The Internal Revenue Service and the Labor Department have signed a memorandum of understanding to improve the agencies’ coordination on stopping businesses from misclassifying employees as independent contractors to avoid providing employment protection.

IRS Commissioner Doug Shulman and Labor Secretary Hilda Solis were on hand to sign the memorandum of understanding on Monday, along with labor commissioners and other agency leaders representing seven states. They signed memorandums of understanding with the Labor Department's Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor.

“This agreement takes the partnership between the IRS and Department of Labor to a new level,” said IRS Commissioner Doug Shulman in a statement. “In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues, and better serve the needs of small businesses and employees.”

The signatory states included Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Solis also announced agreements for the Wage and Hour Division to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois and Montana, as well as with New York's attorney general.

“We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees,” Solis said in a statement. “We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike.”

The memorandums of understanding will allow the Labor Department to share information and coordinate its law enforcement efforts with the IRS and participating states to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.

Business models that attempt to change, obscure or eliminate the employment relationship are not inherently illegal, unless they are used to evade compliance with federal labor laws—for example, if an employee is misclassified as an independent contractor and subsequently denied rights and benefits to which he or she is entitled under the law, the Labor Department noted. In addition, misclassification of employees can create economic pressure for law-abiding business owners.

The memorandums of understanding arose as part of the Labor Department's Misclassification Initiative, which was launched under the auspices of Vice President Joe Biden’s Middle Class Task Force with the goal of preventing, detecting and remedying employee misclassification.

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