DOJ Issues Guidance on Federal Funding Discrimination

If you receive federal dollars, the U.S. Department of Justice just slid something important across your virtual desknew guidance on when your programs might cross the line into unlawful discrimination. It’s not light reading, but it absolutely affects the way you design grants, scholarships, hiring initiatives, and all those carefully crafted DEI programs that have their own FAQs and acronyms.

In July 2025, DOJ issued a memorandum titled Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination. The memo clarifies how long-standing federal anti-discrimination lawslike Title VI, Title VII, and Title IXapply to programs that use federal money, including those labeled “Diversity, Equity, and Inclusion (DEI)” or “equity initiatives.” The punchline: clever labels and good intentions do not override the basic rule that you may not discriminate on the basis of race, color, national origin, sex, religion, or other protected characteristics.

In this article, we’ll unpack what the new DOJ guidance says, who needs to care, what kinds of practices are now squarely in the danger zone, and how organizations can adjust without throwing away every effort to improve access and opportunity.

What Exactly Did the DOJ Issue?

The guidance comes in the form of an Attorney General memorandum directed to all federal agencies that award grants, loans, or other financial assistance. DOJ describes it as a clarification of how existing anti-discrimination laws apply when federal funds are involved, especially where programs use criteria tied (directly or indirectly) to protected characteristics.

The memo focuses on a familiar legal toolbox:

• Title VI of the Civil Rights Act of 1964, which prohibits discrimination based on race, color, or national origin in programs and activities receiving federal financial assistance.
• Title IX of the Education Amendments of 1972, which bars discrimination based on sex in education programs or activities receiving federal funds.
• Title VII of the Civil Rights Act of 1964, which prohibits employment discrimination based on race, color, religion, sex, and national origin.
• The Equal Protection Clause of the Fourteenth Amendment, which limits how state and local governments may consider protected characteristics.

DOJ’s message is that all of these laws still apply when programs are branded as DEI, “equity,” “inclusive excellence,” or anything else. If a program would be unlawful discrimination in any other context, calling it an equity initiative doesn’t magically make it legal.

Who Needs to Pay Attention?

The guidance applies broadly to “recipients of federal funding”. That’s a bigger universe than many people realize. It includes:

• Colleges and universities receiving federal student aid, research grants, or other education funding.
• K-12 school districts that receive federal education dollars.
• Hospitals and health systems receiving Medicare, Medicaid, or other federal health-care funding.
• Nonprofit organizations supported by federal grants or sub-grants.
• State and local governments and agencies administering federally funded programs.
• Federal contractors and subrecipients that receive or help administer federal funds.

If any part of your operations is supported by federal money, DOJ wants you to treat this guidance as a big neon “check your policies” sign.

How the Guidance Defines “Unlawful Discrimination”

The memo doesn’t rewrite the statutesbut it does spell out how DOJ currently interprets them in the context of modern DEI and equity initiatives. Law firms and compliance experts have distilled the memo into several key themes.

1. Preferential Treatment Based on Protected Traits

DOJ flags preferential treatment based explicitly on protected characteristicssuch as race, sex, or national originas a major problem when federal funding is involved. Examples that may raise red flags include:

• Scholarships or fellowships only for students of a specific race or sex when federal funds are involved.
• Hiring or promotion programs that give priority to candidates of certain races, or that exclude others from eligibility.
• Leadership, internship, or mentorship programs reserved solely for members of particular racial or ethnic groups.

The guidance stresses that even programs designed to support groups that have historically been excluded can be unlawful if they deny opportunities to others purely because of their protected traits. DOJ’s view is that federal funds cannot be used to create new forms of discrimination, even in the name of remedying past inequities.

2. Using “Neutral” Criteria as Proxies

DOJ also warns about policies that are facially neutral but function as proxies for protected characteristics. Think of criteria like:

• “Lived experience” defined in a way that effectively requires belonging to a specific race or gender.
• “Cultural competence” or “community connection” used as a stand-in for membership in a particular ethnic group.
• Geographic targeting that closely tracks racial or ethnic demographics and is intentionally designed to mimic a race-exclusive program.

If such criteria are adopted for the purpose of giving advantages or disadvantages based on protected traits, DOJ suggests they may be treated as unlawful discrimination, even if the policy never explicitly mentions race or sex.

3. Liability for Third-Party Discrimination

One of the most attention-grabbing parts of the memo is DOJ’s statement that funding recipients can be liable for the discriminatory practices of contractors, grantees, and subrecipients if they knowingly support those practices with federal funds.

In practice, this means:

• If you pass federal funds to a partner that runs a discriminatory program, you may be held responsible.
• You can’t outsource risky DEI initiatives to another entity and hope the liability stays off your books.
• Grant agreements and monitoring processes need to address anti-discrimination compliance explicitly.

4. Enforcement Tools: Grants, Investigations, and the False Claims Act

DOJ also signals that it’s willing to use serious enforcement mechanisms. The memo and related commentary note that the government can:

• Investigate under civil rights laws and require corrective action.
• Condition, suspend, or terminate federal funding for non-compliance.
• Pursue False Claims Act (FCA) cases if an entity falsely certifies compliance with anti-discrimination rules while running unlawful programs.

FCA liability is especially sobering: it can mean treble damages and penalties, sometimes triggered by whistleblowers who file qui tam lawsuits.

What This Means for DEI and Equity Programs

The guidance has already prompted headlines about “illegal DEI” and “crackdowns on equity programs.” The reality is more nuanced. DOJ does not ban all DEI efforts, but it tightens the guardrails around what federally funded programs can do.

From law-firm analyses and compliance updates, several patterns emerge:​

• High-risk practices include race-exclusive programs, numerical quotas, or policies that disadvantage individuals because they lack a particular protected trait.
• Lower-risk approaches focus on race-neutral criteria like income, first-generation status, rural or under-resourced backgrounds, or broader “underrepresented” categories defined without explicit protected traits.
• Process fairness matters: open competition, transparent criteria, and individualized review tend to fare better than rigid group-based preferences.

In other words, goals like expanding access, improving representation, or addressing historic exclusion are not off limitsbut you need methods that comply with anti-discrimination laws.

Practical Steps for Federal Funding Recipients

So what should organizations actually do? Most compliance experts recommend a structured, calm approach rather than a panic-induced bonfire of every DEI program you’ve ever created.

1. Inventory Your Programs and Dollars

Start by mapping where federal funds touch your organization:

• Which programs, scholarships, internships, or hiring initiatives involve federal grant money or federal financial assistance?
• Where are those funds pooled with institutional or private dollars?
• Which activities rely on certifications of compliance with federal anti-discrimination laws?

You can’t manage risk you haven’t identified, so this inventory step is crucial.

2. Review Eligibility Criteria and Selection Processes

For each program touched by federal funds, examine:

• Do we explicitly limit eligibility by race, sex, or other protected traits?
• Are we using “neutral” criteria that were actually chosen to favor or exclude particular groups?
• Are our scoring rubrics or selection criteria documented, rational, and consistently applied?

If the honest answer to any question is “that policy might be hard to defend,” it’s a candidate for revision.

3. Re-Engineer High-Risk Programs

When programs are identified as risky, organizations often:

• Replace race-exclusive eligibility with race-neutral factors (for example, first-generation status, low-income status, rural location, or prior attendance at under-resourced schools).
• Open previously closed opportunities to all qualified participants while targeting outreach to communities that have historically been excluded.
• Clarify that selection decisions are individualized, not mechanical quotas.

The aim is to preserve legitimate equity goals in a way that aligns with Title VI, Title VII, and Title IX as DOJ currently interprets them.

4. Tighten Oversight of Contractors and Subrecipients

Because DOJ warns about liability for third-party discrimination, contracts and sub-grant agreements should:

• Include clear anti-discrimination obligations tied to federal law.
• Require partners to disclose eligibility criteria for any program using federal funds.
• Provide for audits, reporting, or corrective-action plans if problems surface.

This is also a good time to align your internal monitoring with whatever your federal funding agency expects in terms of oversight.

5. Train People, Not Just Policies

Even the best-written policy can be undone by well-meaning people improvising “small exceptions.” Offer training that:

• Explains the DOJ guidance in plain language, with common-sense examples.
• Shows how to talk about DEI goals without promising unlawful preferences.
• Encourages staff to ask questions before launching new programs or marketing campaigns.

Compliance culture works best when people don’t feel like they’re walking on eggshells but do understand where the legal tripwires are.

Real-World-Style Scenarios: How the Guidance Plays Out

To make this less abstract, imagine a few scenarios that mirror issues highlighted by the guidance and by legal commentators.

Scenario 1: A Scholarship Limited to One Race

A university uses federal funds to support a scholarship described as “exclusively for Black students in STEM.” Under DOJ’s guidance, that type of race-exclusive eligibility is high-risk when federal dollars are involved. The safer alternative: open eligibility to all, but prioritize race-neutral criteria like first-generation status or attendance at under-resourced schools, combined with targeted outreach to communities that are underrepresented in STEM.

Scenario 2: A Fellowship for “Women and Nonbinary People Only”

A federally funded research program offers leadership fellowships only to women and nonbinary scholars. DOJ’s memo suggests that excluding eligible men simply because of their sex would likely be unlawful, even if the goal is to address gender gaps. A more defensible approach might involve leadership training open to all, combined with mentorship opportunities and outreach initiatives designed to encourage participation by women and nonbinary researchers without shutting others out.

Scenario 3: A “Lived Experience” Hiring Preference

A health-care system receiving federal funds adds a preference in job postings for candidates with “lived experience as a member of a historically marginalized racial group.” If that preference is intended to favor applicants of particular races, DOJ might view it as a proxy for race-based discrimination. The system could instead emphasize experience working effectively with diverse communities, measurable language skills, or service in under-resourced neighborhoodscriteria that relate to the job without requiring a particular protected identity.

500-Word Experience Section: Lessons from the Compliance Trenches

While the names and details below are generalized, they reflect the kinds of experiences organizations have been reporting to counsel and compliance consultants since DOJ’s guidance dropped.

1. The University That Hit Pause Before the Lawsuits Hit “Play”
A mid-sized public university relied heavily on federal research grants and student aid. When the DOJ memo came out, campus conversations swung from “we have to cancel everything” to “nothing will really change.” The general counsel’s office took a middle path: it temporarily paused a handful of obviously high-risk programslike a race-exclusive summer bridge initiative and a fellowship that openly promised preference to applicants of a certain ethnicitywhile launching a fast-track legal review of DEI offerings across campus.

That review found that many programs were already defensible and simply needed better documentation: clearer statements of purpose, race-neutral eligibility criteria, and more transparent selection processes. Others required redesign. The summer program re-opened as a first-generation and low-income initiative with targeted outreach to local high schools serving predominantly minority students. The fellowship shifted from “reserved for X group” to “open to all, with a focus on candidates who can demonstrate a commitment to serving under-resourced communities.” The university kept its equity goals but avoided the binary choice of “keep or kill” every DEI effort.

2. The Health System That Discovered a Contractor Problem
A large health system receiving significant federal reimbursement had created a workforce pipeline program for underrepresented communities. On paper, its own eligibility rules looked fineno explicit preferences based on race or sex. But an internal audit, prompted by the guidance, revealed that a third-party nonprofit administering part of the program was using a screening form that effectively excluded applicants who did not identify as members of a particular racial group.

Under the DOJ memo, that kind of “we didn’t know what our contractor was doing” story is not comforting. The health system scrambled to update its subrecipient agreements, tighten oversight, and retrain the nonprofit’s staff. It also built a standard compliance review into the contracting process so future partnerships would be vetted before launch. The lesson: even if your own house is clean, your liability can be affected by what partners do with the federal funds you hand them.

3. The Community Nonprofit That Used the Guidance as a Reset Button
A small nonprofit providing youth services in a low-income neighborhood had cobbled together federal, state, and private funding for years. Its leadership team had always wanted to improve representation in its staff and volunteer corps but felt intimidated by the legal jargon around “disparate impact” and “strict scrutiny.” When the DOJ guidance arrivedwith concrete examples of what looked riskyits board used the moment as an excuse to overhaul policies.

Instead of offering volunteer roles only to “women of color from the neighborhood,” the nonprofit rewrote its criteria to emphasize local residency, commitment to youth development, and availability for weekend programming. It created mentoring and leadership opportunities targeted to teens who had limited prior exposure to college or career pathways, without tying eligibility to any one protected trait. At the same time, the organization revamped its data collection to track who was being served and where gaps still existed.

For this nonprofit, the DOJ memo wasn’t just about avoiding troubleit became a framework for pursuing equity in a way that could be explained to funders, regulators, and the community with a straight face and a clear legal theory.

Across these experiences, one theme stands out: the guidance is both a warning and an opportunity. It pushes organizations to be more precise, more transparent, and more thoughtful about how they pursue inclusion. If you receive federal funds, treating the memo as required readingrather than background noiseis one of the safest moves you can make this year.

Conclusion: Turning a Compliance Headache into a Strategy Upgrade

DOJ’s guidance on federal funding discrimination does add complexity. It asks grant recipients, schools, health systems, nonprofits, and contractors to look hard at programs that may have grown organically over the last decade of DEI efforts. But it also offers a chance to align values, messaging, and legal obligations.

The core message is simple, even if the implementation is not: federal funds can’t be used to discriminate, no matter how noble the stated goal. If your initiatives honor that principleby focusing on race-neutral factors, open competition, and evidence-based outreachthere is still plenty of room to champion equity without stepping over the legal line.