Owner Operator Agreements Explained
Owner operator agreements are of particular importance in the trucking industry. In fact, there are many trucking companies that could not survive the loss of their owner operators. Therefore, it is easy to see how these agreements have become valuable commodities themselves.
The most simplistic way to think of owner operator agreements is as a contract between the trucking company and driver stating that the driver is an independent contractor who is not an employee. While many owner operators may view their status as an independent contractor as a benefit of the position, it is important for a trucking company to abide by requirements of the IRS on proper classification of these workers . For example, according to the IRS website, owners/operators must exercise certain financial control over the business of drivers to be considered independent contractors. If the IRS were to determine that a driver is an employee instead of an independent contractor, an audit would be likely. And, that audit would certainly not be in the best interest of the trucking company.
Trucking companies should be sure to consult with experts to ensure that their owner operator agreement is in full compliance with IRS requirements. Not only would a negative finding from an audit lead to penalties from the IRS, it could also be extremely costly.
Must Have Provisions In A Lease Agreement
When drafting a Lease Agreement for an Owner Operator, a trucking company should include the following provisions:
A. How and when will payments be made to the owner operator including base, fuel surcharge, detention fees, etc…?
It is crucial that the payment terms clearly state when the Owner Operator will get paid. In the event that the Owner-Operator files a Claim against the trucking company he/she can’t say "I hope I get paid by Friday". All dollars and more importantly, the final amount owed should be collected by the trucking company and disbursement should be done by Friday or else the Owner Operator may have been overpaid. Any overpayment to an Owner Operator is a big liability to a trucking company.
B. Who owns the equipment, how is maintenance handled, who pays for repairs and who is responsible for damage to the equipment from the trucking company?
The Owner-Operator should own the equipment. The Owner-Operator should be responsible for all maintenance items and payments for those items unless there are specific items that the trucking company will pay for (brakes, tires, etc…). Typically repairs should be the Owner Operator’s responsibility unless it was caused by defective parts purchased from a dealer. If the trucking company uses defective parts and causes damages to the Owner Operator’s equipment that is the trucking company’s fault.
C. Who owns all permits, stickers, authority, customer lists, etc… owned by the trucking company?
The simple rule here is: The Owner-Operator should own nothing. If the Owner-Operator is treated at an arm’s length of transaction and drafts an affordable Lease Agreement this clause becomes a non-issue.
Federal Law Compliance
When it comes to Owner Operator lease agreements, failure to comply with federal laws – such as with the Federal Motor Carrier Safety Administration (FMCSA) – can result in the loss of legal protection or liability of a given trucking company. In fact, many of the regulations which govern the O/O’s relationship with the motor carrier are found in the FMCSR. These rules specifically govern aspects regarding leasing and leasing operations. Still, there are some non-FMSCR regulatory provisions which may further control which parties may succeed in the event of litigation.
Section 36 of the Federal Motor Carrier Act – which can be found at 49 U.S.C. ยง14707 – provides for direct action against an insurance company for a judgment resulting from an accident. Federal law provides that if a principal has not paid the owner-operator and a court enters judgment against both the company and the owner-operator, then that judgment may force the prevailing plaintiff to collect the judgement from the company’s insurer rather than from the owner-operator. This is one important reason for the leasing of owner-operators to be in accordance with the FMCSR.
There are two notes of caution which may be given with respect to Section 36. First, the Cottman v. United States case (1995 WL598280) seems to hold that this section will be applied only if a decision is secured with respect to the owner-operator, and then the decision is sought against the company’s insurer as well. Second, non-FMSCR regulations may preclude the actions of the owner-operator or motor carrier in securing protection under Section 36. For example, if the owner-operator is subject to the provisions of the Fair Labor Standards Act because it is considered an employee and not an independent contractor, then this benefit does not inure to owner-operators who fail to comply with FLSA overtime.
Advantages for Trucking Companies
For the carrier, entering into an owner operator lease agreement offers several advantages. The most important of these relates to expense management. First and foremost, carriers who enter into such lease agreements satisfy federal regulatory requirements and can send such operators onto public roadways without concern, making the company compliant with U.S. Department of Transportation regulations. As carriers can place such owner operator drivers into many different routes, the company increases operational flexibility.
Many owner operator leases have a "Walk-Away Clause," allowing the owner operator to terminate the lease subject to stated conditions. The carrier still has flexibility because it does not have to make a multi-year commitment to any one owner operator for such items as workers compensation coverage, health insurance and equipment purchase and maintenance. All of the above-mentioned areas are typically covered by the owner operator in an owner operator lease agreement. Additionally, the carrier can hire or remove owner operators from the fleet with relative ease when market forces dictate a change in the operations of the company.
Carriers find owner operator programs to be a vital element in their ability to control costs. Owner operator arrangements allow carriers to adjust the fleet to meet demand – something which is not always as easily accomplished through the addition of company drivers – and often with less downside cost because the carrier is not financially committed to the equipment and the liability coverage usually is the responsibility of the owner operator rather than the carrier.
Benefits for Owner Operators
Owner operators enjoy a number of advantages by leasing with trucking companies as opposed to being an employee, including:
- Independence. Owner operators are independent contractors. This means they have more freedom and flexibility to schedule their work, choose the work they do, and enjoy the benefits that come with self-employment. This independence is balanced by the burden of satisfying the various trucking laws and regulations that apply to all trucking companies, and by the limitations that the trucking company with which they are leasing imposes on them .
- Potential earning capacity. Owner operators often earn significantly more than employees, assuming they are able to find enough freight to haul. This is partly because owner operators have the ability to negotiate the rate they are paid on loads they haul, and why they are paid higher rates than company drivers.
- Operational support. Owner operators usually receive important operational support in the form of items like dispatch services, back-office administrative services, maintenance services, leasing services and other types of support that help them to run their trucking businesses.
Drafting a Reasonable Lease Agreement
We previously touched on some of the critical concerns that new trucking company owners should be aware of prior to entering into an Owner Operator Lease Agreement with a trucking company. In most situations, the success of an owner operator of a trucking company will heavily depend on the terms of the lease he or she is about to sign. As such, it is critical that both parties walk into a negotiation in good faith and with the goal of reaching a mutually beneficial agreement. In this regard, there are several provisions in the lease agreement that can provide the owner operator with leverage depending on the circumstances. Some of those provisions include: Each one of these provisions are designed to protect the owner operator from unfair deductions by the trucking company. In addition, it is generally the owner operator who has a more immediate need to enter into the lease agreement with the trucking company. For this reason, it is important for the trucking company to approach the negotiation fairly, and clearly identify the rationale behind the terms being demanded. During the negotiation, it is important to look for signs that the trucking company may not be acting in good faith. These signs can include unreasonable demands, a clear lack of transparency, unexplained provisions or a reluctance to provide reasonable assurances. In addition, the trucking company should not only be open to explanation and questions from the owner operator, but should also be willing to oversee revisions to the lease agreement as necessary. If, at the end of all negotiations, the owner operator feels that the lease agreement is still too one-sided or unfair, the owner operator should seriously consider looking for other options before signing. Remember that many trucking companies engage owner operator without requiring a long-term commitment, meaning that an owner operator does not necessarily have to sign a long-term lease agreement. Furthermore, the owner operator should have the ability to submit a counter draft of the lease agreement that addresses the multiple issues raised above. If the trucking company refuses to entertain revisions and only provides excuses for why the terms are non-negotiable, then the owner operator may be best served seeking another trucking company to partner with.
Common Pitfalls
An owner operator driver may feel tempted to simply sign an agreement that has been presented to him by a third party trucking company and may not fully analyze the entire agreement prior to signing. It is critical to review an agreement and obtain legal counsel if necessary prior to signing any contract for employment in order to avoid common mistakes and pitfalls. One of the most common mistakes truck drivers make is not understanding all the terms contained in a lease agreement. Many trucking companies will present the agreement with the hope that the owner operator will not read it in detail or obtain legal advice. This lack of due diligence or research can end up being one of the owner operator’s biggest mistakes. Leases are written by lawyers to benefit the trucking companies. We have seen many owner operators overlook the meaning of terms within the lease such as "under dispatch , " "net settlement statement" and "settlement documents." These terms can be confusing to someone who is unfamiliar with contracts and commercial business terminology. We have also noticed an alarming amount of owner operators signing contracts and then attempting to decipher all the terms after the agreement has become final. Another major mistake made by owner operators is not having their lease agreement reviewed by an attorney prior to signing. An experienced trucking lawyer can give a better idea of the fundamental meaning of terms within the lease and inform the owner operator as to how the agreement may affect his rights in the future should a dispute arise. To avoid this common mishap, we suggest having an attorney review the lease before signing. This mistake is easily avoidable with the proper legal assistance. Record keeping is the third most popular pitfall amongst owner operator drivers. Some owner operators are unsuccessful at keeping records in order to track their expenses and their rights under the lease. Inadequate record keeping has often resulted in owner operators not obtaining payment. We have seen many owner operators unaware of their rights under the lease simply because they failed to keep a log of their expenses. There are many common mistakes made by both owner operators and trucking companies. By working with an experienced trucking and transportation lawyer, most of these mistakes can be avoided.