An Overview of Owner Operator Agreements
In short, owner operator contract agreements are an interim solution to the tonnages shortage in the trucking and transportation industry. An increasing number of trucking companies are bringing on owner operators to meet their demands. Whether you are a truck company looking to bring on an owner operator, or an owner operator coming into a new fleet, it is important to understand the fundamentals of an owner operator contract agreement, as well as your obligations and rights under such agreements. A good owner operator contract will leave no room for confusion as to how an owner operator can operate within the fleet, and what the expectations will be in the event of a dispute. The general tips below should be kept in mind when understanding owner operator contract agreements:
- Be cognizant of whether your independent contractor status can be undermined, or void, by the contract you are about to sign . Truckers have greatly benefitted from the independent contractor status, but can lose these benefits if their relationships with employers are too closely scrutinized, or if the employment relationship is improperly structured;
- Know your rights. Whether a truck driver, or an owner operator, it is important to understand that even though you are operating as an independent contractor, you still have obligations and rights under the federal government, and state statutes; and
- Take nothing for granted. Owner operator contracts will often leave nothing certain under the contract; many provisions will leave a lot of room for interpretation. This can happen in both directions. Interpretation of certain provisions may lead to an independent contractor missing out on certain benefits and entitlements, or alternatively an employer may miss out on provisions which lead to more financial burdens than expected. Leaving nothing for granted during the life of the contract agreement will go a long way to reducing or eliminating the chances of a dispute.
What to Include
The critical components of any owner operator contract agreement are payment terms, responsibilities, and length of the contract. Each party should clearly understand the payment procedures, amount, and time line for payments. Commonly used methods of payments include cents per mile, percentage of revenue, or flat fee. Whichever method is agreed upon, they should be described in detail within the agreement to minimize the potential for misunderstanding. If there are conditions for when payment is due, how the payment is determined, or who is responsible for different types of pay, that too should be explained in detail within the agreement. Additionally, each side should understand if they will be required to front any expenses or if any "bridging" will be done by any of the parties. All bridges and expenses should be detailed.
Responsibility is another vital section of the contract. This usually encompasses what truck maintenance each party is responsible for, what employee costs are, and what fees each party is responsible for like scale tickets and permit fees. This section usually has a lot of wiggle room due to the ability to negotiate on most areas. It is important to remember that whatever you put in your agreement should make sense in your relationship to one another.
Finally, the duration of the agreement is important. It will be in the best interest of both parties if a specific date of termination is outlined in the contract. A termination policy may supplement or replace the need for a specific date by spelling out how to terminate the agreement. The typical termination policy can be outlined as: (1) 10 to 14-day notification with no penalty; (2) 72-hour notification with no penalty; (3) automatic termination for failure to maintain insurance or entry of civil judgment or just bad behavior; (4) automatic termination for leaving the area without written permission; or some other termination procedure.
What to Avoid
Those new to owner operator agreements should be mindful of the most common mistakes to avoid, many of which can lead to industry regulatory law issues. These mistakes include but are not limited to:
1.Lack of a written contract
Verbal contracts can go sideways when contradictory obligations are asserted by one party. A contract that clarifies rights, obligations and responsibilities is critical to a successful independent contractor relationship.
2.Onerous termination provisions
Both the carrier and contractor should have a clear, mutual understanding of the terms upon which either party can terminate the relationship. Frontloading potential termination claims can be a source of contention; instead, carefully consider the desired settlement of revenues as well as other expenses associated with termination.
3.Retaining control of equipment or accidents
As the term implies, an independent contractor should be operating his or her own business, free from company control. Further, should an accident occur, the costs to repair or replace equipment should be the responsibility of the owner operator and not the carrier.
4.Ownership of customer contact information
The ability to transfer equity in the business is a key value of any startup venture. The carrier must consider what assets can be transferred to the owner operator in the event the relationship terminates.
5.Binding the owner operator to service the carrier exclusively
Restrictive covenants appear regularly in owner operator agreements. However, independent contractors are free to enter into agreements with other carriers, provided the language of the agreement does not explicitly state that the services are being performed exclusively for the carrier.
6.Failure to comply with the Vicarious Liability Statute, Wis. Stat. § 344.15
Under this statute, carriers are prohibited from entering into any agreement with an owner operator unless the owner operator is notified that they will be liable for damages to persons and property that occur during the performance of transportation services under the agreement. Moreover, carriers are required to maintain minimum insurance coverage – $1 million for public liability, and $100,000 for property damage.
Each of these issues can be easily addressed and prevented by spending time drafting the terms and conditions of the owner operator relationship.
Legal Considerations in Owner Operator Agreements
Owner-operator agreements are governed by a myriad of federal and state employment laws. These agreements are subject to the various Department of Transportation regulations, the Fair Labor Standards Act, Occupational Safety and Health Administration guidelines, the Family Medical Leave Act, and several other federal and state regulations. Because owner-operator agreements are generally exempt from the National Labor Relations Act, they are also exempt from the WARN Act, which protects workers who are subject to a mass layoff or company closing. Both the Equal Employment Opportunity Act and Title VII of the Civil Rights Act apply to owner-operator agreements, just as they do with other employment contracts. Owner-operator agreements must be kept separate from all policies and procedures and treated as distinct contracts with detailed provisions that are specific to the owner. Provisions may include limitations on mileage, weights, time frames for payment for services, drivers logs, inspections, and termination triggers. An agreement agreement is also a contractual partnership, and should be observed as closely as possible by both parties to mitigate legal liability.
Owner Operator Agreement Negotiation
When negotiating the terms of the owner operator contract agreement you want to make sure you are doing it carefully and in a manner that allows for the best leverage toward reaching a mutually acceptable agreement. Owner operators may have little leverage in negotiations because they are in a position where they have little other recourse. Trucking companies will use this to their advantage as they know it is likely that the owner operator will simply agree to the onerous terms in the hopes of the situation turning around in the future.
While it is true owner operators have little recourse, this does not mean they should not try to negotiate better terms. Owner operators should at least understand the weaknesses in their bargaining position so they do not sell themselves short.
One strategy that may work for an owner operator in negotiations is to focus on the overall deal rather than specific terms. Some trucking companies will agree to improve certain contractual terms just to keep the relationship between the owner operator and the trucking company good . If you can show your employer that you value the trip and want to keep your business relationship moving forward, you may be able to improve on certain terms.
This could include resolving matters such as recruiting reimbursements, bonuses, delays in compensation, late payments of compensation, and reimbursement schedule. These are some of the most common issues owner operators are faced with and by getting these resolved now, you will be in a better position in the future.
While in recent years companies were more interested in disputing the employment relationship with owner operators, many companies are realizing that owner operators provide a valuable service and are willing to retain their services under an owner operator contract agreement. By negotiating a better deal, you will be able to help prove to your employer that you are able to provide a valuable service that saves their company money in the long term.
Make sure to focus on the whole deal rather than one term. As the adage goes, "don’t make a mountain out of a molehill."
Owner Operator Technology and Tools
One of the most significant developments in contract law is the move from a mostly paper-based system to a digital one. Contract management systems, which can automate much of the process, make the task of constructing a new form contract as efficient and economical as possible. Depending on the system, it can even allow you to share the form contract with your owner operators once it is final. Then, after completion of the agreement, it creates a fully executed version that has all parties’ signatures on it.
Most of these contract management systems come with templates. You can build your owner operator agreement into one so that each time you need to negotiate a new agreement with a new owner operator, you simply call it up. As you negotiate, you can make notes on the changes you’re discussing with your new owner operator so that you can track what your owner operator is requesting and whether or not you want to make the change to your form contract. This scenario strips the contract of much of its busywork and leaves you with an agreement that’s ready to fulfill all parties’ needs, as well as look good doing it.
Many contract automation systems also offer a place to keep track of whether parties have been paid, what payments were due, and what payment terms are available for each party. The spreadsheets necessary to fulfill this role can take up a lot of time and effort. Additionally, you want to be able to guarantee that your records are correct, and automated tools do that for you, freeing you up to act in negotiations for your clients.
Updates, Edits, and Contract Revisions
It is suggested that contracts—especially owner operator lease agreements—are reviewed and revised on a regular basis to remain current with changes in the law, guidance letters, best practices, and trends in the industry. According to the FMCSA, regular review of contracts "ensures that all of the contracting parties are aware of and agreeing to current responsibilities." With leasing arrangements, it is important to understand what provisions in your contract require review and revision as a result of changes at the state or federal level.
If an owner operator is leasing on an ICC or DOT number, then he or she is operating only under federal regulations. It is worth noting that the Missouri Department of Transportation has expressly adopted all federal laws and regulations (with selected exceptions) applicable to the interstate transportation of property. For this reason, we are going to focus on more common updates—those involving the federal government—in this blog post.
Congress recently enacted several bills addressing transportation. This includes HR 3, known as the "Highway Bill," which "authorizes appropriations for the federal-aid highway program." The bill also made revisions to the Hours of Service (HOS) requirements, including the elimination of the 34-hour restart provision with two rest periods from 1 a.m. to 5 a.m. If the HOS policy in a lease agreement includes reference to the 34-hour restart provision, then this language should be updated.
Separately, the Commercial Motor Vehicle Safety Enhancement Act of 2015 amended § 227 of title 23, United States Code. This section required the companies and drivers to use electronic logging devices (ELD) "when the majority of a driver’s time spent driving is during the hours of 10 p.m. and 5 a.m." Although the time frames for ELD usage were later eliminated, the intent of the law remained "to ensure implementation of electronic logging devices." Still, the language in a lease agreement might reference an ELD policy. If this is the case, then this language should be updated.
Another item worth reviewing is the Hazardous Materials Safety Administration’s (HMSA) ELD Guidance. The HMSA EDL Guidance does not directly apply to trucking companies at the present time. However, the guidance does recommend the creation of a System Security Plan (SSP) "including background screening and training of individuals before they are able to access a carrier’s electronic system." Again, although the HMSA ELD Guidance does not directly apply to a trucking company, if the lease agreement includes policies regarding background checks or training, then the agreement might be inconsistent with the HMSA’s guidance.
In addition to these items, the FMCSA has recently updated guidance on the Use of Driver Coercion. The FMCSA permit a driver leased to one motor carrier to refuse a load when "a person with the authority to direct the operations of the vehicle requests that the driver violate a regulation." The Guidance Letter notes that the driver "should be paid by his or her employer for the time it took to respond to the coercion." Under these circumstances, it is possible that the driver might seek to be paid for the time spent refusing the load. The letter also notes that if a driver is not being paid, then this might constitute an incorrect deduction from wages and result in a violation of the FLSA.
Final Thoughts and Best Practices
The best practices for effective owner operator contract agreements involve a combination of thorough and precise drafting, careful management, and diligent maintenance of the agreement. It is important for both parties to the agreement to be well-informed of their obligations and rights. Beyond signing the agreement, the best way to achieve this goal is through training and communication.
To ensure that owner operator contract agreements meet legal obligations, it is important to remain up-to-date with changes in the legal landscape as well as industry trends. This includes staying informed about federal and state regulations and other case law that could impact the relationship between the carrier and the owner operator .
An owner operator contract agreement is typically never static. The agreement will need to be updated to increase compensation, adjust payment schedules, or reflect changes in applicable law. Carriers should review their owner operator contract agreements on a periodic basis, including the expiration date of each contract agreement.
It is also essential that carriers and owner operators keep appropriate records during the life of the owner operator contract agreement. These records may provide additional support in the event of litigation or agency audit. To this end, the owner operator contract agreement should expressly detail the records that the owner operator must keep.