Here's the moment that changes everything for your HVAC business: hiring your first employee. You're excited because it means you're growing. But then someone mentions workers' comp, and suddenly you're drowning in acronyms, state regulations, and insurance requirements you didn't even know existed. Take a breath. This guide walks you through exactly what insurance you need, why you need it, and how to get it right from day one.
The truth is, bringing on that first hire triggers a whole new set of insurance obligations. Some are legally required. Others are just really, really smart to have. Let's break down what you need to know so you can protect your business, your employee, and yourself.
Workers' Compensation: The Non-Negotiable Requirement
In most states, workers' compensation insurance becomes mandatory the moment you hire your first employee. This isn't optional. It's the law. Workers' comp covers medical expenses and lost wages if your employee gets injured on the job. And in the HVAC industry—where your team is climbing ladders, handling refrigerants, and working with electrical systems—injuries happen.
Some states have different thresholds. A handful don't require coverage until you have three to five employees. Texas doesn't even mandate it for most private employers, though skipping it is incredibly risky. But if you're operating in most states, assume you need it immediately.
Here's where it gets interesting for HVAC contractors specifically: California requires all C-20 licensed contractors to carry workers' comp whether or not they have employees. That's right—even if you're a solo operation, you need coverage. This requirement took effect in 2023 and applies to warm-air heating, ventilating, and air-conditioning contractors. California isn't playing around on this one.
The cost? In 2025, the average workers' comp rate for HVAC contractors is $3.14 per $100 of payroll. So if you're paying your first employee $50,000 a year, you're looking at roughly $1,570 in annual workers' comp premiums. That's a ballpark figure—your actual rate depends on your state, your claims history, and your experience modification rate (EMR).
Getting Your Classification Code Right
When you apply for workers' comp, you'll be assigned a classification code based on the work your employees do. For most HVAC technicians, that's code 5537: Heating, Ventilation, Air-Conditioning and Refrigeration Systems—Installation, Service and Repair. This code covers the boots-on-the-ground work your techs do every day.
If you hire someone to handle administrative tasks—answering phones, scheduling appointments, managing invoices—they should be classified under code 8810 for office employees. That code has a much lower rate, typically around $0.16 per $100 of payroll. Mixing these up costs you money. If you classify your office manager under the technician code, you're overpaying. If you misclassify a field tech as an office worker, you'll get hit with back premiums during your annual audit.
Getting this right from the start matters. Insurance companies audit your payroll annually. If they find misclassifications, they'll recalculate your premium and send you a bill for the difference. It's not a penalty, but it feels like one when you're writing a check for thousands of dollars you didn't budget for.
Employment Practices Liability Insurance: Protection You Didn't Know You Needed
Workers' comp protects your employee if they get hurt. But what protects you if an employee—or even a job applicant—sues you for wrongful termination, discrimination, harassment, or retaliation? That's where Employment Practices Liability Insurance (EPLI) comes in.
Here's the part that surprises most business owners: you're exposed to employment claims from the moment you interview someone. Let's say you interview two candidates and hire one. The person you didn't hire could allege discrimination based on age, gender, race, or any number of protected characteristics. Even if the claim is completely baseless, you still need to defend yourself in court. Legal fees alone can cost $50,000 or more.
Small businesses are actually more vulnerable to employment claims than large companies. Why? Because you probably don't have an HR department, detailed employee handbooks, or established policies for hiring, discipline, and termination. You're winging it. And while that flexibility is part of what makes small businesses great, it also opens you up to risk.
EPLI isn't legally required like workers' comp, but it's a smart investment. Small businesses with five to 20 employees typically pay between $1,500 and $2,500 per year for a $1 million policy. About 36% of small businesses pay less than $150 per month. That's a bargain compared to the cost of defending even one lawsuit.
Payroll Reporting and Premium Audits
When you buy workers' comp, your insurer estimates your annual premium based on projected payroll. At the end of the year, they audit your actual payroll to see if you paid too much or too little. If your payroll was higher than expected, you'll owe more. If it was lower, you'll get a refund.
This is where accurate record-keeping becomes critical. Keep detailed payroll records that separate employees by classification code. If your technician also does some office work, you'll need to split their hours accordingly. Your insurance company doesn't care about your intentions—they care about what the records show.
One more thing: overtime pay counts differently than regular pay. Workers' comp premiums are calculated on straight-time wages, not overtime premiums. So if your employee works 50 hours in a week and gets time-and-a-half for 10 of those hours, you don't pay workers' comp premiums on the extra half-time. Keep good records, and you'll save money.
How to Get Started
Before you bring your first employee on board, contact an insurance agent who specializes in contractor insurance. Tell them you're hiring, what kind of work your employee will do, and what your projected annual payroll is. They'll help you get workers' comp in place and can quote EPLI at the same time. Many insurers will bundle EPLI with your general liability policy or Business Owner's Policy (BOP), which often saves you money.
Don't wait until after you hire someone to get coverage. In most states, you're breaking the law if you have an employee on your payroll without active workers' comp. And if that employee gets injured before you have coverage? You're personally liable for their medical bills and lost wages. That can bankrupt a small business.
Hiring your first employee is a huge milestone. It means your HVAC business is growing, and that's worth celebrating. Just make sure you're protecting that growth with the right insurance. Get workers' comp in place before day one, consider EPLI to protect against employment claims, and keep accurate payroll records to avoid surprises at audit time. Do this right, and you'll sleep better knowing your business, your employee, and your livelihood are covered.
