Owner-Operator Contracts
Watch out! Federal regulations are full of potholes that can land a carrier in court.
Patricia Smith
Senior Editor
Last November, the Owner-Operator Independent Drivers Assn. (OOIDA) added still another lawsuit to its growing string of legal actions against carriers that use owner-operators. This one, filed on behalf of several OOIDA members, accuses Landstar System and its operating companies of overcharging owner-operators for fuel, licenses and other fees. Similar action has been taken against a number of high-profile carriers, including C.R. England, Swift, Prime, Heartland Express and Mayflower.
While complaints vary, the lawsuits are all based on federal regulations (49 CFR Part 376) governing vehicle leasing. Drafted in the 1970s, the so-called "truth in leasing" rules initially fell under the jurisdiction of the Interstate Commerce Commission. Despite limited manpower and budget, the ICC did try to enforce them — or at least go after the most blatant offenders. When the ICC was abolished, authority was passed to the U.S. Department of Transportation, which has refused to become involved in contract disputes, declaring them to be private matters best settled in the courts. Through a lengthy legal battle, OOIDA owner-operators won the right to sue carriers that don't comply with the rules.
The organization has vowed to aggressively pursue legal action against business practices that it feels take unfair advantage of owner-operators. "The purpose of this and other suits against motor carriers is to correct these practices and to promote greater compliance with the federal regulations," says OOIDA President Jim Johnston, regarding the Landstar suit.
Unfortunately, what carriers must do to comply isn't entirely clear. While the regulations seem fairly straightforward, there are many areas that are subject to interpretation by various state courts, notes Ken Siegel, an attorney with the transportation-based law firm Strasburger & Price. And since no two trucking operations are exactly alike, there is no single standard that applies to all situations.
One key issue that appears often in OOIDA suits is markups on chargeback items. In the Landstar case, for instance, OOIDA claims that the carrier receives a much larger discount on fuel purchases than it passes on to owner-operators who buy fuel through the program. Thus, the suit says, Landstar is making "a substantial undisclosed profit" on the transactions. (Landstar has not commented publicly on details of the lawsuit but says its leasing program is in compliance with the law.)
The rules do state that all chargeback items must be clearly specified in the lease contract along with an explanation as to how the charges will be calculated. However, Siegel says he doesn't see anything in the regulations that prohibits markups per se, as long as details are made clear in the contract.
Very often, agreements use general terms like "at cost," which are subject to broad interpretation. "At cost" for fuel, for instance, could be the pump price, the carrier's cost, the discounted price. "You really have to be specific," he cautions. "Using general language isn't going to work."
Alleged mark-ups on insurance premiums are a recurring complaint in the OOIDA suits. Again, says Siegel, there isn't anything in the rules that prohibits carriers from adding an additional amount to their premium cost, but they must make that clear in the contract — and they must be willing and able to provide the documentation to back it up.
Another tricky area: escrows versus expenses. The rules are fairly specific regarding the treatment of escrow accounts, including interest to be paid and reimbursement of unused amounts. Many deduction items — like fuel — are clearly expenses. Others depend on the circumstances.
For instance, if an owner-operator is buying insurance through a carrier, and an amount is deducted from each settlement check to pay the monthly premium, it's logically an expense. But what if the carrier deducts weekly but pays the premium to the insurance company every six months? "Is that an escrow account or an expense?" asks Siegel. "What happens if the owner-operator quits and he has paid six months worth of insurance in advance?"
Maintenance funds are common in carrier sponsored lease/purchase programs. Because they're deducted from settlements, treatment of the funds falls under the leasing rules. Siegel, a former ICC attorney, recalls a case where the carrier was deducting a fixed amount for vehicle maintenance from the owner-operator's settlement check and treating the deduction as an expense.
Maintenance costs increase as the vehicle ages so such agreements usually mean the lessee pays more than actual costs in the first years of the contract. The owner-operator benefits from consistent, easy-to-budget maintenance costs, but what happens to the unused maintenance money if he terminates the contract early? Siegel says the carrier might have been allowed to treat the deduction as an expense if they had specified it as a charge for vehicle "use" or "wear and tear." As a maintenance deduction it was determined to be an escrow fund, thus subject to interest and other rules.
"You have to be very careful with the words you use," he again cautions. And he advises owner-operators to be equally wary. "They should understand exactly what is to be deducted, how much will be deducted, and what it will be used for," he adds. "If something is unclear, they should ask for an explanation."
Because of the gray areas, carriers that use owner-operators are smart to hire an attorney to draft a lease contract specifically for them — preferably one who is familiar with leasing regulations and the pitfalls in owner-operator agreements. Many times, says Siegel, companies try to adopt someone else's contract even though their operation and situation might be quite different.
Equally important: contracts should be review periodically. "A lease that was properly written two years ago may not be proper today because of a recent court ruling," he explains. "It's not a matter of writing it and sticking with it for the next 10 years."
What The Rules Say
Federal regulations governing owner-operator contracts are covered in 49 CFR Part 375 Lease and Interchange of Vehicles. The complete rules can be accessed at www.gpo.gov/nara/cfr (search "49CFR376"). Following are some key points.
Compensation. The lease must state the amount to be paid the lessor (i.e. the owner-operator) either on the face of the contract or in an addendum. This can be expressed as a percentage of gross revenue, flat rate, variable rate or any other mutually agreed upon method.
The contract must clearly specify who is responsible for loading and unloading and compensation for the service.
The lease must specify that payment will be made within 15 days after submission of logbooks and any paperwork necessary to secure payment from the shipper. A carrier may require other paperwork, but not as a prerequisite to payment. Payments can't be contingent upon submission of an exception-free bill of lading.
The lease may make removal of all identification devices a condition of payment if the lease is terminated. The lease must clearly specify which party is responsible for removing identification devices and when and how these devices — other than those painted directly on the equipment — will be returned to the carrier.
Lessors who are paid a percentage of gross revenue must receive — before or at the time of settlement — a copy of the rated freight bill or a computer-generated document with the same information. If a computer-generated document is used, the contract should give them the right to view, during normal business hours, a copy of the document from which the information was taken. If the freight is hauled under contract, the carrier must provide documentation that contains the same information that would appear on a rated freight bill.
Charge-back items. The contract must clearly specify all items that will be deducted from lessor compensation and how each item will be calculated. It must also state that the lessor has the right to see any document necessary to verify accuracy of the charges.
Carriers can require certain insurance coverage or special equipment needed for the type of hauling they'll do, but they can't require that lessors buy products, equipment or services from them or their designated sources.
The lease shall clearly specify who is responsible for the cost of fuel, fuel taxes, empty mileage, permits of all types, tolls, ferries, detention and accessorial services, base plates and licenses, and any unused portions of such items.
Insurance. The lease must clearly specify the legal obligation of the carrier to maintain liability insurance as required by federal regulations. It must also specify who is responsible for providing any other insurance coverage for the leased equipment. If the carrier will make a chargeback to the lessor for any of this coverage, the lease must specify the amount to be charged.
If the lessor buys insurance from or through the carrier, the lease must specify that the carrier will provide a certificate of insurance for each such policy including the name of the insurer, the policy number, the effective dates of the policy, the amounts and types of coverage, the cost to the owner-operator for each type of coverage, and the deductible for each type of coverage. The carrier must also provide a copy of the policy upon request by the lessor.
Oversize/overweight fines. Except when the violation results from acts or omissions of the lessor, the carrier assumes the risks and costs of fines for overweight and oversize trailers when the trailers are pre-loaded, sealed or the load is containerized or when the trailer is otherwise outside the owner-operator's control.
Base plates. If the carrier is authorized to receive a refund or credit for base plates purchased by the lessor from the carrier, the carrier must refund a prorated share of the amount received. If the base plates are authorized to be sold by the carrier to another lessor, the carrier must refund a prorated share to the initial lessor.
Cargo and property damage. The lease must specify the conditions under which deductions for cargo or property damage may be made from settlements. It should further specify that the carrier must provide a written explanation and itemization of any deductions for cargo or property damage made from any compensation of money owed to the lessor. The written explanation and itemization must be delivered to the lessor before any deductions are made.
Escrow funds. The lease shall specify any required escrow funds or performance bonds, including the amount and specified items to which the fund can be applied. The carrier must provide an accounting of any transactions involving the fund with settlements or monthly statements. The lessor must be given the right to demand an accounting at any time.
While the fund is under the control of the carrier, the carrier must pay interest on the fund at least quarterly. When calculating the fund balance, the carrier may deduct a sum equal to the average advance made to the lessor during the period for which interest is paid. The interest rate shall be established on the date the interest period begins and shall be at least equal to the average yield or equivalent coupon issue yield on 91-day, 13-week Treasury bills as established in the weekly auction by the Department of Treasury.
The lease must clearly state all conditions the lessor must fulfill in order to have the escrow fund returned. When the fund is returned, the carrier may deduct monies for those obligations incurred as specified in the lease and shall provide a final accounting of all final deductions. The lease shall specify that in no event shall the escrow fund be returned later than 45 days from the date of termination.
