Owner Operator Lease Agreement Definition
Owner Operator Lease Agreements are contracts that commonly appear in the commercial trucking and logistics business as well as the moving industry. Owner Operators are simply independent drivers who own their tractor trailer or moving truck. Owner Operators enter into Lease Agreements with "Motor Carriers" or "Lease Companies" to provide transportation services for owners of freight, cargo, and personal property. If the Owner Operator owns their tractor trailer or moving truck they don’t have to lease from a "Lease Company" or Lease Company affiliated with a "Motor Carrier" to haul freight or cargo. There are many Owner Operators who are "Independent Owner Operators" or "Single Owner Operators" who make a living by providing trucking services for freight, cargo, and personal property. The owner operator enters into a Lease Agreement so that an Owner Operator can haul freight for the "Motor Carrier" , "Lease Company", or moving services for individuals.
When the Lease Agreement is entered between an Owner Operator and a "Motor Carrier", "Lease Company", or a moving company, the Lease Agreement defines the relationship between the parties. Relationship agreements between Owner Operators and Lease Companies or Owner Operators and Motor Carriers often define to whom the freight or cargo belongs, who owns the tractor trailer or moving truck, who insures the truck, who receives the freight or cargo payments and how those payments are allocated or distributed between the parties. A "Lease Agreement" is to a freight hauler or moving provider, what a Partnership Agreement is to a business partnership. The Lease Agreement between the parties governs the business relationship between the parties.
Core Provisions of the Contract
A comprehensive owner operator contract should cover all aspects of the business arrangement, leaving little to no room for uncertainty. In a nutshell, Owner Operator Agreements are what govern the relationship between drivers and the freight carriers that employ them. As an Owner Operator, you need to make sure that your contract covers all of the key issues. Below are some of the most commonly negotiated issues in Owner Operator Agreements and the key elements that overlay all of them:
Compensation
The primary issue that dictates the terms of a contract is usually the compensation. Compensation can be in one of two forms: a flat percentage paid out to the Owner Operator based on the loads that he or she hauls, or a flat rate for each mile driven (plus the reimbursement of necessary expenses, such as fuel, maintenance, and tolls), this is known as a per diem rate. The Owner Operator Agreements need to clearly lay out how payment is structured and the frequency of payment. Does the freight carrier pay twice a month? Once a month? Owners should also ensure that there is clear language about when and how the loader will be paid if it is not deemed safe to pull over and, instead, the driver is required to drive to the closest exit.
Lease Duration
All Owner Operator Agreements have a fixed duration and terminate in some fashion. The contract will state whether the Owner Operator is deemed an employee or an independent contractor for the duration of the contract. The lease can also provide an option for renewal. The number of times that the contract can be renewed (and for how long) should also be stated in the agreement.
Equipment Usage Terms
Owner Operators are usually required to furnish their own tractor-trailers and pay for most of the maintenance expenses in connection with the use of the truck. Their only responsibility is to keep the truck in safe operating condition. These provisions MUST be expressly stated in the Owner Operator Agreement. Some trucking companies will try to include a clause in the contract that states that the Owner Operator is also responsible for the costs associated with leasing his or her own truck. If the Owner Operator does not want to be responsible for the cost of leasing his or her own truck, this provision MUST BE STRICKEN.
Owner Operator Agreements can go on for pages and it is the responsibility of both parties to ensure there are no hidden land mines down the road. The basic structure of all Owner Operator Agreements is the same…so it makes sense that you protect yourself from unfair compensation and not being responsible for the cost of leasing your own truck.
Legal Implications
Owner operator lease agreement contracts are complex legal documents that impose rights and obligations in every area of the law. In addition to standard terms and conditions found in typical commercial leases, owner-operator contracts also include terms that address areas that have a high potential for dispute such as independent contractor status, the sharing of revenues, who assumes certain risks, liability for damages, indemnification of parties for loss or injuries caused by negligent conduct and termination rights.
It is not uncommon for a party to seek out a professional who routinely drafts or reviews owner operator contracts. They look for a listener who hears loudly what the law may say when there is a problem with a term or condition. Someone who understands how certain terms may conflict with the statutes and regulations governing their use in the transportation context. Someone who is able to help guide through the minefield of regulatory compliance.
A person experienced in owner operator contracts also knows that there may be a third group who has a separate set of requirements for owner-operator agreements. The Internal Revenue service sets out certain requirements for owner-operator contracts. Some of these requirements are set out in the regulations, while other regulations are set out in the IRS publication 15 A from the Internal Revenue Service. An owner operator contract that fails to meet some of the requirements of the Internal Revenue service may ultimately have unfavorable tax consequences for either the owner operator or the company.
Advantages of Being a Leased Owner Operator
Understanding Owner Operator Lease Agreement Contracts
Owning a truck and leasing it out to a trucking company can provide the owner operator with many benefits. First among them in most cases, are lower ownership costs. Capital Costs, Depreciation expenses, and Interest payments decrease because the owner operator will only incur these costs for the portion of the year that he or she owns the trucking equipment, instead of losing these costs on a full year. Better yet, since the owner operator is a self-employed individual, they will likely be able to depreciate their trucking equipment while reaping the benefits of its use without having to pay income tax. This is one of the best reasons to choose to lease your truck out instead of selling it. Another benefit owner operators enjoy is the flexibility to participate in the market place as commercial carrier, at times that they see the need for additional income. Since owner operators have quite a bit of flexibility to set their own schedule, they can accept or reject jobs from the freight broker, based on their own personal schedule. Owner operators benefit from reduced administrative cost due to the fact that the freight broker they currently lease their trucking equipment too, will handle all of the administrative functions for the owner operator. From billing the client to setting appointments for loading and unloading, and arranging for payments to be made, the owner operator can simply drop off the paperwork at the freight brokers office and allow them to handle their administrative duties. When leasing a truck to a freight broker that charges you hourly, the trucking company will be held responsible for all repairs and maintenance of the trucking equipment. This could lead to significant savings for the owner operator. Although owner operators ultimately benefit, the leasing freight broker may take some of this savings as well which could be a disadvantage for the owner operator.
Typical Problems and Obstacles
One of the most common challenges faced by an owner operator leasing on to a motor carrier is disputes arising from the interpretations of the contract. Repair and other exchange agreements associated with these lease agreements are construed according to contract law. Most of the owner operators leasing on to a motor carrier will enter into a series of contracts upon entering their lease . Each of these contracts must be read and understood prior to execution. A dispute may arise due to a failure to uphold the terms of the contract (ie. payment obligation and performance). An owner operator or motor carrier who provides the equipment, repairs or other services to the other could face certain challenges in regard to cash flow. These challenges can cause a conflict between an owner operator and motor carrier who entered into a lease agreement.
Strategies for Negotiating
When it comes to negotiating an owner operator lease agreement contract, there are a few key strategies to keep in mind. First, sit down with a pen and paper and write out a list of what you would like from the agreement, and what you will not agree to. This list will help you keep track of priorities, and will give you leverage when it comes time to make a deal.
Be willing to do your homework. Learn as much as you can about industry standards for lease agreements and what other drivers have experienced when it comes time to buy one. When it comes to negotiation, it is essential to be able to provide reasonable examples of what you have seen in other contracts, and to be able to discuss them with the dealer.
Communication is key. You may not get everything you want out of your owner operator lease agreement contract, but staying polite and level-headed while discussing and negotiating terms is a big first step toward reaching a beneficial agreement. If you reach an impasse, offer to take some time to think about the other party’s suggestions, and really consider them. This is often one of the best negotiating tools, because it gives the impression that you are willing to compromise.
Termination and Renewal Issues
Termination considerations can be negotiated upon renewal of an owner operator lease agreement contract. If you are considering renewing your lease agreement, take the opportunity to revisit the provisions in your existing owner operator contract. The terms of termination and renewal can be negotiated where the owner operator is concerned about their ability to effectively end the contract within a reasonable time period. A termination clause may set out a specific time period that the owner operator must provide notice to the carrier in order to avoid any criminal or civil liability, including termination of the lease agreement upon 60 minutes’ notice.
Avoiding terminations that are too short may be a point of analysis for both the carrier and the owner operator to consider upon each renewal of the contract. For instance, termination provisions that mitigate the financial risk of either the carrier or the owner operator could be included as part of the lease agreement, where the financial risk is significant enough to alleviate the potential risk of termination for one or both parties.
Generally, when a lease expires, it ceases to be binding upon the parties, unless a specific provision indicates otherwise. Where the lease is renewed, after the contract has expired, the newly executed lease agreement with an effective date of the expiration of the prior lease agreement will govern all matters pertaining to the duration to which the contract continues if no other termination terms and conditions are negotiated and agreed upon. It may be possible to preemptively include new termination and renewal terms in the current contract, but this depends on the substantive law governing the particular owner operator lease agreement.
Example of a Successful Owner Operator Lease Agreement
John Smith, an independent truck driver with seven years of experience, found himself in a challenging situation. He had recently purchased his own rig and was looking for ways to get the most out of his investment. After an extensive search for the right opportunity, John secured an owner operator lease agreement with a large logistics company. Though he was initially hesitant, once he saw the fair contract terms and services offered, he was convinced this was the right opportunity for him.
John immediately capitalized on this opportunity and rented his tractor trailer to a Logistics Plus facility in Orlando, Florida. He was thrilled with his decision, and so were the leasing company executives. Within two months , John was making a profit as a business owner and gaining the independence he had worked hard for. John was especially impressed with the quick, simple payment structure, and appreciated the opportunity to build equity in his new truck.
As a result of his success, John was able to eventually acquire additional leasing contracts with other third-party logistics companies have over the next few months. This led to him becoming a key member of his logistics network, and provided him income enough to pursue opportunities of his own. Not only was the owner operator leasing agreement a great decision, it opened up new opportunities that have allowed John to expand his company and hire other truck drivers.