Q: I was explaining my host agency setup to another attorney, and she told me that my agency’s relationship with my independent contractors is a franchise. As such, it has to comply with the federal and state franchise laws. I have seen franchise prospectuses from some of the largest host agencies; those prospectuses are very long and reveal a lot of confidential information, such as financial statements, that I would prefer to avoid disclosing. Is the other attorney correct? If so, is there any way to avoid having to comply with the franchise laws?

A: The other attorney may well be correct depending on the details of your relationships with your ICs. However, there are exemptions from the federal and state prospectus requirements.

Under the Federal Travel Commission’s (FTC) regulation, a franchise means a contract under which, in return for fees or other mandatory costs of $615 or more during the first six months, you get the right to operate a business that is associated with the franchiser’s name, and either: (a) the franchiser can exert a “significant degree of control over the franchisee’s method of operation,” or (b) the franchiser “provides significant assistance in the franchisee’s method of operation.”

A franchiser under the rules must develop and provide prospective franchisees with a prospectus complying with the 30-page FTC rules, register the franchising opportunity in 17 states and must file the prospectus with several of those state governments. Legal fees alone for such a project will probably exceed $50,000.

Once you have complied, you will need more legal help in complying with the FTC’s rules and rolling out changes to the prospectus. I’m sure that most of my host agency clients would rather avoid such expenses and headaches, but some of those hosts have no exemption from the rule.

So, how can you escape the application of franchise regulation? For the host/hostee relationship, the definition in the federal rule offers three opportunities for exemption:

• First, you don’t have to let your ICs use your agency’s name. Instead, you could require them to use only their own business name.
• Second, you can set up your fees so that less than $615 is required during the first six months.
• Third, you can avoid “exerting significant control” of the hostee’s “method of operation” as well as decline to provide “significant assistance” in the hostee’s “method of operation.”

You already know that, under IRS and state labor department rules, you cannot exert much control anyway, and you may not be interested in offering much more than use of your name and ARC number, so this exemption may work for you.

So, you can allow ICs to use your agency’s name, and you can charge more than $615 in the first six months if you don’t provide significant assistance or exert significant control over the IC’s operations.

The FTC states that the assistance or control must relate to the franchisee’s overall method of operation — not a small part of the franchisee’s business.  

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