On July 29, 2025, US Attorney General Bondi issued a memorandum for all federal agencies titled “Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination” (the Memo). The Memo follows multiple executive orders that reversed course on prior administrations with respect to diversity, equity, and inclusion (DEI) and affirmative action, and called into question set-asides for socially and economically disadvantaged small businesses. In addition, Department of Justice (DOJ) announced in a May 19, 2025, memorandum its new Civil Rights Fraud Initiative, through which DOJ will use the False Claims Act to prosecute any recipient of federal funds that knowingly violates federal civil rights laws.[1] Needless to say, understanding the administration’s position on what constitutes unlawful discrimination is a vitally important step in compliance efforts and business planning for grant recipients and federal contractors.
The Memo speaks specifically to grant recipients’ DEI programs and policies but offers clues as to how the DOJ will enforce anti-discrimination laws for federal contractors, and how the FAR Council may reshape the Federal Acquisition Regulation with respect to small business set-asides in coming months. Most notably, the Memo concludes that awarding contracts based on socioeconomic preferences, e.g., on the basis that a contractor or partner is a woman- or minority-owned business, could be unlawful discrimination.
Guidance to Recipients of Federal Assistance
Entities that receive federal assistance—which includes grants and cooperative agreements, but not typically procurement contracts—are subject to federal anti-discrimination laws, including Title VI and Title VII of the Civil Rights Act of 1964, Title IX of the Education Amendments of 1972, and the Equal Protection Clause of the Fourteenth Amendment. The Memo highlights various practices and policies by funding recipients that the administration considers unlawful and which could lead to revocation of federal funding:
- Segretation of programs, activities, or resources based on protected characteristics – Separating or restricting access to programs, activities, or resources based on race, sex, or other protected characteristics is unlawful. Examples include segregation of facilities or resources (e.g., a BIPOC-only student lounge), and programs that are open only to those from a particular racial or ethnic group (or satisfy a general racial qualification like being an “underrepresented” minority).
- Unlawful use of protected characteristics in hiring and contracting – Notably, the Memo explains that awarding contracts to women-owned or minority-owned businesses as a primary or tie-breaking criterion is discriminatory. Workforce composition requirements, such as requiring 10% of the workers on a particular contract to be people of color, are also unlawful.
- Preferential treatment based on protected characteristics – Provision of opportunities, sponsorship, or other advantages to individuals or groups based on protected characteristics is presumptively unlawful. Examples include race-based scholarships or programs, preferential hiring or promotion practices, and access to facilities or resources based on race or ethnicity.
- Failure to maintain sex-separated bathrooms – Federally funded institutions may not allow males, “including those self-identifying as ‘women,’” to access single-sex spaces designed for females, such as bathrooms, showers, locker rooms, or dormitories, or to compete in women’s athletic events.
- Training programs that promote discrimination or hostile environments – DEI programs that stereotype, exclude, or disadvantage individuals based on protected characteristics or create a hostile environment are unlawful. The Memo cites “toxic masculinity” and white privilege as examples of stereotypes that could violate federal law if used during a training program.
- Use of proxies for consideration of protected characteristics – The use of ostensibly neutral criteria as a substitute for the consideration of race, sex, or other protected characteristics is unlawful. Examples include focusing recruiting efforts on certain geographic areas or institutions based on their racial composition, and consideration of statements highlighting adversity or diversity in applications.
Following the Memo’s non-exhaustive list of unlawful discriminatory policies and practices, the Attorney General provides nine Best Practices, described as “non-binding suggestions”:
- Ensure inclusive access
- Focus on skills and qualifications
- Prohibit demographic-driven criteria
- Document legitimate rationales
- Scrutinize neutral criteria for proxy effects
- Eliminate diversity quotas
- Avoid exclusionary training programs
- Include nondiscrimination clauses in contracts to third parties and monitor compliance
- Establish clear anti-retaliation procedures and create safe reporting mechanisms
The list is not a bad one. In a time of shifting statutory interpretation and enforcement priorities, documenting legitimate rationales for employment and contracting actions is crucial, as is flowing down any anti-discrimination clauses in federal grants and contracts to subrecipients and subcontractors.
Key Takeaways for Federal Contractors
While the federal anti-discrimination laws applicable to federal contractors can differ in some respects from those applicable to recipients of federal assistance, the Memo provides insight into the administration’s statutory interpretation and enforcement priorities that will likely apply to government contractors as well. The Memo states as much by urging all entities subject to anti-discrimination laws to review their policies and practices considering the Memo’s guidance.
DOJ takes the position in the Memo that awarding contracts based on a preference for women- or minority-owned businesses could be unlawful discrimination. As those in the federal contracting community are aware, the Small Business Act authorizes agencies to set aside procurement contracts for businesses owned and controlled by socially and economically disadvantaged individuals, including Native Hawaiian- and Native American-owned businesses, as well as women-owned businesses. Federal prime contracts often include small business subcontracting requirements based on this statutory framework and the implementing regulations. DOJ’s position in the Memo is in tension with this existing procurement scheme, raising questions about the future of socioeconomic small business preferences in federal contracting.
The Memo qualifies its position, stating that awarding contracts based on a protected characteristic is unlawful only absent “the appropriate level of judicial scrutiny.” But judicial scrutiny is something that courts apply when laws are challenged; it is much less useful as a grant or procurement planning tool. Where small business contracting requirements are already set out in statute and standard FAR contract clauses, it is unclear whether DOJ would expect contracting officers and prime contractors to evaluate whether a particular set-aside or preference was narrowly tailored to achieve a compelling government interest, or would accept that Congress already considered a similar question when enacting the underlying legislation, or some third option.
Those following the Revolutionary FAR Overhaul may recall that the FAR Council has not yet released FAR Part 19 – Small Business Programs, and has significantly reduced the FAR real estate devoted to small business requirements in other parts like Part 6. One might wonder whether the administration’s position on socioeconomic preferences as articulated in the Memo will show up in the new model regulations in the coming months.
Conclusion
Given the non-binding nature of the Memo, contractors with socioeconomic small business subcontracting requirements in their federal contracts should continue to comply with those requirements absent other direction from the contracting officer. Federal assistance recipients should evaluate any such preferences in their agreements more closely. All federally funded entities and contractors should, in coordination with counsel, review their hiring and contracting practices, training programs, and DEI policies, paying particular attention to agreements and relationships with state customers, subcontractors, and subrecipients, in light of this new guidance.
[1] For more, see DOJ Announces New Civil Rights Fraud Initiative Targeting DEI.
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