Owner Operator Lease Contracts Basics
Owner operator lease contracts are contracts that outline a business relationship between a motor carrier and an owner operator. In some cases, the relationship is between a leasing company and owner operator. In either case, the term and conditions of the contract are critical to the operation of the business.
Owner operator lease contracts are effective when written. The parties should not – as is often done – grab a generic contract from the internet and use it. First, generic contractual provisions may invalidate the lease agreement. Second, it is important for the owner operator to be clear about the operational aspects of the relationship . If there is too much ambiguity in the agreement, the relationship will become more difficult than it really needs to be.
Owner operator lease contracts should be specific. For example, an owner operator, leasing company or motor carrier should specify whether it will comply with the Federal Bridge Law and the meaning of "88880", "120,000 pounds" and other terms. If no explanation is given, the owner operator may not understand that it is expected to comply with these requirements. It is therefore essential that an owner operator obtain the advice of an attorney before signing a contract so that the owner operator understands its rights under the contract.
Key Terms and Provisions
Owner operator lease contracts typically contain several essential terms and clauses. The following terminology is critical:
Contract Duration: The duration of the agreement is one of the most important terms in the owner operator lease. Owner operator leases are usually for specified terms, anywhere from several months to a full year or longer. Some newer contracts list the duration as "terminable at will."
Payment Terms: Payment terms under an owner operator lease are negotiable, and those terms from one contract to another can vary significantly. Generally speaking, payment terms are monthly, although some contracts specify a quarter or other time period.
Obligation Of Owners to pay for vehicle use: The owner operator is responsible for the operating expenses of the vehicle, unless the contract specifically states otherwise. That means the owner/operator must pay all fees associated with vehicle operation, including fuel, registration, and insurance fees.
The obligation of the contractor to pay a wage: The contractor’s payment for services is typically based on a fifty/fifty split of revenues.
Contractor warranty of compliance with vehicle maintenance standards: The owner operator must maintain the vehicle according to industry standards.
Obligation of the contractor to maintain insurance: Owner operators are required to maintain and carry liability coverage in excess of $1 million. Contractors may also require other types of coverage, such as collision.
Prohibition against vehicles operated by drivers other than the owner: This prohibits owner/operators from permitting other, unapproved drivers, to operate the vehicle.
Owner Operator Lease Contract Benefits
For owner operators, entering into a lease contract has undeniably crucial fiscal advantages; the most important being a steady stream of income with a guaranteed source of payment. Owner operators also have the ability to maintain guaranteed operational independence while freeing themselves from administrative and operational burdens – particularly when it comes to the instances where the trucking operator is the sole proprietor of the trucking company or corporation. This means that owner operators still hold the benefits of an independent contractor, while being able to enjoy the security of a lease contract. It is only once an owner operator has been hired by a motor carrier for an extended period of time through a lease contract, that the opportunity to transition to an employee-owner operator becomes available. Owner operators are also protected from the risks encountered from variations in freight volume as the lease contract ensures a minimum number of loads per month. Without the variability related to contracts with individual shippers or load boards, there is less risk involved in bad weather seasons. With fewer risks to mitigate, owner operators are able to maintain and expand their fleet in the ratio that matches their regular volumes of work.
Common Issues and How To Resolve Them
Common challenges that arise in Owner Operator Lease Contracts, and how to address them
The most common challenges in Owner Operator Lease Contracts are misclassification issues. Truckers, dealers, brokers and freight forwarders often try to arrange their relationships with their motor carrier drivers as Owner Operators on terms that are legally sound if they are genuine contractual relationships, but can be shams in which the driver is actually an employee. It pays to have a consultation with a good transportation lawyer before making or accepting any Owner Operator arrangement. Typically, what the transportation enterprise attempts to do, is to substitute the Owner Operator for the trucking company as the employer. The net result is that the trucking company pays no taxes, and the Owner Operator, who is really just an employee, does not receive the benefit of any taxes withheld for social security, Medicare, and unemployment. When the acts and omissions of the Owner Operator get them in trouble with any of the transportation laws, or worse yet, cause an accident or some other liability, it comes as no surprise that those agencies will say the Owner Operator was the employee of the trucking firm, and therefore it must answer to the driver’s acts. They get caught, none the wiser. The remedy is simple: have a good transportation lawyer review any Owner Operator agreement you are considering, if you are the carrier, or allow someone with good transportation experience and credentials to review the same, if you are the driver. Most Owner Operator agreements need to be fairly evaluated carefully to determine whether they are legally sound. If your Owner Operator agreement provides that the driver is really an employee, then it is best that you follow the law and treat the driver as an employee, who is subject to whatever employer policies your requirements place him under, disciplined for any infractions of any rules, and paid overtime as required by the FLSA. This is especially true if the driver is paid by the hour or in the same way that a regular employee is paid rather than on a per-call basis. If your goal is to have a genuine Owner Operator arrangement with appropriate provisions in your agreement for the independent owner to determine how he spends his time, how he is paid, what equipment he uses, and the area in which he operates, then let our lawyers help you draft an Owner Operator agreement or evaluate yours. We offer a free case evaluation for all prospective clients so that we can determine the best next step to take with little or no risk to you.
Legal Aspects and Compliance
Owner operator lease contracts must comply with applicable transportation laws and regulations. That means that the contract must comply with federal regulations governing trucking companies and leasing arrangements. In particular, owner operator leases must meet the requirements of the federal Transportation Code as well as applicable state requirements.
Under federal law, the lease must establish that the lessor owner-operator is an independent contractor. The primary goal of the federal law is to prevent a lessee from becoming the general employer of an owner-operator employee. A trucking company cannot be in control of all aspects of the owner-operator’s work without potentially violating federal independent contractor regulations.
A mistake in creating the owner-operator relationship can have greater consequences than just resulting in a dispute over the terms of the leasing arrangement. A trucking company may face liability for unpaid respect wages , overtime pay, FICA, income taxes, worker’s compensation, worker’s compensation premiums, and failure to provide medical benefits and contributions into pension funds.
Before creating an owner-operator relationship, a trucking company should review the terms of its existing insurance policy for coverage. The company should also review the sensitive issue of whether most of a carrier’s operations will be brought under the same liability policy where the carrier contracts with an independent contractor. Courts have disallowed coverage for liability of a contractor when the truck was not hauling a load for the broker that contracted with the owner.
The U.S. Department of Transportation requirements also indicate that any person who names himself as an owner-operator must be an "owner" of a vehicle and not simply someone who has borrowed or leased the vehicle.
Negotiating an Equitable Lease Contract
As an owner operator, the contract you will be offered for your services can be critical to your business. In the best case scenario, it is simply a reflection of the relationship between you and the trucking company that has hired you to drive that truck. In the worst case scenario, it is a trap that is designed to rob you blind. Ideally, the lease contract will be beneficial to both you and to the carrier so that there can be a long and profitable relationship. There are a few key points to look out for when negotiating fairness into your lease contract.
All charges associated with the run you are to be paid for should be listed in detail on your pay sheet. If the cargo pay based is $0.5 per mile, that should be listed clearly so that it cannot be biased further down the road. The same should be said of other charges. Airlift fees, layover fees, detention charges and fuel surcharges should all be listed on the pay sheet with as little ambiguity as possible.
The fuel charge that is taken out at the pump is the fuel surcharge. The actual amount of fuel divided by the miles covered should be included on the pay sheet so if there is a conflict, you can get back to the records and see how this number was calculated. It should not differ greatly from the initial calculation stated in the contract.
As soon as one deduction from your pay is unclear, all subsequent deductions can be questioned. Therefore, it is important to clear up any problems with the first deduction before proceeding. The law states that if any part of a contract is deemed void, the rest of the contract becomes null and void.
How To Draft an Efficient Lease Contract
An owner operator lease contract establishes the terms for leasing a commercial motor vehicle from a trucking company operator to the trucking company itself. Such a contract sets out the rights and responsibilities of the owner operator and the trucking company operator under federal regulations. The Federal Motor Carrier Safety Administration does regulate certain aspects of the lease agreement and states that the agreement must contain:
• The names and addresses of the parties to the lease;
• The name of the authorized carrier;
• The type of vehicle and Vehicle Identification Number;
• The term of the lease;
• The responsibility for maintenance, repair, service, and inspection of the leased vehicle;
• Compliance with applicable leases.
The key in drafting a lease agreement that protects yourself is a step-by-step process .
The first step is to have a discussion with the trucking company operator/employer about what the lease is going to include and exclude in terms of your own individual concerns.
Next, the owner operator and employer can discuss the many clauses unique to each owner-operator situation. As an example, an environmental goods transport owner-operator will want a clause that specifies responsibility and liability for damage to or loss of Red Everyday Ale in transit.
Finally, the owner operator and the trucking company operator sign the lease. All of this can be prior to the start date for the lease agreement but you should not begin working before the lease agreement is executed.
None of this process or paperwork should be binding on either party until both parties have signed the document.