Transportation Brief: Best Practices for Structuring Lease-Purchase Programs
September 21, 2017
Best Practices for Structuring Lease-Purchase Programs
Responding to increased interest in entrepreneurship opportunities and capacity demands, many lease-purchase programs are available for sole proprietor owner-operators. Some of these programs are available “in-house,” with the motor carrier or its equipment leasing affiliate leasing/selling the truck to the owner-operator. Other programs offered by unaffiliated equipment and finance vendors require the motor carrier to provide credit assurance and to settlement-deduct the lease payments.
These various types of lease-purchase programs fare differently under federal and state laws impacting the independent-contractor status of owner-operators. That said, several best practices have emerged from recent cases and other authorities:
- In-house lease-purchase programs run by an affiliate instead of the carrier fare better, on average, than carrier-run “leaseback” programs, largely due to trial attorneys and paternal regulators “spinning” an employment narrative that disregards the commercial terms and market realities of the programs.
- In certain states, an affiliate-run program preserves statutory independent contractor exemptions from workers’ compensation and unemployment laws.
- An Equipment Lease Agreement that features commercially reasonable terms (e.g., reasonable valuation of the vehicle; owner-operator assumes risk of loss and damage to the vehicle) has been recognized by the IRS as supporting independent contractor status because it reflects the existence of an arms-length bargain between the parties.
- Lease-purchase programs that are not exclusive to the carrier (i.e., those allowing the owner-operator to operate the truck for non-affiliated carriers) add further indicia of truck ownership by the owner-operator. However, credit assurance arrangements that facilitate the carrier-to-carrier portability of the lease-purchase program remain valid regardless of the equipment finance source.
- Lease-purchase programs that include lease-to-buy options building equity in the truck tend to be more readily understood as an investment by the owner-operator, while many courts instead focus on the risk of loss to determine if ownership investment exists.
- An Equipment Lease Agreement that is compliant with certain provisions of the Federal Leasing Regulations is supportive of a business-to-business relationship with owner-operators and mitigates the expense of legal disputes over their applicability.
- If the carrier agrees to settlement-deduct lease payments (owed either to an affiliate or a third party), it should first obtain written authorization for the deduction from the owner-operator.
Scopelitis’ Transportation Brief® is intended as a report to our clients and friends on developments affecting the transportation industry. The published material does not constitute an exhaustive legal study and should not be regarded or relied upon as individual legal advice or opinion.
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