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Expediter Beware: What You Should Know Before Signing an Owner-Operator Lease Agreement
When it comes to signing an owner-operator lease agreement with a trucking carrier, ignorance is NOT bliss. Any unpleasant surprises -- whether with payment terms, chargebacks, or other aspects of the contract -- could disrupt your cash flow and drive you out of business.
So, what should you expect in a solid lease agreement?
Refer to the Federal Motor Carrier Safety Administration (FMCSA) regulation part 376.12 on "Written Lease Agreements." This will give you an excellent overview of what must be (and cannot be) included in the contract for it to be compliant.
Then, as you compare a carrier's lease agreement with the rules specified under federal regulation 376.12, keep these important points in mind.
1. Payment Terms
(f) Payment period. The lease shall specify that payment to the lessor [owner-operator] shall be made within 15 days after submission of the necessary delivery documents and other paperwork concerning a trip in the service of the authorized carrier.
"After the owner-operator submits paperwork for a load (like the bills of lading and any additional charges they'll be reimbursed for), the motor carrier is legally required to pay the owner-operator within 15 days for that load," advises Dale Watkins, business services for Owner-Operator Independent Drivers Association, (OOIDA) a trade organization that fights to protect the rights of all professional truckers.
But some carriers offer turnaround on settlements that's sooner than 15 days. Will that be reflected in the lease agreement?
"It's possible for the carrier to specify less than 15 days in the contract. But in most cases, even a carrier that strives to pay its owner-operators within a shorter time will still put the 15 days in the actual contract, just in case there's a glitch in their system, and they can't fulfill the verbal promise to pay sooner," says Watkins.
2. Right to Review
(g) Copies of freight bill or other form of freight documentation. When a lessor's revenue is based on a percentage of the gross revenue for a shipment, the lease must specify that the authorized carrier will give the lessor, before or at the time of settlement, a copy of the rated freight bill or a computer-generated document containing the same information, or, in the case of contract carriers, any other form of documentation actually used for a shipment containing the same information that would appear on a rated freight bill.
If you suspect that you might be paid an incorrect amount for a given load, this provision is designed to give you the right to verify it.
"The carrier has a legal obligation to allow you to review the rated freight bills, which are the documents between the motor carrier and their customer on certain loads, to confirm whether you're being paid correctly per your contract," says Watkins. "Now, the carrier can legally cover up the customer information, but there has to be enough information on that bill that the contractor is certain that it reflects the load that they pulled."
3. Chargebacks
(h) Chargeback items. The lease shall clearly specify all items that may be initially paid for by the authorized carrier, but ultimately deducted from the lessor's compensation at the time of payment or settlement, together with a recitation as to how the amount of each item is to be computed. The lessor shall be afforded copies of those documents which are necessary to determine the validity of the charge.
Your compensation package might look great at first glance. But unexpected, burdensome chargebacks could quickly eat away your profits.
"All charge backs are to be listed in the contract," says Watkins. "So, if the carrier is charging you a percentage of use of its fuel card, that needs to be in the contract. If the carrier is charging you an administrative fee for doing your license and other tasks, that has to be in the contract. At settlement time, all charges must match up with what's in your contract."
When you go through the contract, look closely for administrative costs that seem out of line.
"I saw one contract that had a $295 per week administrative charge. If it's in the contract and you sign it, there is nothing illegal about that," says Watkins. "Another carrier had a $50 per week administrative charge just to print out a settlement. Some of those things, the carriers just nickel and dime you on. And if it's in the contract that you sign, you're required to pay it."
Another potential chargeback is for liability insurance coverage. Some carriers will cover the expense of the insurance for owner-operators; others will charge it back. It all depends on what's written in the lease agreement.
So, first, make sure you're o.k. with the charges listed in the contract. Then, use the contract to verify whether you're being required to pay any chargebacks that aren't in the agreement.
4. Deductibles
(j) Insurance...(3) The lease shall clearly specify the conditions under which deductions for cargo or property damage may be made from the lessor's settlements. The lease shall further specify that the authorized carrier must provide the lessor with 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.
The contract should outline precisely how much responsibility you have in terms of cargo claims and what the deductible will be. "Good contracts will tell me what deductible I would be responsible to pay for a cargo or liability claim," says Watkins. "I see deductibles ranging anywhere from a $1,000 to $10,000. For expediters, deductibles are typically closer to the $1,000 to $2,500 range."
Reviewing the Contract
Before you execute the contract, have an expert -- whether an attorney or someone at OOIDA -- review it for you to ensure there are no potential pitfalls that could put your financial future in jeopardy.
(OOIDA offers a free service to its members to review owner-operator lease agreements. Click Here to learn more.)
"Don't sign any contract until you absolutely understand every paragraph in it," Watkins advises. "So many people that we deal with sign the contract blindly because a carrier is rushing them, 'We got work for you right now, so we need to sign it quickly to get you on the road.'"
But when you feel pressure to "sign now," put on the brakes. You want to be completely comfortable with the terms before moving forward because a good owner-operator lease agreement will pave the way for a solid business relationship between you and your carrier -- one built on mutual trust and respect.
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Know the Terminology
As you read a contract, you'll likely come across unfamiliar terms. Use this glossary as your guide to help make the lease agreement more understandable.
(a) Authorized carrier. A person or persons authorized to engage in the transportation of property as a motor carrier under the provisions of 49 U.S.C. 13901 and 13902.
(b) Equipment. A motor vehicle, straight truck, tractor, semitrailer, full trailer, any combination of these and any other type of equipment used by authorized carriers in the transportation of property for hire.
(c) Interchange. The receipt of equipment by one motor common carrier of property from another such carrier, at a point which both carriers are authorized to serve, with which to continue a through movement.
(d) Owner. A person (1) to whom title to equipment has been issued, or (2) who, without title, has the right to exclusive use of equipment, or (3) who has lawful possession of equipment registered and licensed in any State in the name of that person.
(e) Lease. A contract or arrangement in which the owner grants the use of equipment, with or without driver, for a specified period to an authorized carrier for use in the regulated transportation of property, in exchange for compensation.
(f) Lessor. In a lease, the party granting the use of equipment, with or without driver, to another.
(g) Lessee. In a lease, the party acquiring the use of equipment with or without driver, from another.
(h) Sublease. A written contract in which the lessee grants the use of leased equipment, with or without driver, to another.
(i) Addendum. A supplement to an existing lease which is not effective until signed by the lessor and lessee.
(j) Private carrier. A person, other than a motor carrier, transporting property by motor vehicle in interstate or foreign commerce when (1) the person is the owner, lessee, or bailee of the property being transported; and (2) the property is being transported for sale, lease, rent, or bailment, or to further a commercial enterprise.
(k) Shipper. A person who sends or receives property which is transported in interstate or foreign commerce.
(l) Escrow fund. Money deposited by the lessor with either a third party or the lessee to guarantee performance, to repay advances, to cover repair expenses, to handle claims, to handle license and State permit costs, and for any other purposes mutually agreed upon by the lessor and lessee.
(m) Detention. The holding by a consignor or consignee of a trailer, with or without power unit and driver, beyond the free time allocated for the shipment, under circumstances not attributable to the performance of the carrier.