An Overview of Truck Owner Operator Lease Agreements

What is a Truck Owner Operator Lease Agreement?

What is a truck owner operator lease agreement?
A truck owner operator lease agreement is the most commonly used trucking independent contractor agreement used throughout the trucking industry. Generally speaking, an owner operator contractor is an individual who has his or her own truck and or trailer and can independently contract with a motor carrier or freight broker for compensation and provide transportation services. However, an owner operator contractor is not an employee of the carrier or broker he or she is conducting business with. Rather, they simply have a contractual relationship by way of an Owner Operator Contractor Agreement (also referred to as a long form lease agreement in the trucking industry).
The owner operator contractor will be given access to the carrier’s or broker’s freight. The owner operator contractor will have access to freight provided to them via the carrier’s or broker’s internal freight network or platform. The owner operator contractor will be expected to pick up and deliver the freight as contracted to GDS , the carrier or freight broker.
One of the primary benefits of owner operator contractor agreements is the owner operator contractor is able to use the carrier’s or broker’s Authority to transport freight. If an owner operator contract does not have the carrier’s Authority and permits the owner operator contractor to transport freight from one shipper or receiver without contacting the carrier first the carrier may have grounds to terminate the owner operator agreement. The operational requirements and obligations of a carrier are set forth in detail under "leasing" regulations in the Code of Federal Regulation and the applicable state regulations.

Key Terms and Clauses to Incorporate

Truck owner operator lease agreements should contain a variety of important terms and clauses. These include payment terms (such as when and how much the lessee will pay the lessor), maintenance responsibilities including whose responsibility it is to maintain and repair the truck, and termination conditions, including the triggers and processes for early termination.
In our experience, many of the disputes involving owner-operator agreements have arisen from the parties’ failure to reach agreement on these important terms and clauses. We will now analyze each of these terms and clauses in turn.
Payment Terms: As mentioned above, payment terms are essential components of any contract. However, they are especially significant in the context of a truck owner operator lease agreement because these agreements can be structured with any number of payment arrangements. For example, some truck owner operator lease agreements provide that the truck owner is entitled to a set percentage of the profits from the operation of the leased truck. These agreements typically define the term "profits" and explain how profits will be calculated.
An example of a complex but thorough definition of "profits" comes from a 2012 case decided by the 11th Circuit, which is the federal appellate court presiding over district courts in Florida, Georgia, and Alabama. That definition essentially provided that "profits" meant revenues minus costs of operating the leased truck, such as insurance, fuel costs, etc. Further, the agreement in question allowed the lessee to deduct from the profits certain charges incurred in the course of transporting freight under the agreement, such as detention charges, and deduct any garnishments owed by the lessor.
Other truck owner operator agreements simply grant the lessor 50% of the lessee’s gross revenues, meaning that the lessor receives half of what the lessee receives for transporting cargo but does not share in the lessee’s costs of operating the truck (e.g., insurance, fuel costs, etc.).
To avoid disputes, owner-operators should always carefully review payment terms, particularly those involving revenue sharing.
Maintenance Terms: Typically, a truck owner operator lease agreement contains a provision detailing whether the lessor or lessee will be responsible for vehicle maintenance, repairs, and upkeep. Maintenance provisions offer significant leeway to the parties to do as they see fit. For example, the parties may specify that the lessee is responsible for maintenance and upkeep of the truck, including performance of regular maintenance and repairs that fall below $500 in cost.
Alternatively, the parties may agree that the lessor will be responsible for all maintenance and repairs, including those that cost more than $500. In either case, the parties should discuss the maintenance and repair process, including the duration of the lessee’s use of the truck before returning it to the lessor and the process for requesting and approving maintenance or repairs.
Owner Operators who share maintenance and repair responsibilities with the lessor should also consider the mechanics for reviewing and remedying a missed or failed maintenance or repair item. For example, the parties might agree to a procedure by which the lessee can request repairs to items (such as brakes, lights, mirrors, and tires) that the lessor has allegedly failed to repair or replace.
Termination Conditions: Like payment terms and maintenance terms, termination conditions in truck owner operator lease agreements can be highly variable and difficult to navigate. On the one hand, the parties can agree on an early termination provision, such as that the truck owner has the right to terminate the agreement upon 24 hours’ notice to the lessee.
On the other hand, the parties might agree to a specific list of "default" or "termination" events that allow either party to terminate the agreement without notice, such as cancellation of the lessee’s insurance, an adverse change in the lessee’s credit standing, loss or suspension of the lessee’s commercial motor vehicle license, or suspension of trailer privileges.
Parties to truck owner operator lease agreements are generally free to tailor the conditions for termination to suit their needs. Those reviewing these agreements should read this section carefully, as they may permit an equivalently simple procedure for termination, such as 24 hours’ notice to the lessee, or they may require a series of steps unlikely to be undertaken under the circumstances.

Advantages for Owner Operators

The flexibility inherent in a lease agreement gives an owner operator the ability to make the decisions that he or she feels are best for their pocketbook. This flexibility is one of the benefits of a leasing agreement. Since they are not technically employees of a trucking company, owner operators have the freedom to choose when and where they want to operate.
Financially, a leasing company can provide financing where it might otherwise be difficult for an owner operator to secure the funds to buy a truck. Since the leasing company has a vested interest in the success of a lease agreement, they also provide advice and support to an owner operator if his or her operation increases from a small, regional operator to a national one.
Ultimately, in order to be successful at what you do, you must be able to respond to changes and opportunities in our ever-changing world. The truck owner operator lease agreement gives a truck operator the flexibility to reach out for the opportunities he or she sees.

Common Issues and How to Navigate Them

Unfortunately, there are common missteps that both truck owners and motor carriers can make that can lead to expensive legal disputes. Knowing about these common traps and take the necessary steps to spot them in advance will allow you to avoid them.
Generally, these problems imply a relationship that is closer to being an employee than an independent contractor. There are many ways that the true relationship can be subverted to favor the motor carrier and since the independent contractor may be relying on the security of the relationship with the motor carrier for his or her livelihood, the outcome can be very unfair to the owner operator.
The easiest way to avoid these pitfalls is to procure qualified legal counsel experienced in drafting and reviewing truck owner operator lease agreements.

Tips for Negotiating a Favorable Agreement

As an owner-operator, one of the most important aspects of your business is the lease agreement you have with your leasing company. A few key contractual terms can substantially affect your bottom line. Here are four tips for negotiating quality terms that will benefit you and the company without being overly favorable or unnecessarily restrictive:

• Set an appropriate lease term. Just as most companies aim for a long-term lease with their tenants, as an owner-operator, you want to establish a lease agreement that lasts. Demand a minimum one-year lease term – if not longer. This provides both you and the leasing company with stability.
• Properly define the vehicle’s use. The leasing agreement should not dictate that you only operate on behalf of the company in certain locations (for example, no New York-California Interstate runs). This would serve to restrict your business unnecessarily. Conversely, the leasing company should not attempt to dictate where you can and cannot operate your vehicle. After all , it is your business. You should be free to operate anywhere you choose.
• Favor reasonable lease costs. A common practice among leasing companies is to charge the least burdensome transactions or service fees on settlements, payroll checks, or advancements. These transactions can really add up. In addition, the leasing company should be required to list these under "costs" rather than "fees," since the Internal Revenue Service can disallow these as tax deductions when they are listed as "fees."
• Demand reasonable restrictions. Of course, it is reasonable for the leasing company to reserve the right to inspect your truck, trailer, and shipment, and to make determinations about your on-road safety equipment and employment practices. However, other common restrictions are overly burdensome. For instance, it is not reasonable for the leasing company to insist on installing electronic equipment that tracks the progress of your trailer. If it is too burdensome, you can always decline to sign the lease agreement.

Legal Compliance and Considerations

The terms of truck owner operator lease agreements in contrast to the terms required by the Federal Motor Carrier Safety Regulations are analyzed on a regular basis by regulators and the courts. Regulations require that these agreements be in writing, that they be signed by the parties, that the agreement cover a specific term, that it specify the compensation to be paid by the carrier, that there be identification of the equipment, that the owner operator be permitted to lease the equipment to someone else, that the carrier pay for any repair or maintenance not resulting from the owner/operator’s negligence and that the carrier maintain the equipment in accordance with any applicable federal maintenance standards. In addition to these requirements, the agreement must also specify that the owner operator be given 14 days notice to cancel the agreement. The regulations further specify that the agreement has to either be terminable on 5 days notice to the owner operator or have an initial term of 90 days. There are some additional requirements that apply when the agreement is for 10 or more trucks. Truck owner operators considering the use of independent contractors for any business/operational purpose should review their written agreements for compliance with these requirements.

Case Examples: Successful Agreements

Identifying which truck owner operator lease agreement is best for you is important, but it is also important you understand them in the context of real experiences. A typical truck owner operator lease agreement will have a weekly lease cost and a variable weekly variable costs.
Here are some real-life examples of successful truck owner operator lease agreements:
Example 1: John became a truck owner operator lease driver for ACME INC. After a week or two, John felt like the agreement was fair because it provided him with compensation and flexibility. ACME INC. paid for his parking (even in the winter), and when John traveled home on his off time, he could drop the truck at home vs . , in the previous agreement, having to slightly miss out on his time off schedule.
Example 2: Joe was unhappy with his truck owner operator lease agreement. The weekly lease cost was higher than they had initially discussed, and sometimes the company would not cover their variable costs. In the end, Joe lost money on a few dispatches.
Example 3: Chris was vastly satisfied with his experience as a truck owner operator lease driver. He was in business for himself, and he made a profit. The company provided cargo insurance that was beneficial to him, and the lease he negotiated helped him gain new clients.