## Facts

- Circle C Investments, Inc. operated two Texas nightclubs, the Crazy Horse Saloon and (for a period) Lipstick, featuring topless dancers.
- The Secretary of Labor sued under FLSA § 17 seeking to stop minimum-wage, overtime, and recordkeeping violations and to restrain the continued withholding of back wages.
- The challenged workforce included topless dancers as well as servers, bartenders, disc jockeys, doormen, and “house mothers.”
- Circle C did not pay the dancers an hourly wage; dancers earned money primarily from customer tips.
- Dancers were required to pay Circle C a mandatory $20 per-shift “tip-out” at the end of each shift, which Circle C described as “rent” for use of the club’s facilities (stage, dressing areas, and related services).
- Circle C imposed rules governing dancers’ conduct and performances and otherwise controlled key aspects of how the clubs operated.
- The dancers’ personal investment was minimal (such as costumes and small items like a padlock), while Circle C made the major investment in the business (premises, maintenance, inventory, and advertising to attract customers).
- The district court found the dancers did not exercise specialized skills in the way a separate business would and that dancer turnover tended to be high.
- After a bench trial, the district court held the dancers and other workers were FLSA employees, found willful violations of minimum wage, overtime, and recordkeeping requirements, enjoined future violations, and restrained withholding of $539,630 in back wages.
- Circle C and the individual defendants Beatrice Cranford (original owner and president for a period) and Charles Cranford appealed; the Secretary cross-appealed the denial of prejudgment interest and aspects of the back-wage calculation.

## Issues

1. Whether the topless dancers were “employees” covered by the FLSA, rather than independent “tenants” renting space from Circle C.
2. Whether Beatrice Cranford and Charles Cranford were “employers” under the FLSA and could be held personally responsible for compliance and back wages.
3. Whether the district court committed reversible error by admitting testimony from witnesses the Secretary did not identify before trial.
4. Whether the back-wage remedy in this § 17 action should include prejudgment interest.
5. Whether the back-wage calculation had to account for amounts employees paid for items such as costumes, uniforms, tip-outs, and fines that reduced their take-home pay.

## Decision

- The Fifth Circuit affirmed the district court’s finding that the dancers were FLSA employees under the economic-reality test and rejected the club’s “tenant” characterization.
- The court affirmed that Beatrice and Charles Cranford qualified as FLSA employers based on their authority and involvement in the clubs’ operations and could be held individually liable.
- The court held the district court did not abuse its discretion in admitting testimony from witnesses not identified before trial and found no basis for reversal on that ground.
- On the Secretary’s cross-appeal, the court held the district court erred by failing to award prejudgment interest and directed that it be added.
- The court also agreed that the back-wage computation should be revisited to account for worker-paid items (including tip-outs and other charges) to the extent they functioned like deductions that reduced wages below FLSA requirements.
- The judgment was affirmed as to liability and modified/remanded for additions and recalculation relating to prejudgment interest and back wages.

## Legal Principles

- FLSA coverage turns on “economic reality”: whether workers are economically dependent on the business or are in business for themselves.
- Courts consider factors such as the employer’s control, the parties’ relative investments, the worker’s opportunity for profit or loss, the skill and initiative required, and the permanence of the relationship; no single factor is controlling.
- Labels and private characterizations (such as “tenant” or “rent”) do not determine FLSA status when the working relationship shows employee dependence.
- The FLSA defines “employer” broadly and can include individuals who act directly or indirectly in the company’s interest in relation to employees, including owners or managers with operational control.
- Trial courts have discretion over evidentiary and case-management rulings; reversal generally requires a showing of meaningful prejudice.
- In § 17 wage cases, prejudgment interest is generally appropriate to compensate workers for the lost time value of unlawfully withheld wages.
- Required payments to the employer and other worker-paid costs that primarily benefit the employer may not be used to reduce pay below minimum wage (or distort overtime), and back-wage calculations must account for such reductions when proven.

## Conclusion

The Fifth Circuit held that Circle C’s topless dancers were FLSA employees under the economic-reality test, affirmed that the corporate owner and the Cranfords were liable as employers, found no reversible error in admitting certain witness testimony, and remanded to add prejudgment interest and to adjust the back-wage award to reflect worker-paid costs such as tip-outs and related charges that could reduce wages below FLSA standards.


Reich v. Circle C Investments, Inc., 998 F.2d 324 (1993)