Lease-to-own provisions in independent contractor agreement

By Henry E. Seaton
January 3, 2012
Reprinted /

Q: We have a purchase program set up with independent vendors that allows our owner-operators to purchase used trucks. We facilitate the transaction by deducting truck payments from the owner-operators and are liable for two months of payments to the vendor. Does this arrangement violate our independent contractor agreement?

A: Independent contractors often need the aid and support of their lessee carrier in arranging to purchase used equipment. From an Internal Revenue Service point of view, so-called “lease-to-own agreements” will not vitiate independent contractor status for federal tax purposes. But the independent contractor model is under great attack – particularly at the state level.

The owner-operator needs ‘portability,’ i.e. the ability to leave the carrier and still purchase the truck.

*The federal leasing regulations are found at 49 C.F.R. 376.

*In North American Van Lines Inc. v. NLRB, 869 F.2d 596 (D.C. Cir. 1989), the Internal Revenue Service approved lease-to-own agreements as not violating independent contractor status for federal withholding purposes.

*Recent state law cases in California and Massachusetts are concerning.

Currently there are 23 states that exempt owner-operators from worker’s compensation by statute and 17 states that have statutory exemptions for unemployment compensation. Other states impose various control tests to determine these issues, and it has become impossible for me to offer advice on a “one-size-fits-all” basis. In several states now, to qualify for the worker’s compensation exemption as I understand it, the carrier or an affiliate cannot own a truck leased to the owner-operator. Unfortunately, legislation approved by the National Conference of Insurance Legislators Model Act contains the same condition, and we also may see an unfortunate increase in the chilling effect of such restrictions in future state statutes.

Your third-party financial arrangement hopefully will satisfy the Model Act and statutory exemption states. A key issue to remember, though, is the importance of the carrier’s involvement not being tantamount to control. The owner-operator needs “portability,” i.e. the ability to leave the carrier and still purchase the truck for the declining or residual value.

Most frequently, the vendor, when entering lease-purchase agreements with owner-operators, will condition the sales agreement upon the owner-operator being with a qualified company and that the company make the deductions from settlements. Any lease-to-own or vendor lease-purchase contract should not obligate the owner-operator to remain under contract with a particular carrier for the period of the lease-purchase buyout. The owner-operator should have the right to purchase the equipment for the declining residual at any time or to find a new carrier to make deductions through the balance of the lease. This is necessary to preserve the operator’s independence, preserve his equity and show absence of control by the carrier.

Caveat: The reader is cautioned that this area of the law is a developing one and varies by state. The devil is in the details, and no general conclusions about federal or state treatment of independent contractors are possible.

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