W-2 Employee or 1099 Contractor? Classifying HVAC Workers

General information, not legal or tax advice. Talk to an employment attorney or CPA about your specific setup.

Why it matters

Misclassifying an employee as a 1099 contractor can mean back overtime, back payroll taxes, penalties, unpaid workers' comp and unemployment premiums, and lawsuits. It also leaves you exposed if an uninsured "contractor" gets hurt on a job.

The core question

Is this person in business for themselves, or economically dependent on your company?

Signs of an employee:

• You set their schedule and dispatch them.
• You set the prices and they wear your uniform and drive your truck.
• You provide tools, parts and training.
• They work only for you, indefinitely.
• They're paid hourly or per job but can't increase profit through their own business decisions.

Signs of an independent contractor:

• They bid jobs and set their own prices.
• They have their own company, license, insurance, truck and tools.
• They choose which jobs to take and work for other contractors.
• They hire their own helpers.
• They can make or lose money depending on how they run their business.

Where federal rules stand (late 2026)

• The U.S. Department of Labor proposed a rule in February 2026 to replace the 2024 six-factor test with a framework close to the 2021 rule.
• The proposal puts the most weight on two core factors: the worker's control over the work and the worker's opportunity for profit or loss.
• Other factors still matter: skill required, permanence of the relationship, and whether the work is part of an integrated unit of production.
• Since May 2025, DOL investigators have been told to apply the older economic-reality approach in enforcement.

Check the status before relying on it; rules in this area have changed several times in recent years.

State tests are often stricter

Many states use an ABC test for wage or unemployment purposes. Under a typical ABC test, a worker is an employee unless:

• A: they're free from your control and direction,
• B: the work is outside the usual course of your business, and
• C: they're customarily engaged in an independently established trade or business.

Prong B is hard for HVAC companies: a tech doing HVAC service for an HVAC company is doing your usual business. The IRS also has its own test for tax purposes.

Where 1099 can legitimately fit

• A licensed duct fabrication or insulation company you subcontract a specific job to
• A crane service, electrician or another trade with its own business
• An independent installer with their own company and insurance who bids jobs and works for several contractors

Get a written subcontract, a certificate of insurance naming you, and a copy of their license.

FAQ

Can I start a new tech as 1099 and switch later?

If they work like an employee from day one, they're an employee from day one. The label doesn't change the classification.

What about helpers paid in cash?

They're almost certainly employees, and cash pay doesn't change payroll tax, overtime or workers' comp obligations.

What if a tech asks to be 1099?

A worker's preference doesn't decide classification. The working relationship does.

Sources

• Holland & Knight: DOL proposes to rescind 2024 independent contractor rule
• Smith Gambrell & Russell: DOL independent contractor rule
• Sheppard Mullin: DOL signals shift in contractor classification
• IRS: Independent contractor or employee?