Over the past year, there has been a spate of breach of contract and Federal Leasing Regulations claims against transportation companies contracting with owner-operators that have resulted in million dollars plus payouts. Transportation companies should revisit their contracts with owner-operators to ensure terms match operational realities.

The breach of contract claims generally allege that, despite the owner-operators’ contracts identifying payment terms as a fixed percentage “of the gross receipts of each load”—i.e., a set percentage of the rate charged by the motor carrier to its own customers—the motor carrier actually pays a percentage of the rate offered to the owner-operator. An example illustrates the issue: Motor Carrier X’s agreement with Owner-Operator Y promises “80% of the gross receipts of each load.” Motor Carrier X’s customer agrees to pay the motor carrier $2,000 to transport a load. At this price, Owner-Operator Y would earn $1,600 (80% of $2,000) to transport the load; however, knowing the load is on a desirable route, Motor Carrier X’s dispatcher offers Owner-Operator Y the load for $1,200, which Owner-Operator Y accepts. According to plaintiffs’ lawyers, this results in a breach of contract and, in turn, Owner-Operator Y’s entitlement to the $400 difference between the spot negotiated rate and the contract term. To mitigate potential exposure, motor carriers should consider a review of their agreements with owner-operators to ensure the written contract terms take into consideration these spot negotiations and otherwise match operational practices.

Confirming the motor carrier’s operations are aligned with the contract terms offered to owner-operators will also reduce exposure to Federal Leasing Regulation claims, which have also increased recently. The Federal Leasing Regulations mandate a “written lease” between the motor carrier and owner of the equipment and require certain disclosures related to, among other items, escrow funds, insurance chargebacks, and other settlement deductions. Plaintiffs’ lawyers have seized on  (i) differences between the actual settlement charge-back amounts—often pointing to changes in the amount charged mid-lease—and the figures identified in the motor carrier and owner-operator’s written lease; (ii) escrow fund provisions lacking requisite specificity about items the motor carrier can permissibly deduct from the escrow fund and/or non-compliance with the Federal  Leasing Regulations’ escrow-fund requirements by equipment leasing companies that utilize maintenance reserve accounts; and (iii) settlement deductions occurring that do not appear in, or are otherwise not authorized, by the written lease. Like the breach of contract claims, auditing motor carrier leasing practices to ensure consistency with the company’s operations and confirm the proper processes are in place to trigger lease modifications when operational changes occur will help head off Federal Leasing Regulation claims going forward.

For more information, contact Andy Butcher or Prasad Sharma.