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While Josh Frydenberg personally consulted the Merivale CEO about JobKeeper’s design, court documents detail the huge underpayment suit his pub empire is facing. By Rick Morton.

Inside Hemmes’ $100m wage case

Hospitality industry billionaire Justin Hemmes.
Credit: AAP Image / Dean Lewins

Justin Hemmes concedes his billion-dollar Merivale pub empire could never have expanded so aggressively were it not for a Howard-era workplace agreement that paid some staff substantially below the modern award for a decade. According to court documents – filed in a class action claiming almost $100 million in back pay for lost penalty rates and other entitlements – Hemmes’ company, Merivale, argues this is proof it thought it was acting lawfully.

Amid these underpayment allegations, however, the businessman has been drafted by two Coalition governments to provide economic and workplace advice in the wake of the coronavirus pandemic.

Hemmes, in his mid-40s, is a close friend of federal Treasurer Josh Frydenberg and received a call shortly after a now-historic March 26 dinner where the JobKeeper scheme was first realised as a $130 billion program.

Frydenberg dined that night with Scott Morrison in his prime ministerial office. Also present was Finance Minister Mathias Cormann. Treasury secretary and deputy secretary Steven Kennedy and Jenny Wilkinson were beamed in by videolink.

For weeks, the leadership team had resisted calls for a wage subsidy similar to one in Britain and New Zealand. What they wanted, instead, was a payment that could be rolled out using existing government bodies and, crucially, a program that preserved the relationship between employers and their staff.

Hemmes was one of four businessmen consulted about the final design of the policy, even as his company was preparing its defence in the Federal Court of Australia.

The son of Sydney society figures John and Merivale Hemmes – the former, known simply as Mr John, died in 2015 – Justin Hemmes has also been a key voice on the business advisory committee convened by New South Wales Treasurer Dominic Perrottet, which has assumed increased influence in the state during the Covid-19 shutdown.

These relationships have raised eyebrows among business rivals and industry groups, given the pending courtroom showdown.

In court filings, Hemmes’ lawyers say the Howard-era agreement was changed legally at the 11th hour, and if Hemmes thought this was not the case the business would have significantly scaled back its operation.

 

The story of how Merivale’s agreement remained in place through five prime ministers and major changes to industrial relations law is laid bare in documents filed in the Federal Court.

According to Merivale’s own defence pleadings, filed at the end of May and reported for the first time here, the business could never have grown to the scale at which it now stands, were it not for its workplace arrangement.

Over the past decade, Merivale’s footprint has spread across Sydney with a steady acquisition of bars, restaurants and pubs.

The company now owns venues across the city, including the Coogee Pavilion, the Ivy nightclub, The Newport on Sydney’s northern beaches and the popular Vic on the Park pub.

Merivale first began drafting a collective employee agreement around August 2007, in the dying months of the Howard government. The deal was voted on, agreed and inked in December of that year, but under “WorkChoices Lite” it was now subject to a “fairness test” from the then Workplace Authority.

The subsequent tussle between Merivale’s lawyers and the regulator are documented in email exchanges released under freedom of information and obtained by The Saturday Paper.

On December 15, 2008, Merivale was advised by letter that the Workplace Authority was “not satisfied that, on balance, your agreement provides fair compensation for the removal or modification of protected conditions”.

The company was given 14 days to agree to one of three variations that would bring the deal back to standard, a time line that annoyed Merivale’s lawyers. The regulator had set out proposed pay rates that would satisfy it if they were met.

Instead, on December 29, 2008, Harmers Workplace Lawyers wrote back to the authority with a simple undertaking: that the agreement would not operate “to provide any employee with less compensation than that which the employer would be required to provide to the employee to ensure that the agreement passes the Fairness Test”.

There were no dollar figures or amounts of equivalent compensation listed.

The promise simply to “pay what is fair” without stipulating what that might look like was again rejected by the Workplace Authority on January 30, 2009, putting Merivale on a collision course with Labor’s new workplace regime, due to start in June.

A flurry of emails followed from Harmers on behalf of Merivale, complaining of a lack of communication and openness from the authority. It argued that since the company had completed an audit of staff work patterns and pay – and belatedly agreed to the pay increases set out in the regulator’s first letter on December 15 – then the subsequent promise to “ensure the agreement passes the Fairness Test” on December 29 should now be seen as an undertaking to commit to the original demands.

Just weeks before the Rudd-era Fair Work Act took force, which was due to usher in a new round of tests that would prove more generous to employees, Merivale won a significant reprieve from the acting director of the soon-to-be-defunct Workplace Authority, Penny Weir.

“The undertaking submitted on 29 December 2008 was not sufficient for the agreement to pass the Fairness Test,” Weir wrote in the letter dated June 4.

“However, you outline significant administrative issues experienced by your client and this provides grounds to rescind the original notice advising you that the agreement does not pass the Fairness Test.”

Merivale was made to pay compensation to employees who had been underpaid between December 21, 2007, and June 11, 2009; but the reversal of the decision represented a victory for the group, which had flagged staff layoffs if things did not go their way.

“This delay impacts on the 800-odd employees currently covered by the agreement as the terms and conditions of their employment are currently uncertain,” Harmers wrote in a letter in March 2009.

“In addition, with every day that this situation remains unresolved, the amount of back pay that is potentially owing to employees and must be paid by Merivale, potentially increases, thus impacting on the future financial viability of the business.”

With minor variations in play, the WorkChoices-era agreement lasted another decade before it was replaced in March last year.

The company shifted to the modern award when, with the help of the United Voice union, two former employees sought and successfully had the old agreement terminated by the Fair Work Commission.

Adero Law principal Rory Markham, who is leading the class action against Merivale in the Federal Court, says the 2010 hospitality industry award should have covered staff from its beginning. The pub empire, meanwhile, says it cannot be held accountable for decisions a regulator may or may not have made in error.

In its defence pleading, Merivale says it “took steps in the manner in which it operated its business which it would not have taken if it had been aware that the former award applied from 2007 and the Hospitality Industry (General) Award … applied from 1 January 2010”.

These decisions to expand the business included “trading on weekends and public holidays”, “focusing, or focusing more heavily, on trading as a specialty food-focused business in various venues which traded on weekends” and “taking on greater levels of debt finance for operating venues … than it otherwise would have”.

While much of the lawsuit targets the payment of flat rates to staff, about $12 million to $18 million of the claim is for salaried employees who were paid for about 38 hours each week but were, according to Adero, rostered and actually worked up to 55 hours each week.

To this claim, Merivale says its letter of offer to chefs and managers in this category made it clear they “agreed it was reasonable … to work any additional hours necessary to achieve the efficient and effective performance of … duties”. It also says these ordinary weekly hours were averaged out over 52 weeks of the year.

Financial documents for the major holding company Hemmes Group Pty Ltd in 2019 – which includes 12 other entities in a tax-consolidated group – include a note from auditors Deloitte on an excess of “current liabilities over current assets amounting to $101,755,832”. This is about 60 per cent greater than the company’s $63 million liability gap in 2018.

“Notwithstanding this position the financial statements have continued to be prepared on a going concern basis as a result of the entity receiving a letter of support from another related company in the Merivale Group,” reads the report, signed by Justin Hemmes in November last year.

“Additionally, The Company has classified $108,264,203 … of at call related party receivables as non-current as it does not anticipate collection of amounts in the next twelve months. However, The Company is able to cease settlement at short notice should funds be required.”

 

On April 1, in an interview with 2GB’s Alan Jones, Josh Frydenberg detailed his call to Hemmes about JobKeeper.

“Well, that’s true, Alan. When we were working on the JobKeeper package, we wanted to talk to the business leaders who tragically were closing their doors and laying off their staff,” Frydenberg said.

“So, I did speak to a number of them – Justin Hemmes, Solly Lew, and I also spoke to Rob Scott at Wesfarmers and Richard Murray at JB Hi-Fi. Between them, they employ around 150,000 Australians and through no fault of them, no fault of their staff, but as a result of this global pandemic, they had to close their doors.

“And they were pretty emotional about it in many cases and we knew then that, of course, we had to continue to support the employee.”

Justin Hemmes and Josh Frydenberg did not respond to questions from The Saturday Paper.

A spokesman for Dominic Perrottet said the NSW treasurer had never discussed the legal proceedings with Hemmes, who sits on his business advisory committee.

“It is important to canvass a wide range of opinions and ideas to form a more complete view of the NSW economy,” he said.

This article was first published in the print edition of The Saturday Paper on Jun 20, 2020 as "Inside Hemmes’ $100m wage case".

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Rick Morton is The Saturday Paper’s senior reporter.