Federal I&D Enforcement Raises Financial Stakes for Employers

For many employers, inclusion and diversity (I&D) initiatives have long been viewed through the lens of culture, recruitment, and employee engagement. Increasingly, however, they are also becoming a matter of compliance risk.

During a recent SHRM webinar, experts cautioned that federal enforcement efforts targeting what the government describes as discriminatory diversity, equity, and inclusion (DEI) practices are creating significant legal and financial exposure for federal contractors and subcontractors.

"There are moments when the compliance landscape changes quietly, and by the time organizations realize it, the expectations, enforcement environment, and consequences have already shifted. This is one of those moments," said Carolynn Johnson, President of SHRM CEO Action. 

Executive Orders Put Contractors on Notice

At the center of the discussion were Executive Orders 14173 and 14398. Executive Order 14173, issued in 2025, directed federal agencies to scrutinize what the administration characterized as unlawful DEI practices. More recently, Executive Order 14398 narrowed its focus to what the government calls "racially discriminatory DEI activities" among federal contractors and subcontractors, while also creating new compliance obligations and audit authority.

According to David Cohen, Founder and President of DCI Consulting Group in Washington, D.C., the newer order is significant because it provides a more explicit framework for enforcement. "For the first time, the government has defined what they believe to be discriminatory," he said.  

The order applies to companies doing business with the federal government, including many subcontractors. Contractors may be required to certify compliance, permit audits, and flow compliance obligations down through their supply chains. Violations could potentially result in contract termination, suspension, debarment, or referral to the Department of Justice (DOJ).

Toolkit: SHRM’s BEAM Toolkit for I&D

False Claims Act Takes Center Stage 

The discussion also highlighted the government's increasing reliance on the False Claims Act (FCA), a Civil War-era anti-fraud statute signed into law by President Abraham Lincoln in 1863. Traditionally used to combat fraud involving government funds, the FCA allows the government to recover triple damages and permits whistleblowers to file claims on the government's behalf.

"This is the first time the government is trying to use this False Claims Act for discrimination issues," Cohen said.

The implications can be substantial. "If I have a contract with the government for $10 million, and there is a False Claims Act case, and the Justice Department says that [I am] guilty, I potentially owe the government three times what I billed,” Cohen said, “So $30 million."

Webinar: A Practical Look at Legally Compliant I&D for HR Leaders

Multi-Million Dollar Risk

The government's approach was illustrated by a recent settlement involving IBM. In April, IBM agreed to pay approximately $17 million to resolve allegations that certain employment practices violated anti-discrimination requirements contained in its federal contracts. The settlement marked the first resolution secured under the DOJ’s Civil Rights Fraud Initiative, which seeks to use the FCA to pursue alleged discriminatory employment practices by federal contractors. IBM denied wrongdoing as part of the settlement agreement.

The IBM case has drawn widespread attention because it demonstrates how employment practices can become FCA issues when organizations certify compliance with federal contract requirements. Legal observers have noted that the settlement may serve as a roadmap for future enforcement actions involving federal contractors.

Balancing Compliance, Culture, and Business Goals

For HR leaders, the challenge is that the practices receiving scrutiny often involve routine talent management activities rather than obviously unlawful conduct.

"What makes this especially important for HR leaders is that the areas receiving attention are not unusual or fringe practices,” Johnson said. “They are decisions and programs many organizations are actively managing today, like hiring practices, leadership development, mentoring approaches, compensation structures, and talent programs.”

The panelists emphasized that employers should not assume all I&D initiatives are unlawful. Instead, they recommended conducting careful reviews of programs, policies, and employment practices through the lens of Title VII and disparate treatment principles.

Joanna Colosimo, Vice President of Workforce Analytics and Compliance Strategy at DCI Consulting Group in Washington D.C., urged employers to take a proactive approach. "Conduct an audit of your DEI-related programs. Do a DEI risk audit," she said. At the same time, she cautioned organizations against overreacting. "What I did not say here, I did not say abandon your DEI programs."

Cohen similarly argued that organizations can reduce risk through good-faith compliance efforts and documented self-assessments. "That, to me, is probably the biggest takeaway from today," he said. "This is scary. Yes, I know that. But there are things that you can do to protect yourself and protect the company by doing these audits of your practices."

Sample Checklist: I&D Program Compliance Checklist

Ultimately, Johnson said the key issue is not that anti-discrimination laws have fundamentally changed, but that enforcement priorities have. "The law hasn't changed, but the enforcement action has," she said. "And I think that's really what we need to pay very close attention to."

As federal agencies begin implementing new contract requirements and preparing investigations, organizations that proactively assess their practices may be in the strongest position to avoid costly disputes.

"The organizations in the strongest position will not be the ones reacting after questions are raised," Johnson said. "They'll be the ones that understand the landscape early, evaluate thoughtfully, and make informed decisions with confidence."