Spotlight on US EDI compliance risk for employers

Across the US, EDI has become a legal flashpoint. What started as a drive to improve representation and inclusion has, under the Trump administration, turned into a compliance minefield. The Department of Justice is now actively policing diversity policies through its new Civil Rights Fraud Initiative, signalling that some EDI programmes could expose employers to liability under the False Claims Act. We’ll speak to a US lawyer who is advising clients about that risk. 

The shift in the US is part of a broader political campaign against what the White House calls “woke ideology.” On his second day in office, President Trump signed the Executive Order called “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.” It requires federal contractors and grant recipients to certify that they do not have unlawful EDI policies and their federal funding depends on that certification being true, creating direct False Claims Act exposure if it isn’t.

The Justice Department followed up in late July with formal guidance spelling out the kinds of EDI practices it considers unlawful – for example, diversity goals tied to specific timeframes or programmes that appear to give preference to certain groups. Under the Civil Rights Fraud Initiative, those statements can now be treated as false certifications, triggering whistleblower actions and treble damages under the False Claims Act. 

For US employers, this marks a major change in risk profile.  Even internal training programmes or recruitment statements that reference gender or race can be scrutinised as indicators of unlawful preference. And because the Initiative invites employees and private citizens to act as whistleblowers, the exposure is no longer theoretical  - it’s active, financial, and reputational.

Although the focus is on US entities, this will also be watched closely by multinational companies with UK or European headquarters. Global EDI policies that apply across regions could inadvertently breach US rules, so international employers will need to review their frameworks to ensure they don’t create risk on the US side.

So, let’s get a view on this. Cara Crotty, a partner at Constangy based in Columbia, South Carolina. She co-chairs the firm’s EDI and contractor compliance practice groups and advises employers across the US on these very issues. So what is underpinning these EDI-related claims?: 

Cara Crotty: “Well, federal law prohibits employers from using protected characteristics, like race, gender, religion, national origin as a basis for making employment decisions and President Trump issued an executive order on his second day in office that requires federal contractors and other recipients of federal funds to certify two things. One, that they do not have illegal DEI in place and, two, that they are acknowledging that their payment from the government is conditioned on understanding the materiality of that certification. So if a contractor or other recipient of federal funds has a DEI policy that would violate that provision, that discriminates in some way, then there is the potential that a False Claims Act could apply and result in significant monetary liability. In addition, the Department of Justice started a Civil Rights Fraud Initiative that encourages employees and private citizens to file qui tam actions, or whistleblower lawsuits, against employers that are violating those provisions that have illegal DEI. So it strongly encourages and incentivises employees to report their employers to the federal government.”

Joe Glavina: “In the UK, it's common for employers to set diversity goals. What kinds of employer statements or actions would create a legal risk in the US?”

Cara Crotty: “Any kind of statement that indicates the employer has a quota or a preference for individuals based on a protected characteristic could certainly get an employer in hot water and raise the risk here in the US. So statements around goals that are expected or required to be achieved, especially by a certain date and time, could be construed to be a quota, or that the employer has adopted an illegal preference and will be using protected characteristics when they're making employment decisions. So most US employers are abandoning diversity goals altogether, but an employer would certainly want to avoid creating the perception that any protected characteristic is being used in making an employment decision. So if an employer decides to retain goals – and they are not necessarily unlawful – but any statements around diversity goals should make it clear that protected characteristics are not being taken into account when making decisions, and that employment decisions are based on legitimate job-related criteria and not protected characteristics.”

Joe Glavina: “Here in the UK we don’t have an equivalent of the False Claims Act and whistleblowing claims about EDI-related issues are rare. Are you seeing a rise in US whistleblower lawsuits based on diversity programmes?”

Cara Crotty: “So you know, it's interesting. In the UK, it's not surprising that you don't have a False Claims Act. Our False Claims Act actually arose during the Civil War back in the 1960s when there was a lot of fraud against the union government for profiteers submitting invoices for goods that weren't delivered, or for shoddy goods. But I think it's too early to know now if there's an increase in qui tam or False Claims Act claims because the procedural process for bringing those types of claims is fairly lengthy. An individual would file a qui tam action actually under seal, and then the government has the opportunity to review the information and make a determination about whether or not it wants to intervene in the action and all of that can take some time before the lawsuit would ever become public. So I think we're in a wait and see mode right now for whether or not there's an increase in False Claims Act lawsuits. What we are seeing, especially since the Students for Fair Admissions decision a couple years ago, is the number of lawsuits alleging reverse discrimination where majority group members, such as male or Caucasian, is alleging discrimination. So I think there has been more focus on that area and, significantly, just this past term, the US Supreme Court ruled that majority group plaintiffs do not have a higher standard to prove in a discrimination case. So some of the jurisdictions in the US had held that a majority group plaintiff would have to show that their employer is the unusual employer that discriminates against the majority group, and the Supreme Court held that this the statute, the Title VII, didn't support the creation of an additional burden for individuals that discrimination on the basis of race or gender is unlawful and it doesn't matter whether or not the individual is part of a majority group or not.”

Joe Glavina: “I’d like to ask you about the Students For Fair Admissions case which I know has had a big impact in the US. How has it changed the landscape for employers trying to balance EDI with legal compliance?”

Cara Crotty: “Yes, it's really interesting, because the Students for Fair Admissions decision didn't change employment law at all. It was already unlawful for employers to make employment decisions based on race or gender, or any other protected characteristics. So when the decision first came out, I thought, well, this is ho hum for employers, it’s business as usual, but I was sorely mistaken. I think what's  really changed, if it's not the law, it was the perception around DEI and definitely the political environment. So I think many employers realized that they had policies that were just never challenged before, or had not been scrutinized, and no one really gave them a second thought. So things like training programs that are limited to women or people of colour would be considered problematic under Title VII and certainly this administration has clearly stated that those are the types of things that it would consider to be illegal DEI. So those are the types of policies that we're seeing changes being made. I think as a result of the Students for Fair Admissions decision, as well as the change in this political climate, most employers are doing a deep dive around their DEI policies and initiatives and ensuring that there's no either express or implied sentiment that a protected characteristic is a factor in in making employment-related decisions.”

Joe Glavina: “If a UK company is operating in the US as a federal contractor, what would you advise they avoid saying in their AAPs or diversity statements? Is it a case of avoiding quotas, outcome-based targets, that sort of thing?”

Cara Crotty: “Yes, that’s definitely a big part of it. I would also recommend that UK employers with US based entities that are federal contractors update your affirmative action plan documents. You want to eliminate references to executive order 11246 which was rescinded by President Trump, and then correspondingly eliminate references to an affirmative action plan for females and minorities. Contractors are still required to develop affirmative action plans for individuals with a disability and protected veterans, but the female and minorities AAP really should be eliminated. So, like you mentioned, language around quotas or preferences, anything indicating that selection criteria for any term, condition or privilege of employment is based on a protected characteristic should be really very closely scrutinized. Any hiring goals tied to race and sex – like I mentioned, most employers are backing away from those – but if you retain them then you want to make sure it's clear that the goals are based on our good faith recruitment efforts’ and that we will always make employment decisions without regard to protected characteristic very good in.”

Last month Cara talked to this programme about the particular risks facing UK-based businesses which have a presence in the US – that’s ‘Spotlight on EDI risk for UK employers with US operations’ and is available for viewing now from the Out-Law website and we’ve included a link to it in the transcript of this programme for you.

Clearly, navigating the contrast between UK and US rules requires specialist advice on the American side and Cara and her team at Constangy are very well placed to help with that so please do make contact if you need help. Her details are there on the screen for you.

- Link to HRNews programme: ‘Spotlight on EDI risk for UK employers with US operations’