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Last week, the U.S. Department of Justice announced a $21.5 million civil False Claims Act (FCA) settlement with Deloitte concerning allegedly unlawful diversity, equity, and inclusion (DEI) practices. The settlement follows a flurry of federal anti-DEI initiatives, confirms DOJ’s continued focus on DEI enforcement actions, and expands the range of practices that DOJ may scrutinize. While the settlement includes no admission of liability – much like the similar settlement from earlier this year – it provides valuable insights into the risks federal contractors face.

What Does This Mean?

The qui tam risk is no longer theoretical. While earlier anti-DEI initiatives have been driven solely by the federal government, this settlement highlights the role private FCA plaintiffs may play in such actions. The claims at issue were brought under the qui tam provisions of the FCA by the American Alliance for Equal Rights. The involvement of qui tam relators will likely lead to more DEI enforcement actions involving a wider range of contractors, not just industry leaders.

The settlement also enforces the importance of internal reporting and investigation procedures, as well as disclosure and cooperation with the government. More specifically, concerns that may previously have been evaluated principally under federal employment laws, may now require analysis of the contractor's federal certifications, contract clauses, and billing practices to address potential FCA implications.

Staffing and Utilization are Squarely in Focus For DOJ. The settlement indicates that DOJ will scrutinize all traditional human resource decisions, not just hiring and promotion practices. DOJ alleged that Deloitte identified available employees by race and sex and encouraged staffing managers to consider employees whose utilization could help advance demographic parity goals. Government contractors routinely use sophisticated systems to manage employee availability, utilization, and project staffing. The settlement suggests that DOJ may examine those processes to determine the role DEI plays in staffing decisions.

DOJ is building an enforcement program. This settlement – the second such resolution in just four months -- confirms that the DOJ’s Civil Rights Fraud Initiative has moved beyond a single headline-grabbing resolution and will continue to aggressively pursue DEI enforcement actions. Though untested in the courts, the core legal theory remains the same – i.e., the contractor allegedly certified or represented compliance with anti-discrimination obligations while engaging in discriminatory practices and allocated costs to federal contracts relating to those practices. Other contractors are facing similar allegations, and the number is likely to grow under the current administration.

Practical Takeaways for Federal Contractors

Contractors should consider a targeted compliance review, to include the following:

  • Review the entire DEI ecosystem. Reviewing just those programs and policies directly tied to DEI may fail to capture the greatest risks. Contractors should broadly assess policies and programs for employment, promotion, compensation, development, staffing/utilization, and use of demographic data.
  • Ensure contractual compliance at all levels. Contractors should ensure that any review also encompasses federal contractual obligations, including under FAR 52.222-26 (Equal Opportunity) and the recently released FAR 52.222-90 (Addressing DEI Discrimination by Federal Contractors). While not addressed in the allegations against Deloitte, FAR 52.222-90 imposes new obligations on federal contractors related to DEI and requires contractors to maintain and provide access to records sufficient to demonstrate compliance. The clause also imposes subcontractor oversight obligations and requires contractors to report “reasonably knowable” “racially discriminatory DEI activities” by subcontractors.
  • Be aware of state obligations. Many contractors have similar compliance obligations arising under state and local government contracts. Those contractors should carefully analyze those obligations to identify and address any potential conflicts with the federal regime.

If you have any questions or would like additional information, please contact the authors of this alert or the Womble Bond Dickinson attorneys with whom you work.