Diversity, equity and inclusion programs have come under fire. President Trump issued an executive order prohibiting federal contractors from engaging in “illegal DEI.”^¹ However, there is no formal definition of “illegal DEI” or “legal DEI.” Based on case law, there are some boundary lines.

Consider this situation: A federal and state highway contractor puts out to bid a guardrail subcontract. The government contract has minority set-aside requirements of 15 percent of the total contract amount that is to be awarded to subcontractors owned or controlled by disadvantaged groups. The guardrail contract is awarded to a subcontractor owned by a Latino family. Claiming race and national origin discrimination, a losing bidder — a white-owned guardrail contractor — sues.

A similar situation occurred more than 30 years ago and made its way to the U.S. Supreme Court several times. The losing contractor was Adarand Constructors Inc. After a decade of litigation during the 1990s and early 2000s, the Supreme Court set some ground rules for determining whether such set-aside programs are lawful. The result is that lawful set-aside programs are rare.

The Supreme Court concluded that any person, of whatever race, has the right to demand that any governmental actor “justify any racial classification subjecting that person to unequal treatment under the strictest judicial scrutiny.” That phrase generally means the federal, state or local government must justify any mandated set-asides based on race, national origin or sex by showing that there was past discrimination, and that the set-aside program for minorities or women is narrowly tailored to rectify that past discrimination.

In the Adarand case, the Supreme Court elaborated: “In other words, such classifications are constitutional only if they are narrowly tailored measures that further compelling governmental interests.” With the Adarand litigation and the few cases that followed, federal, state and local governments largely failed to meet the high burden of proving their set-asides were narrowly tailored. To end the litigation, the government eventually certified Adarand as a disadvantaged contractor, removing race-based criteria from qualification. Any contractor able to show disadvantage — regardless of race or gender — was eligible to be considered under set-aside programs. The compelling government interest was recast as assisting disadvantaged contractors.

With recent executive orders, the Trump administration has changed the government's view of what constitutes compelling governmental interest in awarding contracts, whether from local, state or federal entities. According to the most recent order, minority or women set-aside programs with targets or quotas are no longer consistent with the administration’s view and are to be considered unlawful. Furthermore, the U.S. Department of Justice is expected to pursue legal action based on this interpretation.

To minimize risk, general contractors and developers should clearly define legitimate, nondiscriminatory business criteria for awarding subcontracts. Once awarded, they should be prepared to explain their decision based on those criteria.

The circumstances are similar in hiring. Federal and state laws generally prohibit employment decisions based on race, color, religion, sex, national origin, age, disability or military status. These protections apply equally to white applicants and applicants of color. The U.S. Supreme Court will likely reaffirm this in a reverse sex discrimination case: Ames v. Ohio Department of Youth Services. Ms. Ames alleges she was denied promotions because of her heterosexuality by a homosexual manager who promoted homosexuals. Many legal analysts predict the Court will rule that members of a majority have no greater burden to prove discrimination than those in a minority.

So what does this mean for affirmative action? Making employment decisions based on race or other protected categories has long been unlawful. The narrow exception — as with contracting — is to remedy past discrimination in a narrowly tailored way. The Civil Rights Act of 1991 states that nothing in the act “shall be construed to affect court-ordered remedies, affirmative action, or conciliation agreements, that are in accordance with the law.” However, as with minority contracting programs, such affirmative action in employment is rarely upheld as lawful. One exception includes certain preferences for veterans by federal contractors.

Legal affirmative action or DEI involves casting a wide net for applicants. Employers may advertise widely to ensure diverse demographics have access to job openings. For instance, it is legal to include historically Black colleges and universities in campus recruitment efforts. But when it comes to hiring, employers must choose the best-qualified candidate, regardless of race, color, sex or other protected characteristics.

The same principle applies to subcontracting. Federal contractors can lawfully solicit bids from minority-owned businesses. But excluding potential bidders based on race or sex is unlawful. Final contract awards must be made on the basis of legitimate, nondiscriminatory business reasons, not the demographics of the bidders.

DEI and affirmative action challenges also arise in the context of incentive agreements. Many municipalities and local governments require incentive recipients to meet or exceed participation goals for minority- and women-owned businesses.

The City of Cleveland, for example, adopted Ordinance No. 297-2023, requiring companies receiving financial assistance to contract with certified Minority Business Enterprises (MBEs) and Female Business Enterprises (FBEs). Projects receiving $250,000 or more in city assistance must enter into a Community Benefit Agreement (CBA). A standard CBA applies to projects under $20 million, while an expanded CBA is required for those over $20 million. Both versions include mandatory community benefits, with the expanded version also requiring additional considerations for legislative approval.

Incentive recipients must submit a specific plan to meet or exceed participation goals of 15 percent for certified MBEs and 7 percent for certified FBEs. Certification requires that a business be at least 51 percent owned and controlled by a minority or woman, respectively. Companies must report quarterly to Cleveland’s Office of Equal Opportunity to demonstrate CBA compliance.

Other cities have similar requirements. Cincinnati, for example, has mandated “best efforts” by developers to employ minority (11.8 percent) and female (6.9 percent) workers in each construction trade, referencing City Resolutions No. 32-1983 and 21-1998. Although these are often described as “goals,” the enforceability of such provisions remains unclear.

Similar contracting requirements have sparked legal challenges. A federal lawsuit was filed Feb. 5, 2025, by a landscaping business against Harris County, Texas, alleging that the county’s Minority and Women-Owned Business Enterprise (MWBE) program unconstitutionally prioritizes race over merit. See Landscape Consultants of Texas Inc. v. Harris County, Texas, Case No. 4:25-cv-00479 (S.D. Texas).

The lawsuit claims that Harris County imposes mandatory MWBE utilization goals on individual public contracts to meet an annual 30 percent “aspirational” MWBE goal. The complaint seeks declaratory and injunctive relief, citing violations of the Equal Protection Clause and 42 U.S.C. §§ 1981 and 1983.

In light of the new executive order targeting “illegal DEI,” it remains to be seen whether the Department of Justice will join or initiate similar litigation. Section 4 of the order seeks to “encourage the private sector to end illegal DEI discrimination and preference” and instructs the attorney general to propose a strategic enforcement plan. This includes identifying litigation “potentially appropriate for federal lawsuits.”

The order has likely increased the legal risks surrounding DEI and affirmative action. It has also complicated matters for companies that are bound by existing incentive agreements and now face the challenge of aligning their compliance with evolving federal interpretations.