January 2025 directed at eliminating DEI in the federal government, defining “sex,” combating “illegal” corporate DEI programs, and undoing DEI standards for federal contractors.

On February 5, 2025, following the directive in one Executive Order to investigate and report on the “most egregious and discriminatory DEI practitioners” in the private sector, United States Attorney General Pam Bondi issued a memorandum titled “Ending Illegal DEI and DEIA Discrimination and Preferences.” The Memorandum advised that the Department of Justice Civil Rights Division would be taking efforts to effectuate the Executive Order in the private sector and educational institutions that receive federal funds by working to identify potential targets with “illegal DEI” programs and creating a plan to deter the use of “illegal DEI” – including through criminal investigations.

While none of the Executive Orders defined “illegal DEI,” a memorandum released on February 5, 2025, by the United States Office of Personnel Management to the Heads and Acting Heads of federal agencies provides some insight into how the federal government, at least, is thinking about “illegal DEI.”  According to that Memorandum, the following may constitute “illegal DEI:”

• Any program or benefit of employment that is based in whole or part on a protected characteristic
• Diverse slate hiring panels
• Restricted access employee resource groups
• “Special Emphasis Programs” that promote DEI based on protected characteristics

Ultimately, what is and is not legal will be decided by the Courts – likely under Title VII of the Civil Rights Act of 1964. Title VII broadly applies to employers with 15 or more employees who have been working 20 or more weeks in the previous calendar year, governments, employment agencies, labor unions, and certain U.S. citizens employed abroad.

Federal Contractors

In addition to liability under Title VII, employers who are also federal contractors have an added layer of complexity. One of the more challenging aspects of one of the DEI Executive Orders is that it attempts to set up liability under the False Claims Act (FCA) for federal contractors with “illegal DEI” programs.

The FCA creates civil monetary liability for those who submit to the federal government: (1) a false or misleading claim or statement, (2) while knowing that the claim was false, and where (3) the false claim or statement is material to the Government’s payment decision. So, for example, a contractor could violate the FCA if it fails to comply with a “material” contractual requirement but submits a claim for payment nonetheless. The Executive Order requires every government agency to include in every contract or grant award a provision confirming that the contractor understands and agrees that “its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions,” for purposes of the FCA.

While the full scope of the FCA is beyond this article – and setting aside whether a claim under the FCA based on a contractor’s diversity program would be successful – federal contractors may begin to see contracts or requests for modifications to contracts with specific requirements around certifying the contractor does not have an “illegal DEI” program.

Nationwide Injunction

Employers, however, are advised to stay-tuned. On Feb. 21, 2025, Judge Abelson of the U.S. District Court for the District of Maryland issued a nationwide preliminary injunction in Nat’l Ass’n of Diversity Officers in Higher Education v. Trump, __ F. Supp. 3d __, 2025 WL 573764 (D. Md. Feb. 21, 2025), barring the President and executive branch departments from enforcing certain provisions of the Executive Order.

The injunction, however, explicitly permitted the AG to investigate and report on the “most egregious and discriminatory DEI practitioners in the private sector” to the extent the AG is simply taking steps to deter “illegal DEI.” The injunction also does not prevent lawsuits and investigations based on DEI initiatives by the government or third parties.

DEI Audits

For these reasons, federal contractors and employers subject to Title VII (or a state law equivalent) with DEI programs have time to, and should, conduct a thorough audit of their programs to ensure compliance with best practices under Title VII and to determine whether any parts of their programs are subject to challenge based on the Administration’s likely definition of “illegal DEI.” Examples of initiatives or activities that could be challenged include:

• A quota system, which includes specific hiring or promotion quotas based on any protected characteristic
• Hiring or promotional practices with diverse slate requirements
• Preferential treatment based on protected characteristics
• Groups that exclude any particular group from membership because of membership in a protected class
• DEI training that utilizes stereotypes or indicates that any particular group is sexist or racist
• Scholarships or opportunities that are limited to individuals of one protected class versus another
• Bathroom and locker room policies
• Pronoun policies

Employers should also review their communications related to DEI to ensure those communications align with corporate policy and the law. Employers may want to conduct this audit through counsel for a thorough and privileged analysis of whether the program is lawful and to assist in mitigating any portions of the program that may be subject to legal challenge.

With all of the other changes 2025 has brought adding an audit may seem a daunting task. But an audit now may prove invaluable in the coming months as the EEOC and the AG make every effort to effectuate the Executive Orders and target companies that maintain DEI programs viewed as “illegal” by the federal government.

---