Lease Agreements Explained
Lease agreements are contracts between motor carriers and independent contractors posing as owner-operators, by which a driver "leases" an 18-wheeler from the company to the driver. Most of the time, the motor carrier owns the truck; depending on the terms of the lease agreement, the motor carrier (or perhaps a leasing company) makes payments on the truck to the dealership where the truck was purchased. It is also possible that the motor carrier and the dealership have already completed the financing terms, and have established a full purchase price, interest rate, and length of time to make payments; in this scenario, the specific vehicle should be identified in the lease agreement, and payments from the contractor to the motor carrier should be structured as truck rental fees for the specific vehicle that was listed in the lease agreement.
A true lease agreement creates a principal-agent relationship between the motor carrier and the independent contractor instead of a joint-employer relationship. A joint-employer relationship is one in which not only do the parties share similar business interests, but one party objectively exerts control over key aspects of the other, with both parties benefiting from the arrangement. In the trucking industry, the leasing of equipment is permitted and encouraged by the Federal Motor Carrier Safety Administration (FMCSA), provided that the lease agreement meets all of the FMCSA’s requirements . In this light, it can be argued that a true lease creates an independent contractor relationship when terms of the lease agreement and their effect on the working relationship between the parties do not artificially create a joint-employer relationship. If the reverse happens—i.e., the lease agreement is objectively found to have created a joint-employer relationship—there are substantial legal and economic consequences for both parties.
Lease agreements can be constructed in many ways. The simplest construction is to view the lease agreement as a "pass-through" of all aspects of the relationship—driver gets independent contractor status, motor carrier provides truck, driver is paid contractor compensation, and the contractor pays rent on the truck. We will review this construction in detail in a later post. There can also be a "twist" construction, by which the motor carrier sets the independent contractor up with a truck finance company, who then leases the truck to the motor carrier as lessor. In this case, the motor carrier (as lessee) then subleases the truck to the independent contractor as sublessor. In either construction, the motor carrier generally determines the rental rate or lease terms, payment amounts, due date, and other important elements.
Key Lease Agreement Features
There are several critical facets to a lease agreement that every prospective forest owner-operator must understand. The first is the length of the lease. Most lease agreements are for a term of one year, but can go as long as three years. The cost is typically higher for longer lease terms. The lease agreement will spell out any extra fees. The owner-operator, expensing all the operational costs, might be required to pay for repairs or even a pro-rata fuel charge. You might have been able to negotiate a lease agreement based on your favorable safety rating or history, and have removed any fee charges from the contract, but such a modification is rare. Another key part of the lease agreement obligates the owner-operator to pay a percentage of all revenue received for every load delivered and each load dispatched. The percentage is usually 65 to 70 percent. The company will hang on to the remaining 30 to 35 percent to cover costs such as fuel, benefits, maintenance and permits. Because you have agreed to receive a percentage of the revenue, the cost of diesel can place an added financial burden on you. But in the current economy, this might be the best option for both parties (reduced fuel prices and a more stable oil market help in this respect as well). The agreement will also spell out your obligations regarding maintenance of the truck. You must maintain the vehicle in good working condition at all times and make repairs and replacements as needed. You might also be responsible for project insurance.
Benefits of Lease Agreements for Owner-Operators
Lease agreements for owner-operator truck drivers have some distinct advantages. A few of those are discussed below:
Tax deductions
When you lease your vehicle to a company, rather than being an employee, you may benefit from additional tax deductions. Some owners may be able to claim the truck as a business asset by leasing it to the company, taking advantage of depreciation and other tax benefits.
Ability to build asset equity
As an owner-operator, you run your own business. You can even own your own truck for the company. If you lease the truck to the company, you can receive the benefits of having your own asset to use in the course of your work and not face misclassification issues by contracting with a commercial trucking company while also being subject to the ownership regulations of a company driver. In addition, you are able to sell the truck when you leave the company. This builds equity and saves you the costs of purchasing a new truck should you not receive your deposit back. Furthermore, as a business owner, you can take advantage of the ways a business might save you taxes.
Flexibility of choosing which job to take
While it might not sound reasonable, there is more flexibility for a contractor to walk away from a lease with a company than for an employee to quit. Under most state labor laws, an employee may have to work out his contract termination with his employer. But a leasing agreement does not specifically create any term employment. As a result, a contractor or leased driver may be able to walk away from his or her company more easily than the company employee.
Pitfalls in Lease Agreements
While most owner-operators are considered independent contractors, in the eyes of the law, many companies still exert significant control over their drivers. Before entering into a lease agreement with a carrier, it is important to understand some of the most common mistakes and pitfalls that have caused owner-operators unpaid, costly fees, or even to lose their lease agreement.
Carriers may attempt to increase the profit margin for terminated lease agreements by attempting to collect "termination fees." These fees can often be hundreds of dollars, and can far exceed the cost of the repairs needed to make leased trucks road-ready again. If the carrier is able to charge a driver for the repairs, too, their checks are getting much bigger after a driver is no longer driving their trucks.
Though Federal law requires that lease agreements include specific terms (such as the duration, costs, and compensation for loss of revenue to the lessee), cases continue to arise where the carrier has failed to include all of the required terms in the lease agreement. In particular, many owner-operators have been denied proper compensation when a truck has been repaired due to a defect that was not expressly stated in the lease agreement (such as a defect with the engine or transmission), in violation of their rights under the Truth In Leasing Regulations.
Lease agreements are often confusing and difficult to understand. Too many owner-operators do not fully read or comprehend all of the parts of the contract before signing. When reading a lease agreement, be sure to check for and consider the following:
· Does the contract include details on termination (how and why may the contract be terminated)?
· Is there language allowing the carrier to charge you after the lease ends?
· Does the contract require a termination fee if the company keeps your truck in its possession after the termination?
· Does the carrier have "discretion" when determining compensation for repairs?
· Does the company get the final say on whether or not a defect is covered under the lease?
· Do you have the choice to use your own repair shops for repairs? Or are you required to use the company’s repair shops?
In the past, many owner-operators did not read their lease agreements, as the rates were good and the relationships appeared to be amicable. However, as company compensation rates decrease, they are also attempting to save money by making changes to all aspects of the lease agreement, including making them harder to read or understand. Be sure to do your homework, request your own counsel to review it, and fully understand the exact terms of a lease agreement before submitting a signature for the industry’s largest "blank check."
Negotiating the Best Lease Terms
There are some issues that should be negotiated in owner-operator agreements. These are just a few of those issues:
1. Sign-on bonuses
One of the biggest issues in leasing is that the company charges the owner-operator for the sign-on bonus after a period of time, which can be as soon as 6 months after the start date of the lease. Companies like to sign on owner-operators with the lure of bonuses and then write it off later. In order to avoid being stuck paying back a large amount of money, negotiate (or if you have already signed, request) that such bonuses be amortized along with the truck payment over the term of the agreement. Failure to do this can result in an owner-operator being stuck having to pay back a huge amount of money that is owed as early as 6 months into the contract.
2. Reefer Fuel/Fuel Cost Issues
Trucking companies charge their owner-operators a higher amount for their fuel based on the percentage they may charge the general public. While companies are entitled to make a profit, the percentage should be somewhat lower than what you would pay on the open market. However, the big issue comes when the owner-operator enters into an agreement to purchase a truck that has a separate fuel tank for the reefer. The company may still require you to pay the markup on the price they spend for the reefer fuel even though the fuel is purchased separately. Negotiate to have the reefer fuel purchased by you excluded from the markup.
3. Escalating and declining base compensation
One of the hottest topics in trucking these days is whether companies can include a provision to pay a specified amount at the outset of the contract with that amount escalating during the first year of the agreement and then declining during the last portion of the contract. These provisions are designed so that the per mile rate declines over the life of the agreement. One way to neutralize this declining rate is to negotiate that the per mile rate for running miles for the owner-operator begin at a higher amount and end at the same amount . For example, the per mile rate for the first portion of the career for the owner-operator could be $1.20 per mile. The per-mile rate eventually declines to $.90 cents per mile, but then increased slightly back to $1.20 or more for the end of the career for the owner operator. This is favorable because it gives the owner-operator a longer amount of time at the higher rate while not harming the company because the owner-operator’s career will eventually end and then the $.90 per mile rate applies for the duration of the truck payments.
4. Workman’s Compensation
Companies try to avoid paying workman’s compensation to employees which are actually independent contractors or owner-operators. To do this they tend to invoke community and social security welfare laws to prevent you from using their benefits. Examples of those benefits are prescribed by state law and give you the independent contractor status necessary to avoid paying the cost of worker’s compensation insurance. Get your Workman’s Compensation statute. You must negotiate that such Workman’s Compensation benefits fall under applicable state and federal law and not be used by the company as an excuse to avoid liability through various benefits that have no application to your situation as an owner-operator.
5. Favorable compensation increase terms for term period
Many companies negotiate for an increase in the per mile rate when you have either met a specified mileage requirements or your anniversary date. If companies are going to use the fact that you are working for them to their advantage, so should you. Think about negotiating fixed career increases after a specific period of time such as every three months until your requirements for retirement are met. Such increases will give you added security that your per-mileage rate will increase every three months when you accomplish a specified goal.
Legal Protections and Resources
While the owner-operator relationship is similar to being an independent contractor in many ways, such as being able to choose your own work hours, running your business how you choose, and earning a gross pay that can vary from load to load, there are still some inherent legal protections that being an employee provides that you do not get as an owner-operator entrepreneur.
Misclassification
The Fair Labor Standards Act (FLSA) governs the minimum wage, overtime, and recordkeeping requirements for certain nonexempt employees (although there are other nuances to the law). The FLSA provides exempt employees with greater freedom in their work hours and offers them more flexibility in other areas, but exempts them from the minimum wage and overtime provision of the Act. They are not entitled to collect unemployment compensation. Most importantly, they are not covered under the FLSA protections and provisions. Some owner-operators are arguing that they are misclassified as independent contractors rather than employees and because they are independent contractors, they have no protections under the FLSA or the equivalent state wage-hour laws. Owner-operators argue that they should not be classified as independent contractors because truck drivers are required to maintain certain qualifications, necessary licenses to operate their rig on public highways, and because they are at employers’ disposal, which includes having the vehicle maintained, repaired, fueled, etc. If you are misclassified as an owner-operator but perform work as an employee of the company, you may be entitled to the protections of the FLSA.
Negotiating An Owner-Operator Contract
You may want the freedom and flexibility of an independent contractor. Negotiating your contract may even give you sole responsibility for the truck lease, maintenance, and all the other duties an employee would have—but make sure that this is what you want. Before signing a lease agreement, negotiating your compensation and the details of your contract are essential. You want to make sure that all of your hard work is compensated for, and that you are protected if the work doesn’t pan out as projected. The main states with protections and regulations for leased drivers include: California, New Jersey, and New York. California law governs the process of entering into an owner-operator contract, prohibits mandatory arbitration clauses in these contracts, requires that all contracts be written (not oral), and more. New York has a mechanic’s lien law that protects independent contractors in the trucking business. New Jersey requires drivers to have certain safety equipment and insurance coverage, while also banning lease conditions such as premium products, mandatory maintenance, trucks older than five years, and others. The Federal Motor Carrier Safety Regulations provides some general regulations that are applicable, including ensuring that jurisdictional brokers are licensed and kept on record. Federal trucking regulations can be found at 49 C.F.R. § 376.2. State and federal agencies may provide you more information about your Rights as a truck driver and whether a lease agreement is right for you.
Renewing or Terminating Lease Agreements
Many lease agreements allow the parties to extend, renew, or terminate under certain circumstances. This can keep the contract fresh and allow parties to avoid time-consuming and costly litigation that would otherwise be necessary to modify an existing agreement.
An owner-operator may want to renegotiate certain provisions of a lease and intend to do so by simply modifying or extending the existing agreement. However, many transportation companies will treat any attempt by an independent owner-operator to modify the terms of the agreement, or even a termination, as a repudiation of the entire lease. This is a dangerous road to travel as many of those companies have sued their owner operators for breach of contract or converted earnings . When in doubt, an owner-operator should always consult with an attorney familiar with the trucking industry before unilaterally terminating a lease agreement or deciding not to renew it.
It is important to remember that some states allow for pierce-the-corporate veil actions when the owner operator terminates a lease agreement, but not necessarily when the carrier terminates the lease agreement.
All parties to owner-operator lease agreements should follow the termination procedures in the lease as a general guideline to avoid litigation. A conveyance of the equipment from the lessor to the lessee can be used to avoid any future litigation related to the lease agreement.