Brexit’s Repercussions on the Hospitality Sector

Article co-authored by Chris Mumford, Aethos Consulting Group™, and Ben Sheldrick, Magrath LLP

The referendum result in the U.K. this past summer has plunged the U.K. into a period of uncertainty as the country waits to find out what the decision to leave the European Union will mean exactly. A plummeting in the value of the pound was the most apparent immediate impact of the vote in June, along with a whirlwind of successive resignations among the country’s political leadership. As the U.K. waits for Article 50 to be triggered and for the terms of exit from the EU to become apparent, we take a look at what immediate impact there has been on the U.K. hospitality sector and what the future may look like.

Hotel, restaurant, entertainment and leisure businesses in the U.K. employ some 400,000+ EU migrant workers. The average five-star hotel in London, for example, has a workforce with more than 50 nationalities represented. Under EU treaty provisions, workers are free to enter the U.K. without any form of work permit or visa, and employers simply have to undertake a “Legal Right to Work” (LRTW) check before they can begin work. This flexible labour market has proven to be hugely beneficial to employers in the hospitality arena. The sector has become dependent on immigrant labour and is now in danger of no longer being the attractive destination for foreign job seekers that it has been traditionally.

As Keith Edwards, Chief People & Development Officer at Soho House, which operates restaurants, clubs and hotels, notes, “At Soho House, in the weeks and months since the Brexit referendum, we have noticed it becoming harder and more expensive to recruit and we expect that trend to continue. The drop in the value of sterling means that many of those from abroad who are working here have less money to send home, and the influx of those moving to the U.K. to seek work is slowing given the general uncertainty.”

This experience is shared in the hotel sector by Jumeirah Group, which has three properties in London. Ann Whelan, VP Human Resources Europe, states, “We are seeing a decline in casual workers, for example, housekeepers. The agencies we work with are seeing a drop in footfall. In terms of resourcing into our properties we not yet seeing any impact — it is too early — but the uncertainty and ambiguity over what’s going to happen does mean some Europeans are expressing reluctance over coming to the U.K.”

In the restaurant sector, outlets are predominantly staffed by young EU workers here in the U.K. for a temporary period to improve their English language skills and/or to study. Many businesses are dependent on being able to employ young people whose primary reason for coming to the U.K. is to learn English before returning to their home country to pursue their professional careers. Many restaurant businesses are now seeing that those who have been in the U.K. for a while are now moving back to their home country as a result of the currency dip.

Whelan notes that those Europeans already here are taking stock of their long-term futures in the U.K. “We are encouraging those EU citizens already here to apply for permanent residency. We are also starting to hear concern from those with children who will be due to start primary or secondary school this summer. As they are not sure how long they will be able to remain in the U.K. and therefore how long their child will remain in school here before having to relocate, they are now bringing forward decisions about their futures in the U.K.”

Not only is a fall in the number of job applicants making it more expensive to recruit, but employers are also facing increased costs through the National Living Wage, currently at £7.20 an hour and due to increase to £7.50 next April. Most hotel employees are on salaries above the National Living Wage, but in the restaurant sector the impact is certainly being felt. The restaurant sector wrote to Prime Minister Theresa May in December (The Evening Standard) to express concern over new business rates and the ability to retain EU workers. The reality is that, while restaurants would like to be able to increase salaries, it is simply not possible. Since the referendum, costs have really come under heavy pressure – on top of business rates going up and the living wage going up, the cost of supplies has also risen dramatically due to the currency fluctuation.

There is no doubt that public concern around immigration was one of the key motivating factors behind the vote to leave the EU in the referendum of June 2016. Consequently, it is very difficult to see how the government can negotiate a new relationship with Europe that continues to permit free movement of workers.

Furthermore, the government remains committed to reducing net migration to the tens of thousands annually. Currently, the figure is running at more than 330,000 per year — workers from the EU make up about half of this annual figure. There is, therefore, a long way to go before the target can be reached. Leaving the EU, with the consequent curb on free movement rights, will go a long way toward enabling the government to reach its long-awaited target.

Given the political narrative around immigration concerns, it seems inevitable that some form of “hard Brexit” will follow the two-year negotiation period after Article 50 has been invoked. This is likely to mean the re-imposition of immigration controls for EU citizens — although, it is very unclear at this stage what the structure of this new regime will look like.

Theresa May has already indicated that the government is unlikely to rely on a Points Based System (“PBS”) for EU workers. Indeed, there is already reference under Tier 3 of PBS (as yet undefined in detail) that in theory will allow for “lower skilled” workers to be recruited by employers who have specific needs. Originally, this was conceived primarily for the agriculture and manufacturing sectors that may require significant additional resources on a seasonal or contractual basis. Tier 3 has never been opened, however conceivably it could be used for EU workers within hospitality and services sectors following Brexit.

Alternatively, the government may introduce a new work permit scheme for these sectors. This would require employers to request permission from a central government authority to employ foreign national workers. If such a scheme is introduced, EU citizens would be unable to take jobs in restaurants, hotels and food outlets, etc., without first obtaining a work authorisation document.

It is possible that the work permit scheme could be introduced on a sector-specific basis (providing for a specific quota of work permits to be made available to the hospitality sector on an annual basis). Alternatively, a regional scheme could be introduced. This could mean that London, a region that relies very heavily on EU migrants in the hospitality sector, could receive a greater quota of work permit allocations than other areas of the country. London’s mayor, Sadiq Khan, has already indicated to government that he would like London’s position as a powerhouse of the economy to be recognised in the new arrangements.

The British Hospitality Association has indicated that at least 100,000 work permits will be needed by employers per annum following Brexit. The government appears to be between a rock and hard place. If they fail to meet their net migration target, they will be deemed to have ignored public concerns around immigration numbers and population growth. Equally, if they fail to provide the requisite number of work permits for sectors in need, the government will be accused by industry of impairing a very significant economic driver.

Whatever the new regulatory regime will look like following Brexit, as Keith Edwards rightly predicts, it is inevitable that business will suffer from additional administrative burdens of immigration compliance. Looking ahead, once Brexit is finalised, business costs are predicted to continue growing. “We will see what kind of Brexit the U.K. ultimately gets, but my expectation is that we will continue to be able to hire EU citizens but with a more burdensome administrative component, which will ultimately mean an increase in the overall cost of hiring.” These financial and administrative burdens risk becoming a significant drain on employers who have until now operated within a very liberal and flexible labour market across the EU.

It seems inevitable that Article 50 will be invoked by the end of March 2017. Consequently, it is entirely possible that the new immigration regimes for EU workers could come into force as early as spring 2019. In the interim, the hospitality sector will be lobbying hard to minimise the negative impact on its constituents.

Ben Sheldrick: Ben is a Managing Partner and Head of Business Immigration at Magrath LLP Solicitors, one of the UK’s leading commercial immigration practices. Ben is also Director of Magrath Global, Singapore. He is recognised as a leading UK immigration expert by the legal community and is noted by all of the major legal directories for his expertise in immigration law.

Ben is immigration counsel to many household-name multinational companies and he has extensive experience in strategic planning of global mobility programmes for large organisations. His team also advises individuals of all nationalities seeking entry to the UK as workers, investors, entrepreneurs, artists, performers or for family reunion.

Ben works with the International Bar Association (IBA), the Immigration Law Practitioner’s Association (ILPA), the American Immigration Lawyers Association (AILA), British American Business (BAB) and many other groups in disseminating information in respect of global immigration policy and legal developments.