Most HVAC companies pay field techs a flat salary. Most of them are breaking federal law. Here’s what happens when you buy one.
You’ve done the financial due diligence. You’ve reviewed the P&L, stress-tested the SDE, and modeled your SBA pro forma down to the penny. You feel good about the numbers.
Then, six months after closing, a former technician files a wage complaint with the Department of Labor. He says he worked 55 hours a week for three years and never saw a dime of overtime. He’s right — and suddenly you’re staring at a back-wage claim that makes your entire first-year profit disappear.
This isn’t hypothetical. It’s one of the most common employment liabilities in the HVAC industry, and almost nobody checks for it during due diligence.
What the FLSA Actually Says About HVAC Technicians
The Fair Labor Standards Act requires employers to pay non-exempt employees 1.5x their regular rate for every hour worked beyond 40 in a week. The key word is “non-exempt” — and here’s where HVAC companies get it wrong.
There are three main overtime exemptions:
- Executive exemption: The employee’s primary duty is managing the enterprise or a department, and they supervise at least two full-time employees
- Administrative exemption: The employee performs office or non-manual work related to business operations and exercises independent judgment on significant matters
- Professional exemption: The employee performs work requiring advanced knowledge in a field of science or learning, customarily acquired through a prolonged course of specialized instruction
HVAC field technicians fail all three tests. They don’t manage departments. They don’t exercise independent judgment on business operations (diagnosing a compressor failure is technical judgment, not business judgment under FLSA). And while HVAC work requires real skill, it doesn’t meet the DOL’s definition of “advanced knowledge” acquired through “prolonged specialized intellectual instruction” — trade school and on-the-job training don’t qualify under the DOL’s fact sheet on the professional exemption.
The 2024 salary threshold is $58,656/year. Even techs earning above that amount must still meet the duties test. Salary alone doesn’t make someone exempt.
How This Becomes Your Problem
The seller has been paying his three senior technicians $65,000/year salary, no overtime. They each work 50–55 hours per week during busy season, 45 hours in shoulder months. This has been going on for five years.
In a stock deal, you inherit the company — including all its liabilities. Those unpaid overtime claims are now yours, fully and completely.
In an asset deal, you might think you’re clean. You’re not, necessarily. Many states recognize successor liability when the buyer continues the same business, with the same employees, doing the same work. If you kept the seller’s techs on your payroll (and you almost certainly did — they’re the business), a court may hold you responsible for the prior owner’s wage violations.
The Math That Should Keep You Up at Night
Here’s what a single FLSA overtime claim looks like for a mid-size HVAC company:
Scenario: 8 technicians classified as exempt, each working an average of 50 hours/week (10 hours overtime), at an average regular rate of $28/hour.
- Overtime premium owed per tech per week: 10 hours × $14/hr (half-time premium) = $140
- Per tech per year: $140 × 50 working weeks = $7,000
- 8 technicians × $7,000 = $56,000/year in unpaid overtime
- 2-year lookback (standard): $112,000
- 3-year lookback (willful violation — and paying salary to avoid overtime IS willful): $168,000
- Liquidated damages (equal to back pay, mandatory for willful violations): $168,000
- Total exposure: $336,000
Add $30,000–$75,000 in legal fees and DOL penalties, and you’re looking at $366,000–$411,000.
That’s more than most first-year owner’s draws. It’s more than most earnout structures. And it was sitting in the company’s payroll records the entire time you were doing due diligence — you just didn’t know to look for it.
Why This Is So Common in HVAC
HVAC company owners don’t misclassify technicians out of malice. They do it because:
- “That’s how my boss did it when I worked for him.” The practice gets passed from owner to owner. Nobody questions it because nobody’s been caught.
- Overtime is expensive. A 10-tech shop with each tech working 50 hours/week generates $70,000/year in overtime costs. Paying flat salaries hides that cost — until it doesn’t.
- Technicians often prefer salary. A predictable paycheck feels better than hourly, and many techs don’t realize they’re giving up overtime pay they’re legally entitled to.
- Small companies don’t have HR. There’s no compliance officer reviewing FLSA classifications. The owner handles payroll, and the owner doesn’t know the law.
The DOL doesn’t care about intent. If the classification is wrong, the liability exists — whether the owner knew about it or not.
How to Detect This During Due Diligence
Add these steps to your diligence checklist:
1. Request the payroll register for the last 3 years
Not just the W-2 summaries — the actual payroll detail showing:
- Each employee’s classification (exempt vs. non-exempt)
- Hours worked per week (if tracked)
- Pay rate and method (salary vs. hourly)
2. Identify every employee classified as “exempt salaried”
For each one, ask: what is their primary duty? Do they manage two or more employees? Do they make independent decisions about business operations (not technical decisions)? If the answer to both is no, they’re likely misclassified.
3. Check for “hidden overtime”
Some HVAC companies pay technicians hourly but cap their hours at 40, paying a separate “bonus” or “flat rate” for additional work. This is a common attempt to avoid the 1.5x overtime premium — and it’s illegal. The DOL’s position is clear: all hours worked must be counted, and all compensation must be included in the regular rate calculation.
4. Review any prior DOL correspondence
Ask the seller directly: has the company ever been investigated by the DOL, received a complaint, or settled a wage claim? Prior complaints are a red flag that the problem has already been identified — and may be ongoing.
5. Look at time tracking
If the company doesn’t track hours for salaried employees, that’s a red flag in itself. No hour records means no evidence of compliance — and in FLSA cases, the burden shifts to the employer to prove hours worked. Without records, the employee’s estimate of hours is presumed accurate.
Structuring Your Deal to Manage This Risk
If you find potential FLSA exposure, you have options:
- Indemnification clause: Require the seller to indemnify you for any pre-close wage claims. Standard in most purchase agreements, but make sure the language specifically covers “employment and labor law claims, including but not limited to FLSA violations.” Generic indemnification language may not hold up.
- Escrow holdback: Hold 5–10% of the purchase price in escrow for 18–24 months to cover potential employment claims. The statute of limitations on willful FLSA violations is 3 years, but most claims surface within 18 months of closing.
- Purchase price adjustment: If the exposure is quantifiable, negotiate a dollar-for-dollar reduction. A seller who’s been saving $70,000/year in overtime costs has been artificially inflating SDE by that amount — your valuation should reflect the true cost structure.
- Reclassify immediately post-close: On day one, reclassify all technicians correctly. This doesn’t eliminate pre-close liability, but it stops the clock on new exposure and demonstrates good faith if a claim does arise.
The Fix Is Straightforward — and Cheaper Than You Think
Converting exempt techs to non-exempt hourly is operationally simple:
- Set the hourly rate to produce roughly the same annual pay at 40 hours/week
- Track all hours worked (ServiceTitan and Housecall Pro both have built-in time tracking)
- Pay 1.5x for hours over 40
- Budget for overtime as a real line item in your pro forma
The annual overtime cost for a 10-tech shop averaging 48 hours/week is approximately $45,000–$55,000. That’s real money — but it’s a known cost you can plan around. The alternative is a $300,000+ surprise you can’t.
The Bottom Line
Every HVAC acquisition due diligence checklist covers financial statements, customer concentration, equipment condition, and employee retention. Almost none cover FLSA overtime compliance.
That gap is the time bomb. The seller saved $50,000–$70,000/year by paying techs a flat salary instead of hourly plus overtime. That inflated SDE flowed into the valuation, and you paid a multiple on it. Now the DOL wants the money back — from you.
Check the payroll. Classify it correctly. Budget for overtime as a real cost. And if the exposure is significant, price it into your deal.
The best time to find an FLSA problem is during due diligence. The worst time is when the DOL investigator shows up at your shop.
Planning an HVAC acquisition and want to make sure nothing’s hiding in the payroll records? Resources like Lendesca can help you navigate the financial and operational complexity of buying a service business — including the compliance risks that don’t show up on a P&L.
Employment compliance is one of many hidden liabilities in HVAC acquisitions. The employee benefits due diligence guide covers the broader benefits landscape, and the workers comp audit guide covers a related payroll classification risk. For the full regulatory framework, see the 29 USC § 207 overtime statute.
