Owner Operator Lease Agreement Defined
Owner Operator Lease Agreements are agreements that govern the relationship between a trucking company or freight broker and an Owner Operator. These contracts are designed to allow trucking companies to utilize independent contractors (Owner Operators) without subjecting trucking companies to liability as a "joint employer." Under a joint employment relationship, trucking companies lend supervision and have the ability to control Owner Operators, exposing them to claims arising from Owner Operators’ negligent conduct. State and federal labor laws also apply to joint employers.
An Owner Operator Lease Agreement is a critical part of an Owner Operator’s business plan. A properly drafted Owner Operator Lease Agreement clearly establishes the relationship with the Owner Operators and prevents misclassification claims . It also protects the trucking company from claims by taxing authorities that the trucking company is a joint employer, therefore should be responsible for payroll taxes, overtime payments, and workers’ compensation insurance.
Owner Operators should review their Owner Operator Lease Agreements before hiring drivers. Much information could be gained through a review of their Owner Operator Lease Agreements. The trucking company may have incorporated a term that is friendly to their position, but harmful to Owner Operators. For example, if a trucking company can terminate the contract at any time without penalty, the owner operator would be wise to consider the possibility they could get terminated on a regular basis with little recourse.
The Major Components of a Lease Agreement
While the options available to an owner-operator when leasing onto a motor carrier are vast and include many different lease options with a large array of fine print, generally all lease agreements contain the following provisions:
Lease Term – All Lease Agreements are for a specific term. The lease can be terminated under certain conditions during the lease term.
Payment Structure – Owner-operators are usually compensated by way of a percentage of the revenue accrued from each load they deliver. However, detailed information regarding the base pay structure should be found within the lease agreement, including deductions taken from the settlement checks such as lease payments, escrow payments, insurance premiums, fuel taxes and other expenses (frequently used by companies to help make up the difference between base pay and percentage pay).
Maintenance Responsibilities & Repairs – All lease agreements will contain provisions spelling out the maintenance and repair responsibilities of the owner-operator. While in the real world owner-operators spend quite a bit of their time at the shop, lease agreements almost always specify that the owner-operator is responsible for maintenance and repair costs on the equipment while contracted with the motor carrier.
Termination – Lease agreements also contain provisions covering how the lease is terminated, whether by either party or immediately by the motor carrier on certain grounds, such as an inability to be an independent contractor or violations of company policies.
How Owner Operators Benefit
There are a number of benefits for owner operators entering into a lease agreement, not the least of which is the avoidance of vicarious liability. Assuming the owner operator has properly entered into an owner operator lease agreement with the carrier (subject to certain rights of the carrier to terminate the lease per the terms of the lease agreement), the owner operator will be insulated from vicarious liability in the event of an accident. Because the lease agreement contains the requisite provisions as described above, which would otherwise make the carrier vicariously liable for its owner operators’ negligence. Subject to the carrier’s right to terminate the lease in certain circumstances, the owner operator will be Nicolson LLP liable for his acts or omissions occurring within the scope of his duties under the lease.
From the business perspective of the owner operator, the owner operator entering into a lease agreement can realize other benefits of the lease arrangement. The owner operator can save himself operational costs, and possibly cut down on his own administrative tasks. The owner operator may save money if he perceives that a lease agreement can keep him as close to independent contractor status as possible, while still enjoying the benefits of proximity to the carrier.
The owner operator may feel that a lease agreement can give him the operational control and flexibility he wants. The owner operator can even grow his own business when he enters into a lease agreement with a carrier by making contacts with shippers and brokers, and then using his carrier status to obtain loads.
Risks and Downsides
Owner operators should carefully balance the desire to operate their own truck against the risks involved in entering into a lease agreement. Lease agreements can be complex, contain multiple layers of liability and obligations, and can ultimately cost owner operators thousands of dollars if not reviewed and understood before execution. A poorly written contract can result in job loss, financial loss, or even worse a loss of an owner operators CDL. At worst, an owner operator may find themselves participating in a RICO or criminal enterprise.
Equally as detrimental, owner operators have also been found liable for damages and injuries caused by an accident in a company owned truck. In some cases, this liability extends even when the lease agreement was terminated prior to the accident. The FMCSR mandates that all motor carriers maintain written lease agreements with owner operators. However, general statutory compliance does not make a lease agreement a good business deal for an owner operator or protect the owner operator from liability and financial loss. A well drafted lease agreement should clearly define the parties, the equipment and where appropriate, the hauling of goods . A clear releasing and indemnification provision, whereby the motor carrier indemnifies the owner operator from damages and injuries caused by a negligent act of carrier to an independent party should be a part of every lease agreement. In addition, a properly drafted lease agreement should contain provisions which address applicable state "reimbursement" laws which will require the reimbursement of certain expenses. Owner operators can also face lawsuits for injuries caused by negligence. Both common law and Michigan statute establish the owner/operator as liable for the negligent operation of a motor vehicle since the statute creates statutory "double liability" of the owner and lessee where the lessee uses any vehicle owned by the person in their trade or business. The owner operator should seek indemnification for damages caused by a negligent act of the motor carrier and should only assume liability for damages and injuries caused by an owner operator’s own negligence and/or the negligence of an independent contractors hired by the owner operator.
Choosing the Right Agreement
When selecting a lease agreement with a trucking company, it is essential to consider several factors to ensure the best fit. Look at the company’s reputation within the industry, which can be found through online research, industry publications, or word of mouth from other drivers. A well-established company with positive reviews is more likely to provide a stable working relationship.
It is also crucial to review the terms of the lease carefully. Both parties must have a clear understanding of their rights and obligations. Ambiguities in the contract language can lead to unnecessary conflicts and misunderstandings down the road. The lease should explicitly outline compensation, benefits, and termination criteria, so both parties share the same expectations.
Another aspect to consider is how well the lease aligns with the owner operator’s long-term business objectives. If it offers room for flexibility, then it is more likely to be a sound choice. Owner operators should ask themselves whether a company aligns with their business goals and if the agreement helps them progress towards their professional objectives.
Legal Implications and Requirements
Owner operator lease agreements, while common in the trucking industry, must harmonize with both federal and state laws that regulate the nature of the relationship between the owner and the motor carrier. As part of their larger obligation to enact regulations that promote the safety and welfare of the driving public, the Federal Motor Carrier Safety Administration ("FMCSA") has promulgated 49 C.F.R. Part 376, which governs the financing of commercial motor vehicles. The regulations prohibit motor carriers from holding interests in commercial motor vehicles owned by lessor-driver, it prohibits lessor-drivers from operating commercial motor vehicles subject to lease agreements with unauthorized carriers, and it mandates detailed provisions in owner-operator lease agreements. 49 C.F.R. §§ 376.12-16. State law also impacts the enforceability of owner operator lease agreements as they relate to employee classification. For example, if the State of New Jersey, requires workers in the motor carrier industry to be classified as employees—rather than independent contractors—then the owner-operator will be entitled to certain rights under the law, as opposed to being an independent contractor . See N.J.S.A. 34:1A-5.
Depending on the breadth of the parties’ obligations under the agreement, there may be potential exposure under ERISA, the Employee Retirement Income Security Act of 1974. ERISA establishes minimum standards for the administration of voluntary employee pension and insurance plans. To that end, state law claims related to owner-operator lease agreements may be preempted. See Egelhof v. B.P.J. Group Life and Health Plan, 246 F.3d 872, 874 (9th Cir. 2001). Thus, while an owner-operator lease agreement may satisfy the intellectual sensibilities underlying a long-planned business strategy, motor carriers must consider the legal implications resulting from their choice of enforcement under ERISA. Protecting the owner-operator’s interests may be a primary goal, but they must weigh the risks involved in permitting the carrier to exercise as much control as is typical of an employer. Consulting with a legal expert familiar not only with the technical requirements of owner operator lease agreements, but also the practical implications on a carrier-client’s particular business model, is instrumental in assuring that the agreement is binding, enforceable, and legally sound.