Lease Purchase Programs: Know The Laws
Poorly structured programs can jeopardize independent contractor status and violate leasing rules.
Truck lease/purchase programs are a good way to attract – or keep – veteran drivers who want to become owner-operators. But before you start signing leases and handing out keys, you need to schedule some long sessions with an attorney who understands the trucking industry, federal leasing regulations and state employment laws.
One important question that many carriers don’t consider is how a truck lease arrangement might affect the independent contractor status of its owner-operators. The state of Illinois has an interesting law that basically bans company-sponsored lease/purchase programs for owner-operators. Truck leases or financing must come from a totally independent third-party (even members of a carrier’s owning family must stay out of the picture). Otherwise the owner-operators will be classified as employees for unemployment insurance purposes and the carrier could be subject to back taxes, interest and fines.
The Illinois law is unique and not likely to be widely adopted elsewhere, but it does underscore the problems lease/purchase programs can create.
According to Nancy Joerg, a management-side employment lawyer with Wessels & Pautsch, the lease/purchase provision is part of a comprehensive law aimed at clarifying the independent contractor status of owner-operators. It was compromise legislation hammered out by a diverse group representing a broad spectrum of trucking interests and, like most compromise legislation, it has a few quirks. Nevertheless, said Joerg, “We were glad to get something. Before that we were stuck with an agency, the Illinois Department of Employment Security, which found every owner-operator to be an employee because of the supposed control and direction of the carriers over their drivers.”
"Control” is a major consideration in any federal or state review of independent contractor status. The more control a company exercises over its contractors, the more they start to look like employees. Many lease/purchase arrangements give the carriers what auditors see as a great deal of control over both equipment and drivers.
"When you purchase an automobile no one tells you where to use it, how to use it, how to maintain it,” Joerg noted. “But if you purchase a truck and the carrier is telling you how to use it, how to maintain it, and that you can only use it for them, then it starts to look like a sham.”
"Ownership” is another key consideration. The Illinois rule was mainly a concession to the Teamsters and owner-operator groups who argued that lease/purchase plans often were little more than a way for carriers to charge drivers for the use of company trucks. At the same time, federal and state auditors look for equipment ownership or some other financial stake in independent contractor businesses.
Ideally, the owner-operator is building equity in the truck or has a reasonable buyout option at the end of the contract. Lease agreements without buyouts can work, but auditors “will be looking to see if this is truly an overhead item for the owner-operator,” Joerg cautioned. “Is it a true rental in the sense that if the owner-operator goes on vacation, he still has rental payments?”
One particularly tricky question is whether or not the lease/purchase contract should tie the owner-operator to the carrier. Under many carrier-sponsored lease programs, the owner-operator is prohibited from taking the truck if he switches carriers.
"It’s a double-edged sword,” said Kurt Vragel, a transportation attorney based in Glenview, Ill. The practice pushes the envelope on those two key independent contractor issues – ownership and control – but it also helps protect the carrier’s investment.
“If you have a driver who is in fact lease purchasing a truck and has title to the truck, he can go anywhere else,” he explained. “The problem is that the company may not be able to take the truck back if the driver fails to make the payment.”
One remedy is to have lease agreements with buyout clauses. “The carrier or leasing company retains title to the truck so it’s simply a matter of repossessing it when the lease is cancelled,” Vragel explained. Some attorneys also recommend lease/purchase contracts that allow sub-leasing, but only to carriers that meet pre-set safety and financial standards.
WARRANTY & REPAIRS
Another concern is that lease/purchasing agreements for new or used equipment can open sponsoring trucking companies to warranty and product claims.
"Are you supposed to give the owner-operator a warranty? Is there a guarantee that the truck will work?” asked Vragel. “I was involved in a case where the owner-operator claimed that the carrier gave him a faulty truck. It can cost quite a bit of money to extricate the company from such a claim, even if only to defend against the allegation that the truck was defective.”
Maintenance and repairs should be addressed up front, he advised. “It might be prudent for both the trucking company and the owner-operator to get some kind of maintenance agreement with a major repair company.” Escrow or reserve funds to cover major repairs are a good idea as long as the owner-operator has complete access to that money, he said.
In a teleconference sponsored by the Truckload Carriers Assn., attorney Dan Barney of Scopelitis, Garvin, Light & Hanson, recommended an addendum to truck lease/purchase contracts that establishes minimum guidelines regarding the condition of the equipment when it’s delivered and when it’s returned.
The owner-operator should inspect the vehicle before taking delivery and should certify, in writing, that it meets the specified guidelines. Barney also said the lease should specify who will be responsible for maintenance and repairs and he recommended an addendum listing service items and required maintenance intervals.
In order to avoid lawsuits, equipment lease/purchase agreements as well as operating agreements must strictly adhere to federal leasing rules, he cautioned. Any equipment-related charge-backs or deductions from settlement checks must be clearly specified in the operating agreement, including the method of computation.
Leasing agreements should make it clear that the lessee will be responsible for operating expenses, such as licenses, permits, maintenance and repairs. Otherwise, he explained, owner-operators may claim that they thought those expenses were included in the lease payments. Moreover, documentation of those financial obligations can be helpful if the owner-operator’s independent contractor status is questioned.
Leasing rules say that any unused escrow or reserve funds must be returned to the owner-operator within 45 days after termination of the hauling contract. Barney said contracts must list specific items to which the reserve funds will be applied. Owner-operators must be given an accounting of their reserve funds at least once a month but they have the right to ask for an accounting at any time. The rules also say that interest must be paid on escrow funds at least every quarter using a rate that can’t be lower than the rate on 90-day Treasury Bills.
Like any other lease or finance arrangement, carrier lease/purchase plans can require that the owner-operator maintain a certain level of insurance on the vehicle. The carrier can make insurance available to owner-operators, but company-sponsored insurance and other purchasing programs must be optional – not required. Costs or charge-backs, including administrative fees, should be specified.
Know the Laws continued...
