In the wake of accusations of unfair wages stemming from a confusing pay system at the ritzy Silicon Valley Capital Club, state officials are now confirming that the club violated employment law.

“Under California law, a service charge cannot be used to make up any shortfall in paying at least the minimum wage for all hours worked,” read a statement from the California Labor Commissioner’s Office.

The Capital Club came under fire last week after San José Spotlight revealed a confusing compensation structure in which the club pays employees less than minimum wage, but compensates for it with a portion of a 20 percent mandatory service charge. Current and former employees interviewed by San José Spotlight said they were paid either $7 an hour or $10 an hour, depending on their position, and received a one to two percent portion from the weekly service charge pool to bridge the gap.

San Jose State Professor Scott Myers-Lipton, who helped lead a group of his students to advocate for the city’s current $15 an hour minimum wage, was surprised by how the Capital Club is paying their employees.

“We have to be clear that they have to pay minimum wage,” he said. “It’s not optional. I think there needs to be new language about that.”

Myers-Lipton said his students found that California employers cannot pay below the minimum wage and make up the difference with tips.

But San Jose officials, who previously investigated the club, deemed the practice legal since the service charge is not a tip. According to the Labor Commissioner’s Office, a service charge is not a tip – which is what the city referenced.

Christopher Hickey, division manager for a city department that investigates wage claims, confirmed his office received a complaint about the Capital Club, but found it to be operating within the law.

“Our current understanding is the service charge and commissions can be used (that way),” he said. “If we are showed other information or the state shows other ways they interpret it, we would follow suit.”

The Capital Club’s General Manager Bruce MacKenzie said Friday that he was not aware that the club’s pay system is illegal.

“Our company does the same system all over the (corporation) and I don’t know why (the state) would say that,” MacKenzie said, referring to the overarching corporation, ClubCorp.

He added that the club has no intention of changing its pay structure, but that he’ll speak with the venue’s attorney about the legality.

Another accusation

Syrus Fotovat, who worked at the club from Jan. 2018 to Oct. 2018, said on Wednesday that he earned a base pay of $10 an hour. He said the unpredictable pay from the service charge made it difficult to pay rent, utilities and other expenses.

Fotovat’s pay stub for September 11, 2018. See full pay stub here. Fotovat’s pay stub for September 11, 2018. See full pay stub here.

He had to resort to selling his guitar accessories to make ends meet.

“I was making the unwise decision to essentially just rotate my payments on credit cards,” he said. “I’d miss one so I could pay the other and then pay double on the next one on the next month and it was pretty bad.”

Fotovat said he’s seen the club’s financials and said it’s always been profitable.

“Out of ClubCorp total we had the best track record, we were always in the black so instead of losing money we were actually making money, he said. “We were always progressing as a club.”

Capital Club’s notable members

The silicon valley organization, which fought for the city’s original wage theft policy, continued to patronize the Capital Club this week amid accusations of unfair wages. As accusations swirl, powerful patrons that have stood against wage theft still continue to patronize the club.

On Thursday, the silicon valley organization held its monthly membership breakfast at the club, according to its website and Facebook page.

In 2016, the silicon valley organization, formerly the San Jose Silicon Valley Chamber of Commerce, issued a letter to Mayor Sam Liccardo advocating for the city’s first wage theft policy.

“The members of the Chamber of Commerce pride themselves in operating in a manner that reflects the best practices in business, and as such, when wage theft occurs we must be willing to support efforts to curb such practices,” the letter read.

MacKenzie’s name was on the letter as part of the executive committee. He currently sits on the organization’s foundation Board of Directors.

The silicon valley organization did not respond to requests for comment.

Labor-aligned groups and individuals this week, however, canceled memberships at the Capital Club. Jean Cohen, a spokeswoman for UA Local Union 393, said the organization will cancel its membership.

The union, which includes plumbers, steamfitters and other service technicians across Santa Clara and San Benito counties, has been vocal about wage theft and other labor violations at the downtown Silvery Towers site.

Tom Saggau, a political consultant who has represented clients like UA Local Union 393, garbage companies and the San Jose Police Officer’s Association, renounced his membership with the Capital Club Friday with his business partner Dustin DeRollo.

“It was a very easy decision,” Saggau said. “We can’t be associated with an organization that doesn’t align with our values.”

Saggau and DeRollo also issued a letter to the club reiterating their reasons for leaving.

“Your compensation structure does not provide hard-working employees a fair wage,” Saggau and DeRollo wrote in the letter. “Frankly, our hope is your employees separate service with you and find a job that can help them support themselves in Silicon Valley.”

Saggau and DeRollo’s resignation letter from the Silicon Valley Capital Club.

Contact Grace Hase at [email protected] or follow @grace_hase on Twitter.