Understanding Owner Operator Lease Agreements: The Essential Guide

What is an Owner Operator Lease Agreement

Owner Operator Lease Agreements are Frequently Used in the Trucking Industry, Particularly as an Alternative to True Owner Operators. The Parties to an Owner Operator Lease Agreement Are: (1) the Owner Operator; and (2) the Trucker. An Owner Operator Lease Agreement is a contract in which an individual who owns a tractor (the "Owner Operator") enters into an agreement with a trucking company (the "Trucker") to lease his tractor to the Trucker. Under an Owner Operator Lease Agreement, the Trucker will lease the Owner Operator’s tractor on a per mile or per load basis. Owner Operator Lease Agreements define the period of use of the Owner Operator’s tractor and allocate the costs of fuel, tolls and other truck-related expenses among the parties. To comply with the Independent Contractor Test , the Trucker cannot control details of the manner or method in which the Owner Operator performs his services under the Owner Operator Lease Agreement. To assist in this end, the Owner Operator Lease Agreement will generally contain language stating that the Trucker is leasing the Owner Operator’s tractor only and that the Owner Operator is an independent contractor to the Trucker. These are only examples of language that may be included in an Owner Operator Agreement. There is no particular form that an Owner Operator Lease Agreement must take, but to properly classify an owner operator under the Independent Contractor Test, the Owner Operator Lease Agreement must not show the Owner Operator as an employee of the Trucker.

Key Elements of a Lease Agreement

A lease agreement between an owner operator and a motor carrier is contractually binding. Although parties have certain freedoms in structuring their relationship with terms not specifically required by law, typically they must agree upon key elements in the contractual agreement:

• Terms of Service. A detailed description of the services that the owner operator will perform on behalf of the motor carrier. For example, if the owner operator’s vehicle will be used for the movement of freight for specific clients, that should be incorporated. Additionally, the provision should state how many miles the vehicle will travel and the type of cargo that will be carried.
• Remedies for Breach. Include remedies for breach of the contract. If the owner operator fails to deliver freight in a timely manner, will there be a charge for each hour that the delivery is late? What will be the remedy if the freight is undeliverable? Likewise, how should freight be handled if it is not in accordance with the terms of the owner operator agreement?
• Payment Terms. Clearly define how payments will be made. Will practical mileage be used, with a per mile payment structure? What happens when an unanticipated delay, such as weather conditions, occurs? Is the per mile rate inclusive or cover additional expenses and costs, such as gas or tolls? Will those costs be deducted from the per mile rate? What type of insurance must be covered by the owner operator? Will the motor carrier provide maintenance for the vehicle, or must the owner operator maintain the vehicle independently?
• Term and Termination. How long will the agreement last? Will it automatically renew, or is the term for a fixed period? Do the parties have the right to terminate the agreement? Consider if extra notice is required for termination, and if either party is entitled to monetary damages for the termination of the contract.

An owner operator lease agreement is an essential part of any motor carrier’s operations. While existing regulations are notable, the independent contractor relationship is evolving. It is important to stay up-to-date on the legal landscape of contract relationships in the trucking industry.

Advantages of a Lease Agreement

Many owner operators choose to lease onto an existing carrier or trucking company that has authority to haul freight rather than obtaining their own authority. Formal written lease agreements with carriers help to establish legal liability for loads, as in the case of cargo damage and personal injuries. In short, having record of these relationships is best for both the company and the individual that drives for it.
A formal written lease also helps to clarify the rights and responsibilities of the driver and the company with respect to income. This allows all parties to understand their rights in the matter in the event of a dispute.
There are several considerations and terms to include in your formal lease. We’ll discuss these in the next section.

How to Write an Effective Lease Agreement

The drafting of an owner operator lease agreement should be approached carefully. As with any business transaction, the provisions of an owner operator lease agreement may have a significant impact upon the parties to the transaction. It is very important to ensure that the relationship between the carrier and owner operator is properly documented, and that the agreement includes all of the provisions necessary to govern your relationship. In particular, the agreement must contain the required provisions specified in the Federal Leasing Regulations as found in Part 376 of the Code of Federal Regulations. In addition, the parties should consider including several other provisions which while not required may be useful in the daily operation of the carrier/owner operator relationship. To assist you in drafting the agreement, following is a step by step outline of how to draft an owner operator lease agreement for the use of a commercial motor vehicle.

• Identify the legal requirements. This step involves confirming that the owner operator lease agreement includes the provisions required by federal regulations and all applicable state regulations. Federal regulations require the inclusion of certain specific provisions regarding leasing arrangements for common carriers and brokers. States may have additional specific requirements regarding the content of owner operator lease agreements. Therefore, it is important to be familiar with the federal law and regulations applicable to your operations, as well as the relevant state law and regulations.
• Select or draft the specific terms. This step includes selecting or drafting the specific contract provisions which supplement the regulated terms. Make sure that the contract reflects the specific agreement reached between the carrier and owner operator. The key to drafting a strong owner operator lease agreement is to document the specific provisions of the agreement in writing. Documenting every aspect of the relationship will help avoid misunderstanding and potential disputes.
• Review the contract. This step includes a thorough review of the final owner operator lease agreement to ensure that the agreement accurately spells out the terms of the parties’ agreement.
• Use appropriate terminology. This step includes using the right terminology when referring to the various parties to the agreement. The words used to describe the parties can impact on the ramifications flowing from miscommunication regarding the terms and conditions of the agreement.
• Seek legal advice regarding the agreement. This step includes considering whether legal review of the agreement is necessary. In some cases, it might be a good idea to seek out legal assistance in drafting the owner operator lease agreement. As discussed above, the way the agreement is drafted can impact on its implications and respective rights and remedies only the parties to the owner operator lease agreement can resolve that issue. Accordingly, you should consider whether a legal review is necessary.

Common Pitfalls

While it may seem like a minor detail, the way you refer to your operators in your Agreement is important. Using the term "employee" to describe your operator may open you to a lawsuit by the IRS for FICA and FUTA taxes and subject you to workers’ compensation claims in many states. Identifying your operators as independent contractors where appropriate protects you from these liabilities. However, after years of litigation over the issue, there is no longer a bright line rule defining the difference between an employee and an independent contractor. The IRS sets out 20 factors that define an employee and requires that all 20 be present in order for the person to be classified as an employee. If even one factor is absent, the person is an independent contractor. In addition to the IRS, the Department of Labor and the Immigration and Naturalization Service all define the relationship between the company and the operator differently. While you should take care to define your operator as an independent contractor under the IRS test, be aware the state and federal agencies have different tests for whether a person is an employee or independent contractor.
As discussed above, the status of a driver or operator as an employee or independent contractor can vary depending upon the agency and purpose for which the test is being applied. This is why it is so important to recognize that the standard form owner operator Agreement you may be using may not be appropriate for your entire fleet. An operator whose principal place of business is in Florida but who frequently drives into Georgia for pickup and delivery could easily determine the operator is an employee in Florida but then argue well he was an independent contractor when in Georgia. The Dispatch Agreement should be tailored to reflect the differences in law between states and the requirements for various agencies (like state unemployment agencies or the ICC) , if the contractor will be crossing state lines.
The term "retained carrier" has no set legal definition and means different things in different industries. In the trucking industry, a retained carrier may be an independent contractor while in other industries it might mean the person is an employee. 49 C.F.R. § 376.11, for example, obligates carriers to have an Agreement with any person they allow to operate under their DOT number. The statute is broad, applying to for-hire and private carriers, interstate and intrastate carriers, carriers transporting hazardous materials and nonhazardous materials. The only exceptions are those exempt from the requirement under 49 C.F.R. § 376.11(d). Wholly owned subsidiaries, lessors and bona fide agents are exempt from the requirement, as are carriers who own all the operational equipment utilized by the driver. Specifically exempt from the requirement are common and contract carriers transporting passengers in charter operations and carriers transporting raw agricultural commodities. 49 C.F.R. § 376.11(d). Because the definition of retained carrier varies from state to state and agency to agency, it is easy to see how mistakenly thinking the definition is the same everywhere can have important financial consequences.
The most common mistake in drafting a contract is to use vague or ambiguous terms. When drafting or signing a contract be sure the term defines all parties to the contract and what is required of them. The terms of your contract will be the most important facts looked at by any court or administrative agency called upon to enforce the contract. Make the terms as clear as you can, accurately reflecting the parties and their respective duties. Vague terms, such as "reasonable" or "normal," are all subject to interpretation, as any attorney can tell you. Keep in mind that the person(s) who will read and enforce the contract in an emergency are likely to be non-lawyers without legal training. If the contract fails to both comply with the law and clearly express your intent, you could find your business in jeopardy.

Where to Obtain a Workable Lease Agreement Template

Before you run off and get a template, understand that not all lease agreements are created equal. For example, my association sponsors a broad range of templates provided to us by our AICPA attorney and CPA members for use by all association members and clients and anyone else who wants them. These templates are fine at best and, in many cases, too generic and therefore inadequate for today’s complex universe. So, the better option is to deal with some of the more reputable legal publishers who charge for their templates but also provide them in a workable format. I have a particular affinity for the templates offered by Thomson Reuters ("Thomson") and CCH/Wolters Kluwer ("KWI"). Thomson’s offering is known as "Form Builder," which provides workable templates through a web portal. You plug in the state, your company name, the driver name and a number of other details, and Form Builder gives you the basic template and requests that you change the language according to your needs. There’s also a (really) short description of what each clause means, so you get some level of guidance. There’s another Thomson offering, but it has been over a year since I have seen it; I think it was essentially a template within Word, but I am not sure. My only quibble with Thomson’s offering is that it’s not perfect. In fact, it’s probably less than perfect for about 25% of the time. But, those 25% of the time when it’s not perfect, the Form Builder will prompt you to delete language without any direction on how to replace what you deleted. KW offers two online products that are easily accessible. One is called Drafting Assistant® and was designed to be used while using Workflow Manager®, as well as outside of Workflow Manager. Either way, the Drafting Assistant works well. KW’s other portal offering is called BestCites® Journal Editor, which is again works well when combined with Workflow Manager, although I do not know how it works when used standalone. Both Drafting Assistant and BestCites Journal Editor are compatible with Thomson Reuters’ Westlaw. There is a free version but you can pay $179.00/month or buy the software for $299.00. KW no longer provides an online chain checklist; however, as I have said several times, it’s probably better to get in the business of preparing your own checklist because you will identify gaps and areas specific to your operations. Also, you should have someone go through the checklist with you (my firms also have an attorney review); so, an inquiry of this type is not a perfect fit for an online product. Other sites to check out are AdvisorPro, JD Supra and Mondaq.

Steps to Finalize and Put into Action the Agreement

When you have gone through the process of finding and selecting an Owner Operator to enter into a lease agreement with you, it is important to finalize the agreement properly. The following are some necessary steps to take. First, make sure that you sign two copies of the lease agreement, and that both you and your Owner Operator have a copy. This way you are entitled to enforce the agreement in the event either party fails to comply without any excuse from the other party.
Second, make sure everything in the lease agreement is in order prior to implementation. For example, if you were using a special type of electronic logging system, make sure the Owner Operator Truck you intend to assign to has the proper equipment. Or if such equipment will be provided by the company, make sure the Owner Operator is aware of this fact.
Third, make sure your Owner Operator is aware of their rights and responsibilities under the lease agreement. This includes the sections regarding lease termination, accounting, charge backs, payment structures, and other contractual rights. You should also explain the process for reimbursement and handling of expenses, especially if the Owner Operator can expect delayed reimbursements depend on the structure of the agreement (e.g. with or without mileage).
The final step should be to get the Owner Operator signed onto the company platform, if applicable, so that all loads are automatically offered to them before the rest of the fleet. The practice of giving new Owner Operators a few weeks or months to sign onto the company platform, even if you have a load for them, encourages them to stick with your company and lets them know they matter.

Frequently Asked Owner Operator Lease Agreement Questions

What are the standard pay parameters for owner operator lease agreements?
Generally, owner operators are paid by the mile, so contracts typically include a pay per mile figure. Pay will often vary based upon load type, with higher pay for higher priority loads such as expedited or Amazon freight. Owner operators will receive a FSC charge, which is a fuel surcharge based on fluctuating diesel fuel prices. Pay per mile is also commonly variable based upon how many miles per week are driven; the per mile pay rate may increase at 2,000, 5,000 and 10,000 miles per week. These parameters should be carefully defined in the owner operator lease agreement. If the owner operator is an independent contractor and is responsible for making truck payments, the stipulations regarding those payments should also be clearly written into the contract.
What taxes does the owner operator have to pay under an owner operator lease agreement?
Owner operators pay self-employment taxes and, pursuant to the typical owner operator lease agreement, are generally responsible for administering 1099 issuance. The owner usually pays other income tax and makes Social Security payments .
Can an owner operator operate their own business while driving for a motor carrier?
Under an owner operator lease agreement, the owner operator is the business entity (whether a sole proprietorship or a formally established entity) that the motor carrier contracts with for its services. Although an owner operator may have more than one client, typically they have the greatest contractual relationship with their preferred motor carrier under the terms of the lease agreement. Further, the owner operator may have multiple trucks and drivers under its authority, but the one that is dedicated to the motor carrier’s loads is also under the owner operator lease agreement. Owner operators are responsible for hiring their own drivers and making payments to them.
What issues may arise when an owner operator terminates their lease with a motor carrier?
No matter the cause of termination – whether for convenience, a breach of the owner operator lease agreement, or other reasons – certain termination issues may arise. A motor carrier may be required to return the owner operator’s equipment and all account records and every other item provided to the owner operator. In the case of a breach, the owner operator may seek damages arising from the breach. A lease agreement should outline how these issues will be resolved at the time of its inception.