The Basics of Owner Operator Agreements
Owner operator agreements are a fundamental part of the trucking industry. Much like other industries, owner operator agreements in trucking are contracts between two parties where one party hires out another for labor services, with one party providing the vehicle, tools, and/or equipment necessary to perform the services. In the trucking industry, owner operators provide their services through the use of tractor-trailer combinations, with the owner operator providing the tractor and the leasing company, in most instances, providing the trailer.
Owner operator agreements are commonly used when a trucking company does not want to buy more tractors or trucks and does not want the burden of owning and maintaining a fleet of vehicles. The leasing out of trucks and tractors is a common practice in the trucking industry with many large companies utilizing owner operator agreements.
In a typical owner operator trucking agreement, the lessor (the company leasing the tractor or trailer) pays the lessee (the trucking company) for the use of the vehicle. The leasing company agrees to lease the tractor to the trucking company for an agreed upon amount of time, and the company is usually required to pay the amount due each month for the tractor or trailer. The lessor is often required to provide liability insurance and/or cargo insurance. The lessee is often prohibited from assigning or transferring the lease without the consent of the lessor .
Owner operator trucking agreements may be short or long-term in duration. These types of contracts can be either verbal or in writing. Although oral owner operator trucking agreements can be enforceable, they can be problematic for both parties if there are problems or disputes that arise during the term of the contract. Not only can the trucking company leasing the tractor suffer by having no documentation of the terms of the contract, the lessor may have no way to recoup any damages or losses that they have incurred due to a breach of contract by the lessee.
Commonly, the lessor will seek to enforce oral owner operator trucking agreements. The trucking company, on the other hand, often seeks to deny the existence of such a contract, either for strategic reasons or because they truly did not agree to the terms of the oral owner operator trucking agreement.
Importantly, even if an oral owner operator trucking agreement could be enforced, the lessor may be precluded from enforcing the owner operator trucking agreement due to noncompliance with federal law, such as the Federal Truth-In-Leasing regulations that apply to owner operator trucking agreements. These problems of proof, assignment, deference to regulatory compliance, and statutory limitations are not exclusive to owner operator trucking agreements. They apply to all types of contracts within the trucking industry.
Essential Elements of the Agreement
The Owner Operator Agreements you can expect to see will vary from company to company. However, certain critical clauses and terms are standard across the board. Here are the core elements you’re likely to find in a typical Owner Operator Agreement.
Payment Structure – One of the first things you want to look at when reviewing an Owner Operator Agreement is how the owner operator will be paid. There are a number of different types of payment structures. The most common is a percentage of gross revenue; however, some companies pay on a mileage basis. Another payment option is a flat rate per mile. The key this is to find out how much money will the owner operator be making through the contract. It’s essential to understand all aspects of the payment structure—particularly the cost of deadhead miles, calculations for fuel surcharge, and detention, etc.
Responsibility for Maintenance – Determine the extent of responsibility for on-road and off-road maintenance costs. The agreement must clarify who covers what in repairs and maintenances when the truck driver isn’t driving. Importantly, it must have a section regarding scheduled on-road and off-road maintenance examination because these types of exams affect the owner operator’s wages.
IRS 1099 Treatment – This section of the Owner Operator Agreement will explain whether the owner operator will be treated as an independent contractor or an employee for IRS tax purposes. In general, you want the owner operator to be treated as an Independent Contractor for taxation purposes. Regardless of whether the owner operator is an Independent Contractor or Employee, this section still needs to be precise and unambiguous in order to avoid any IRS problems. As with any contract, make sure it is properly audited by someone with experience drafting these agreements.
Legal Aspects
Mastering Owner Operator Agreements in Trucking
Because an owner operator agreement is a contract, the law governing contracts applies to owner operator agreements. If the contracting parties are in dispute over the provisions of an owner operator agreement, they might need to seek the assistance of the courts to interpret or void the contract.
Before the contracting parties get the court involved, it usually makes good sense to try to resolve the issues without a legal dispute. A lawyer’s neutral perspective can be helpful to facilitate the negotiation of a settlement. The cost of litigation piled on top of the original dispute often provides good incentive for contracting parties to negotiate a settlement. And if an owner operator signs an owner operator agreement with a troublesome dispute resolution clause that requires binding arbitration, an experienced lawyer may be able to leverage an early settlement by threatening to force the clauses and deprive the other party of their day in court.
When a lawyer reviews an owner operator agreement before it is signed, he or she can write comments and suggest changes that will avoid disputes or provide for an efficient resolution of any future business disagreements. An experienced lawyer can ensure that the owner operator agreement clearly provides how payment may be made to the owner operator or to home base. Properly drafted, an owner operator agreement can provide that if there is a dispute over payment, the owner operator has the option to accept payment pending resolution of the dispute, or require that the money be held by the trucking company and only paid over when the dispute is resolved.
An experienced lawyer can help clients navigate the complex facts, laws, and regulations that come into play when negotiating owner operator agreements. A poorly written owner operator agreement can have potentially fatal consequences down the road.
Advantages for Owner Operators
While there are significant advantages for motor carriers, there are also many benefits to a trucking professional for entering into an owner operator agreement. The most obvious benefit is the potential for increased earnings. Owner operators are usually paid more, per mile, than company drivers who operate similar equipment. Owner operators are also usually able to take home 100% of the revenue for the freight they haul, rather than share it with a motor carrier. Owner operators also enjoy the freedom of being their own boss. They can be choosy about the loads they accept, and which routes they take . They are not forced to drive in inclement weather, nor do they have to spend more time away from home than they wish. An owner operator may also enjoy a wider variety of driving opportunities than a driver who is an employee. Different motor carriers offer different equipment and types of freight. An owner operator can choose the type of carrier that suits them and their driving style best without making a long-term commitment. Finally, when entering into an owner operator agreement, the trucking professional generally has the benefit of negotiating his or her own agreement with a broker. This can help increase his or her profit margins even more by allowing him or her to negotiate better rates.
Common Issues and Solutions
Navigating the world of owner operator agreements in trucking can be complex and fraught with challenges. Many owner operators find themselves grappling with their classification as an employee, independent contractor, or leasee. Each classification comes with its own set of regulations and tax implications. As these classifications are mainly based on the degree of control the company exerts over the driver, understanding IRS and Department of Labor guidelines is crucial. The nuance of this classification can have significant legal and tax ramifications.
Another common issue concerns maintenance responsibilities. Unclear maintenance provisions can lead to disputes over who bears the cost of repairs and upkeep. Addressing these challenges comes down to clear communication and documentation. Before signing, an owner operator should thoroughly review every clause of the agreement and make sure they understand their duties and obligations. Also, having a trucking attorney review contracts may be beneficial. An experienced eye may catch something you miss.
Non-compete clauses are another potential pitfall. Depending on the state, enforcing such clauses may be difficult. A clear understanding of geographical limits and duration is important before signing an agreement.
Lastly, compensation disputes over fuel surcharges, bonuses, and other financial incentives are not uncommon. Clear stipulations for payment can head off many of these concerns. Overarching all these challenges is the issue of safety compliance. In the high-stakes world of trucking, accidents are always a possibility, so knowing who bears responsibility can save headaches later on. Areas of responsibility should include the cost of towing, accident management and potential damages.
While these challenges are common, they are not insurmountable. By understanding the potential pitfalls and taking steps to clarify them in the contract, both owner operator and company can engage in a more secure, mutually beneficial working relationship.
Tips for Trucking Companies
To minimize disputes arising out of the terms of the owner operator contracting process, companies should do the following:
(a) thoroughly vet potential owner operator personnel including but not limited to, the quality of their maintenance record, previous contractor relationships, financial stability and other factors which might indicate a greater propensity for default (including poor credit ratings or unresolved court judgments);
(b) make their operations manual available prior to the signing of any agreement so that an owner operator can make an informed decision about whether to accept the terms of the contract being offered;
(c) develop a relationship with owner operators by meeting with each owner operator personally after a contract is signed, on site – either at the owner operator’s place of business or at the trucking company’s terminal , and conducting a comprehensive orientation session to explain the company’s expectations in greater detail and answer any questions or concerns the owner operator may have;
(d) provide each owner operator with a contract handbook which explains in simple term the meaning of all the terms and conditions contained in the owner operator agreement. The handbook should also identify those provisions of the agreement deemed non-negotiable by the trucking company and also invite the owner operator to negotiate adjustments to fees charged in cases where the owner operator feels strongly (for whatever reason) that a fee should be adjusted or waived;
(e) conduct periodic "checkups" with each owner operator to assess the working relationship, this should be performed twelve weeks after entering into an agreement, and then every six months;
(f) engage the owners of owner operators who have violated provisions of the owner operator agreement in discussions about their violations and whether any "windows" for cure should be opened in light of the circumstances surrounding the violation; and
(g) periodically review all of their owner operator agreements and revise their form as necessary taking into consideration current legislation, court decisions and the general business climate.