Trucking lease agreement – what is it?
A trucking lease agreement is a contract between an owner of a vehicle and an entity that leases the vehicle from the owner. These owners can be individuals, partnerships, or corporations. The individual or business entity leasing the vehicle is termed the lessee. The owner is termed the lessor. The terms of this lease agreement can vary, but generally it clearly lays out the obligations, responsibilities , terms, and conditions of the business relationship between the lessor and the lessee. It is pivotal for any trucking business to fully understand the terms of all the trucking lease agreements, as some leases impose greater legal duties, and expose the lessor and the lessee to greater liability. The terms of a trucking lease agreement also determines who gets sued in the event of an accident.
Key terms of trucking lease agreements
A trucking lease agreement, particularly for owner operators, is a legally binding contract between the trucking company and the driver. It is a separate entity from an employment contract, with distinct rights and responsibilities for both the employer and the owner operator. The lease pays for the driver’s truck and permits him or her to haul the freight of the leasing company, and is usually the most economical option for an owner operator to operate the truck.
The lease agreement usually includes general terms and conditions, such as:
The trucking lease agreement may be part of an independent contractor agreement with a driver leasing company or it may exist as a stand-alone contract between the trucking company and the owner operator. It is important to note that if an owner operator is leasing a truck from a leasing company, the driver should have his or her own contract with that leasing company, as opposed to entering into an agreement to become a "lease-purchase driver," where the operator gives a down payment on the lease and pays a certain amount each week until the entire lease is paid. Many of these lease purchase agreements are bad deals and the drivers end up being tied to the company long after the lease is fulfilled and required to pay exorbitantly high prices for the trucks.
These agreements are very carefully worded to give leeway to the trucking company while protecting the owner operator. For example, the company could charge the owner operator for unloading and unloading fees if it fails to unload at a specified time, which can then result in a chain reaction of illegal delays and fines.
Owner operators and their benefits
Owner operator lease agreements offer a compelling mix of benefits for drivers. They afford a level of flexibility, freedom, and potential income that is hard to match in other occupations. In essence, they provide the self-employment option that many owner operators would prefer.
With a lease agreement, an owner operator has the freedom to accept or turn down loads that don’t suit him. If the owner operator is unable to accept a load for any reason, he has the option of finding a driver for the load through load delivery companies that serve as brokers for independent truckers. The owner operator can also choose the loads that are best suited to meet his financial needs.
At the same time, leasing allows the owner operator to offset some of the costs associated with owning a truck. In other employment situations, workers have benefits like health insurance, retirement contributions and paid time off. Owner operators can negotiate these kinds of benefits with carriers and reduce the out-of-pocket expense of maintaining a business.
Not infrequently, as well, an owner operator will be able to choose whether to operate under a fixed or variable lease. A variable agreement might include a revised per-mile amount in instances when fuel prices change, for example. A fixed lease agreement, on the other hand, is essentially a flat fee paid by the carrier. If the lease agreement allows for increases or decreases in the per-mile or flat fee, the owner operator’s income and costs could vary significantly when fuel prices fluctuate.
Regulations may state that carriers that hire owner operators are not required to cut fuel allowances on specified routes if fuel prices exceed certain amounts. This means that if the owner operator is paid $2 per mile, the lease agreement stipulates that $1.25 of the fee goes toward fuel for the truck. If fuel prices exceed a certain threshold — let’s say fuel prices rise to $5 per gallon — the carrier is not obligated to cut the $1.25 allocation to something less than that amount. In other words, you earn more money since the fuel allowance is larger.
Many owner operators find that the owner operator lease agreement pays off. On one occasion, for example, an owner operator might agree to pay a carrier 72 percent for a load and $175 per fuel stop. Another owner operator might agree to pay 78 percent and $150, or $125, per fuel stop. Consider how much each does for example runs:
Thus, under the first arrangement, the owner operator makes more money on the first run, but ends up paying more money on the second run for the load delivery. Overall, the owner operator covered his expenses for the load and made a profit.
Risks and other possible concerns
When done correctly, leasing can provide substantial savings and other benefits to the Carrier. But leasing is not without its challenges and those challenges can pose significant financial risks to the Carrier, particularly in a one-truck owner/operator leasing situation.
Examine any lease and you will find a myriad of problems, but the two most commonly encountered are (1) the owner/operator does not own the equipment, but the lease acts as though he does own the equipment; and (2) the owner/operator is essentially leasing from himself.
What does it mean to not "own" the equipment? In all economically successful one-truck owner/operator cases, the lease between the Carrier and the owner/operator will indicate that the owner/operator owns the truck. And most of the time, the owner/operator thinks he owns the truck because it is in his name. But most of the time he does not own the equipment and it was placed temporarily in his name to meet the requirements of the Federal Motor Carrier Safety Administration.
For example, consider an operating leasing arrangement where the Carrier leases both the tractor and trailer from a company owned by the owner/operator husband. In this situation, the wife is given a bill of sale for the tractor by her husband’s company. Then, she enters into a one-truck owner/operator lease with the Carrier to drive the tractor that her husband’s company leases to the Carrier. She signs the lease as the owner/operator, and the Carrier deducts the cost of the lease payments and insurance from her settlement statements. The wife gives the Carrier her undivided attention as a successful one-truck owner/operator and also operates multiple daily delivery routes. All of this sounds perfect, except for the fact that she does not own the equipment.
The owner/operator is leasing from himself. In addition to economic arrangements, many owner/operators enter into leasing arrangements in which the owner/operator continues to have and exercise ownership interest over the equipment. There can be substantial tax savings in these situations, but it can be very expensive for a Carrier to try to unwind an owner/operator agreement in such circumstances. The typical problem with such arrangements is that the owner/operator tries to apply all of the expenses he incurs against the income generated by the leases. Many times his costs exceed the income generated by the leases. The question then becomes whether the Carrier should only pay the income (reduced by the operating or net lease treatment) and take ownership of the costs and liabilities associated with the equipment. Unfortunately, the IRS is likely to interpret the lease payments as distributions from a "pass-through" entity and expect the Carrier to pay taxes on the income "passed-through." Thus, the Carrier can end up paying taxes on the income, and still being sued for the costs and liabilities associated with the equipment.
Legal implications
For owner operators, the responsibility for the owner/operator relationship extends to how the law regulates that relationship. In addition to local laws adopted by the carrier, an owner operator’s lease may be subject to federal and state regulation. While the federal regulations give carriers some latitude in drafting the terms of the lease a carrier must not impose additional restrictions that might violate the Federal Trade Commission’s (FTC) Motor Carrier Act of 1980. Federal law prohibits any practice that "unreasonably restricts the ability of a driver-partner to terminate a long-term lease." The FTC has said that if a company requires a driver to pay for goods or services that have no value to the company as a condition of terminating a lease or other agreement that requirement will be considered an unreasonable restraint on the driver’s right to terminate the contract.
In addition to marking the end of the owner/operator relationship , termination of the lease can have additional consequences that an owner operator should understand before signing the lease. Some leases have restrictive covenants, often in the form of non-solicitation or non-compete clauses. While such clauses may be lawful and enforceable, each clause should be carefully reviewed and understood, especially if the owner operator plans to begin working for a new company in the future. Inadequately understanding the scope and reach of the clause could restrict the owner operator’s ability to work. Similarly, failure to understand the circumstances under which the company can terminate the lease can create problems for the owner operator. For example, the owner operator should understand if the lease can be terminated without cause and the notice rights of each party should a dispute arise.
Negotiating a lease agreement
When it comes to negotiating a lease agreement, the owner operator should be thinking about four primary areas that can help to set the stage for the negotiation: Getting organized. This seems elementary, and it seems like something that’s done so long before a discussion of entering into a lease agreement with any carrier is initiated, it may seem unnecessary. But it is actually critical to getting the best deal you can. Make your list of what you want and need out of a lease agreement. Make sure it includes all of the areas discussed above and that you’ve prioritized them. This will give you your starting point and prepare you for the discussions ahead. Do your homework. Contact multiple carriers to see what they offer in a lease agreement. You may be surprised at how far apart they are on certain issues and how some carriers stand out. This will arm you with the information you need to negotiate for the best deal possible. Do not over-negotiate. There is something to be said for the "low-hanging fruit" as an obvious outcome from the negotiation process. But going in with your own low-hanging fruit, such as expenses you don’t want to pay (e.g. escrow funds) or benefits you don’t want to pay for (e.g. occupational accident insurance), is an equally productive negotiating position. We discuss below when or if you should consider hiring a transportation attorney to assist you with this process. Remember this isn’t a game. It’s your business. Don’t lose sight of that.
Examples of leasing agreement clauses
While there are several types of trucking lease agreements, there are certain facts and information that you may expect to find within any lease agreement.
Lease Term and Obligations
The lease agreement must specify whether it is an exclusive lease or a trip lease. In an exclusive lease, the owner operator is guaranteed a minimum amount of pay. On the other hand, in a trip lease, the owner operator is paid only for the specific load(s) he or she hauls. A trip lease is used when a carrier hires an owner operator for just a few days, for instance. When the owner operator comes on board as an employee, the carrier is responsible for unemployment insurance, workers compensation, and possibly additional forms of insurance. The employer also withholds the owner operator’s income taxes. With an independent contractor , the carrier does not have this same level of responsibility.
Contract Consideration
The lease agreement must specify what is being provided in return for the owner operator providing his or her services. This could include items such as advance payments, advances on settlements, recurring payments, payment of expenses while on the road, advances against settlements, and your general overall compensation.
Restrictive Covenants
Typically, a lease agreement should include some sort of restrictive covenant that makes the owner operator use the carrier’s programs, policies, and procedures with respect to the driver’s trip.
Provisions of the Lease Agreement
Here are some possibly problematic provisions you may see in a lease agreement and how they may affect you: Notwithstanding the above, the lease agreement must give you the right to file a protest of any deductions made.