Use Care with Owner-operators
By Henry E. Seaton

November 1999
Reprinted from

Small carriers are increasingly turning to owner-operators as a way to augment their fleets. Definitions differ, but in general an owner-operator owns or leases one or more power units that he provides, with drivers, to a carrier for the carrier’s use in serving its customers.

Owner-operators are typically compensated on a percentage of revenue or on a cents-per-mile basis and are paid as independent contractors. They are generally responsible for all variable costs of operating their equipment, including drivers’ wages, fuel, tractor payments, and fuel and use taxes. By regulation, the carrier to which the operator is leased assumes legal control of equipment during the lease and is responsible for both public liability and cargo coverage.

Although most regulations governing motor carriers have been significantly streamlined in the past decade, the leasing regulations (49 C.F.R. 376) that apply to the contracts between carriers and their owner-operators remain formidable and confusing. Any owner-operator agreement must contain more than two dozen specific requirements designed to protect the owner-operator against abuse.

Unfortunately, drafting an owner-operator agreement isn’t as simple as borrowing someone else’s lease as a template and modifying it to meet your needs. It’s too easy to inadvertently omit or delete required provisions. Some of the more onerous provisions of the lease regulations require you to:

*Specify in writing responsibility for permits, tolls, fines, base plates, fuel taxes, etc.
*Settle within 15 days of submission of the necessary paperwork, which is specifically limited to the log book and proofs of delivery.
*Give the lessor a copy of any rated freight bill when compensation is based on percentage of revenue.
*Specify all chargeback items.
*Be specific on any mandatory escrow and pay interest at 91-day, 13-week Treasury Bill rates.
*Pay escrowed funds within 45 days after termination of the lease, provided that placards are returned.

In recent years, these requirements have become particularly important. The ICC Termination Act of 1995 granted owner-operators the right to bring suit in federal court to enforce these “truth-in-leasing” regulations. Several lawsuits against motor carriers have been filed on behalf of owner-operator groups as a result, and those cases are pending.

Strict compliance with truth-in-leasing regulations isn’t the only trap for the unwary motor carrier. Owner-operators are independent business owners, and you shouldn’t treat them as employee drivers. The last thing you want is to have the Internal Revenue Service reclassify your owner-operators as employees. That would lead to further requirements — back withholding, Social Security payments, etc.

Recent decisions and revenue rulings seem to be more favorable to a finding of independent contractor status, but you still must be careful. Owner-operators provide services under contract. Although you are fully responsible under the safety regulations for the operation of their equipment, they are free to succeed or fail as business owners. A final major pitfall in dealing with owner-operators is workman’s compensation, which is governed by state law. By statute, some states have created an exemption for owner-operators. Pennsylvania, however, recently held that owner-operators are employees for workman’s compensation purposes. Most states don’t require carriers to include owner-operators in their workman’s compensation program. But states have different standards, so check your state’s workman’s compensation laws to know your obligations. In most cases, the safest policy is to require that owner-operators maintain their own coverage and provide a certificate of insurance as proof of coverage for any drivers they hire.

Owner-operators can help a small fleet adjust quickly to market conditions and compete for new business. But be sure to comply with the leasing regulations and both federal and state employment law to avoid nasty surprises.
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