Legal Series: Understanding Disparate Treatment Related to EO 14398

This article is part of an ongoing legal series designed to provide insight and practical guidance on current and emerging workplace compliance issues. These insights shared by lawyers are based on their interpretation of existing regulations and proposed changes, and intended for informational purposes, not to be regarded as legal advice.  

On March 26, 2026, the Trump administration released Executive Order (EO) 14398, “Addressing DEI Discrimination by Federal Contractors.” It addresses racially discriminatory DEI activities and treatment in employment and contracts, specifically forbidding racially discriminatory diversity, equity, and inclusion (DEI) activities.

EO 14398 requires federal contractors to agree that they do not engage in racially discriminatory DEI activities as a condition of receiving contracts. EO 14398 relies on underlying federal anti-discrimination laws that outlaw disparate treatment for legal authority. Disparate treatment is a term for directly treating some differently—disparately—based on an impermissible characteristic like race.

This article details what HR professionals and business owners need to know about disparate treatment related to EO 14398.

What Is Disparate Treatment?

In legal terms, disparate treatment means treating one person differently from another. State and federal laws forbid people from treating others differently—discriminating against them—if the reasons for that differing treatment fall into certain protected categories.

Under Title VII of the Civil Rights Act of 1964, you cannot discriminate in the terms or conditions of employment based on someone’s:

• Race,
• Color,
• National origin,
• Religion, or
• Sex.

In effect, employers cannot choose to treat someone differently based on a person’s protected characteristics.

Terms and Conditions of Employment

If you negatively or positively impact someone’s terms or conditions of employment based on a protected characteristic, you violate Title VII. Terms or conditions of a person’s employment involve job conditions like:

• Pay—wages, overtime, salaries;
• Work environment—the space that an employee works in, such as a private office or an assembly line;
• Benefits—health insurance, retirement benefits, perks; and
• Hours—when you work and how much.

Title VII forbids different treatment, meaning you cannot treat someone worse or better based on their protected characteristics.

Disparate Treatment Case Outcomes

Businesses and individuals who engage in employment discrimination are liable to those they discriminate against for the harms they cause due to their discriminatory decisions. For example, the government or the courts may require a discriminatory business to:

• Hire a wrongly denied candidate,
• Reinstate someone who was wrongly fired,
• Offer a promotion or comparable position, or
• Pay damages to the person it discriminated against.

The outcome of legal action related to disparate treatment varies based on the circumstances. For example, a court may award damages in the form of wrongly denied wages to someone who experienced a hostile work environment that they cannot return to safely. However, a court may order reinstatement in a case where, for example, a business discovered a supervisor engaged in discrimination and removed them, allowing the employee to return safely.

What Does Executive Order 14398 Say?

Officially called Addressing DEI Discrimination by Federal Contractors, EO 14398:

• Defines racially discriminatory DEI activities,
• Requires federal contractors to include a compliance clause in contracts,
• Deputized all federal agencies to enforce this clause and,
• Establishes penalties for noncompliance.

Unlike many executive orders related to DEI and merit-based employment, EO 14398 is limited in scope to racially discriminatory DEI activities, not DEI in general terms or gender based discrimination.

How Does Executive Order 14398 Define Racially Discriminatory DEI Activities?

EO 14398 forbids federal contractors from engaging in racially discriminatory DEI. It defines racially discriminatory DEI as engaging in disparate treatment, intentionally discriminating against someone, based on race or ethnicity in:

• Recruitment,
• Hiring and promotions,
• Contracting,
• Program participation, or
• Resource deployment.

In short, treating two similarly positioned candidates differently based on their race or ethnicity would violate EO 14398. Similarly positioned candidates are individuals with the same basic qualifications, like job experience or skills.

What Does Executive Order 14398’s Compliance Clause Require?

Per EO 14398, government agencies must include this clause in every federal contract. Once incorporated by the contracting agency, the clause requires the contractor to certify that it:

• Does not engage in racially discriminatory DEI,
• Has furnished or will furnish all required information and reports that the contracting agency requires it to provide,
• Agrees that noncompliance with the clause leads to contract ineligibility,
• Will report subcontractor violations to the government, and
• Agrees that the terms of the clause are material to payment of the contract.

By making the terms of the clause material, the government can terminate contracts where it alleges noncompliance.

What Penalties Does Executive Order 14398 Establish?

To ensure compliance, EO 14398:

• Declares that federal agencies with contracts should cancel any contracts with contractors who do not comply,
• Directs that agencies may suspend or debar contractors or subcontractors from eligibility for further contracts, and
• States that the Attorney General may initiate claims against noncompliant entities under the federal False Claims Act.

Briefly, suspension is short-term ineligibility, while debarment typically makes your business permanently ineligible.

How to Identify Disparate Treatment That Violates Executive Order 14398

Much of EO 14398’s definition of racially discriminatory activities overlaps with the activities that Title VII clearly and explicitly forbids. Yet, EO 14398’s definition of racially discriminatory DEI specifically includes recruitment, program participation, and resource deployment.

The order forbids, for example:

• Targeted recruitment restricted to specific racial groups,
• Programs that are limited to members of particular racial groups, such as a Employee Resource Group (ERG) and
• Using outsized resources to help individuals of particular racial groups succeed.

To be racially discriminatory, the steps you take must prefer members of certain racial groups over others, like a training program specifically for people of color. Yet, offering the same program without limiting it to people of color would not violate the order.

How to Respond to and Avoid Disparate Treatment

If you already have policies in place to prevent racial discrimination, you should be in good shape to avoid disparate treatment. Yet, to respond to EO 14398, consider:

• Auditing your employment practices,
• Testing or analyzing your employment decisions for possible bias,
• Reviewing what special programs you have and how individuals qualify for them,
• Ensuring any policies that could contradict the EO highlight merit-based decision-making, and
• Monitoring any significant asymmetries in resource usage.

If you are a contractor who works with subcontractors, ensuring your subcontractors do not engage in disparate treatment is mandatory under EO 14398. Spend time researching your subcontractors’ policies and monitor for signs of disparate treatment, such as leadership treating individuals or groups of workers differently based on their race.

Moving Forward Under EO 14398

Because disparate treatment has been illegal for decades, most businesses should be in good shape to address EO 14398. You may need to adjust wording, monitor policies, analyze employment decisions, and agree to new contract terms. Yet, if you’re careful and self-aware, EO 14398 does not have to bring significant new obligations.

EO 14398 raises the stakes on understanding and preventing disparate treatment, but it does not require abandoning lawful, inclusive practices that help you build a high-performing workforce. The goal should be to periodically perform analysis of your employment and hiring decisions to separate risk from value. Documentation around your workforce analytics should be retained that will withstand regulatory scrutiny and protect your contracts.

Outsolve is committed to helping you stay up to date with changes to the law that affect HR professionals and business owners. For more information on EO 14398, visit our website.