Employers and business owners have all been trying to decode the meaning of "illegal diversity, equity, and inclusion" ("illegal DEI") since President Trump signed Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity. As discussed in a prior bulletin, some guidance has been provided by the Equal Employment Opportunity and the Department of Justice (DOJ). On July 29, 2025, the DOJ released a memorandum, "Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination," which purports to clarify the application of federal antidiscrimination laws to programs or initiatives that may involve discriminatory practices, including those labeled as DEI programs.
The DOJ's guidance identifies "best practices," which it also labels as "non-binding suggestions," to help entities receiving federal funds comply with federal antidiscrimination laws.
To ensure compliance with federal laws, the DOJ urges recipients of federal funding to focus on skills and qualifications when hiring or promoting employees. Recipients are advised to document clear, non-discriminatory reasons for using any hiring or promotion criteria that may correlate to race, sex, or other protected characteristics when applicable.
The DOJ's guidance also warns that the use of "facially neutral criteria" will not automatically be considered a metaphorical "Get Out of Jail Free" card. For example, using "facially neutral criteria" such as geographical targeting or cultural competence is considered "unlawful proxy discrimination" because it is designed and/or applied with the intention of providing an advantage to individuals based on protected characteristics.
With federal partnerships in mind, the DOJ's guidance suggests that nondiscrimination clauses be included in all third-party grant agreements, contracts, and partnership agreements. The language in those clauses should emphasize that federal funds should not be used in connection with programs that unlawfully discriminate based on protected characteristics. Additionally, third parties, such as vendors and subcontractors, should be monitored to ensure compliance with federal laws.
The DOJ's guidance also clarifies that it is an unlawful practice for federally funded state agencies to implement DEI policies that prioritize awarding contracts to minority- or women-owned businesses. According to the guidance, these types of requirements could result in the revocation of grant funds.
Federal funding recipients and federal contractors are encouraged to review their policies to ensure compliance with federal law and this new guidance.
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