HVAC Subcontractor or Employee? How to Avoid Costly Misclassification

Using subs is standard practice in HVAC. You’re slammed with calls, need another set of hands, know someone who can help. You pay them, they move on. Simple, right?

The government would like a word.

The moment you hire, your liabilities change. But improper subbing can create even more liability than you bargained for. Ian Schotanus (aka “The HR Guy”) shared his thoughts on a recent episode of from the HVAC Know It All Business Edition podcast:

“If he’s subbing out a third to a half of his work regularly to another person… I would be looking at bringing them in as an employee”

The stakes are real. The Department of Labor recovered $1.5 million for 430 HVAC technicians misclassified as independent contractors at one Dallas company in 2024.¹ That’s about $3,500 per worker, and that was just the wage recovery. The company also paid $756,158 in liquidated damages on top of that.¹ In a separate case, Power Design and Moriarty settled for $3.45 million over similar violations.² Companies that invest in their employees properly don’t face these problems.

The Line You Might Be Crossing

Here’s what regulators actually look at (spoiler: it’s not your paperwork):

The IRS uses a three-factor test: behavioral control, financial control, and type of relationship.³ If you’re training them on your scripts, providing the recovery machine, and scheduling their calls, that’s an employee wearing a 1099 mask. The IRS sees through that costume faster than a homeowner spots a hack job installation.

The potential damage? One analysis estimates misclassification liability at $140,000 or more per worker over a three-year audit period when you add up unpaid FICA, overtime, liquidated damages, and penalties.⁴ Suddenly that “simple” sub arrangement doesn’t look so cheap.

In states using the stricter “ABC Test,” there’s an even higher bar. One test asks whether the worker performs tasks “outside the usual course” of your business.⁵ An HVAC tech installing systems for an HVAC company? That’s your core business. In California, Massachusetts, and roughly 20 other states, individual subs doing your main work is nearly indefensible.

The General Contractor Exception

There’s one model that works: being a legitimate general contractor.

“The only way to avoid that conundrum is if you’re actually registered as a general contractor and promoting that,” Ian explains. Larger commercial companies do this successfully. They disclose that subcontractors aren’t their employees and don’t represent them as “your team.”

The difference matters more in residential work, where customers expect your people in their homes. Commercial clients understand the GC model. Homeowners typically don’t, and they definitely don’t want to hear “actually, that guy wasn’t really my employee” when something goes wrong.

If you’re building a residential brand and sending subs in your uniforms to service your customers, you’re exercising the kind of control that turns a contractor relationship into an employment relationship. No amount of creative paperwork changes that.

A Note for Canadian Contractors

“Because of contract and employment law the way it’s structured up in Canada, it’s much more likely that sub arrangement is legal and can be defended,” Ian notes.

The Canadian system under CRA Guide RC4110 gives more weight to written contracts than the US system, which focuses heavily on the actual working relationship.⁶ But neither country gives you a free pass. If your “sub” works exclusively for you and uses your equipment, you’re in the danger zone regardless of your address.

Ready to build the kind of HVAC business that justifies bringing on real employees? Property.com’s “Know Before You Go” tool helps you win more profitable jobs by showing permit history, equipment age, and service records before you even pull up to the property. When you’re competing against lowball one-man operations, having better intel means commanding better prices. Build the revenue that supports W-2 employees, not sketchy sub arrangements.

Three Options That Keep You Legal

Option 1: Formalize Employment

When work is regular and they represent your brand, make them W-2 employees. The math often works out better than you think when you factor in quality control and elimination of audit risk. Transitioning from tech to business owner requires building a real team eventually.

🎧 Related Episode: How To Hire, Retain and Fire: In The Skilled Trades w/ Sid Upadhyay (38:42) covers recruitment strategies and workforce development for HVAC businesses ready to bring on W-2 employees.

Option 2: True Partnership

Combine overhead, share insurance, formal agreement, separate businesses. This requires genuine independence. They serve other clients and make real business decisions.

Option 3: Legitimate GC Structure

Register properly, disclose sub relationships, let subs keep their own identity. Works for commercial work. Less so for residential service with brand expectations.

The Path Forward

If you’re subbing out 30-50% of your work to the same person regularly, you’re in risky territory. The answer isn’t to hope nobody notices. It’s to structure the relationship correctly before someone files an SS-8 or a workers’ comp claim lands on your desk.

📺 Watch: Gary & Trent Parker discuss the reality of building something real in the trades, including the struggles most contractors don’t talk about.

When you’re ready to hire the right way, you’ll find it’s not just about protecting yourself. It’s about building something that actually lasts.

The best time to fix your subcontractor arrangement was before you started it. The second-best time is now.

NOTE: This content is for educational purposes only and is not legal advice. Consult with a qualified attorney for guidance on your specific situation.