The UK’s hospitality and retail sectors are navigating one of the most challenging operating environments in recent memory. Businesses are simultaneously grappling with increases in the National Living Wage, higher employer National Insurance contributions, rising energy and property costs, inflationary pressures, supply chain disruption and continuing labour shortages. At the same time, many consumers are facing their own cost-of-living pressures, leading to more cautious spending habits and increased sensitivity to price rises.
The result is a difficult balancing act. Employers are being asked to absorb growing employment and operating costs while maintaining service standards, protecting profitability and remaining competitive in a market where customers have less disposable income and greater choice than ever.
An article in The Independent a couple of months back, illustrates how finely balanced many business models have become. The article reported that a £4.10 flat white may generate as little as 18p profit once expenses such as wages, utilities, business rates, VAT and other overheads have been taken into account.
Whilst the example relates to a coffee shop, the underlying reality is familiar across both hospitality and retail. Rising food, ingredient, logistics and supply chain costs have increased operating expenditure, while consumer demand remains unpredictable. Labour costs continue to represent one of the largest areas of expenditure, particularly in service-led businesses where customer experience depends heavily on appropriately staffed and engaged workforces. In many cases, staffing costs account for a significant proportion of the sale price of goods and services.
Against this backdrop, the Employment Rights Act 2025 (ERA 2025) introduces a further layer of cost, compliance and legal risk. For businesses already operating on narrow margins, the reforms raise important questions about how employers can maintain operational flexibility whilst accommodating enhanced worker protections.
A sector under pressure
The economic backdrop is particularly challenging for hospitality and retail operators because both sectors are heavily dependent on consumer confidence and discretionary spending.
Households facing increased mortgage costs, higher rents, energy bills and food prices are often more selective about where they spend their money. Consumers may reduce visits to restaurants, cafés, pubs and leisure venues, delay non-essential retail purchases or trade down to lower-cost alternatives. This can create significant fluctuations in demand, making workforce planning increasingly difficult.
For hospitality operators, trading patterns can change dramatically depending on the weather, local events, tourism levels and seasonal demand. Retail employers face similar challenges, particularly around Christmas, Black Friday sales, school holidays and other peak trading periods. The ability to adapt staffing levels quickly has therefore become a critical component of business resilience.
It is precisely this need for flexibility that many employers fear may be constrained by aspects of the ERA 2025.
The changing employment law landscape
As I have said on multiple occasions, the ERA 2025 represents one of the most significant employment law reforms in a generation. The changes that have started to be implemented since April of this year, and which continue into early next year, are particularly significant for hospitality and retail employers, whose business models often rely on large, customer-facing workforces, flexible scheduling arrangements and significant numbers of part-time, seasonal and variable-hours employees.
Key changes include:
- Guaranteed hours obligations and compensation for cancelled shifts (enactment date in 2027 to be confirmed) : Employers will be required to offer qualifying workers contracts which more closely reflect their actual working patterns over a reference period and may face compensation obligations where shifts are cancelled, moved or curtailed at short notice. This could prove particularly challenging in sectors where staffing requirements are heavily influenced by customer footfall, weather conditions and seasonal demand.
- Extended tribunal time limits: Since 1 October 2026, most employment tribunal claims now have a six-month limitation period rather than three months. This extends the period during which claims may be brought and may increase uncertainty when managing workplace disputes.
- Enhanced duties to prevent harassment and liability for third party harassment: From 31 October 2026, Employers will be required to take all reasonable steps to prevent sexual harassment and to protect workers from third-party harassment linked to protected characteristics. This is particularly important in customer-facing environments where employees regularly interact with members of the public, guests and customers.
- Earlier unfair dismissal protection: From 1 January 2027, employees will be able to bring unfair dismissal claims after six months’ service rather than two years. This substantially reduces the period during which employers can assess capability, attendance and cultural fit before facing unfair dismissal risk. Given the traditionally high levels of staff turnover within hospitality and retail, this change is likely to affect a significant number of employers.
- Removal of the compensatory cap for unfair dismissal: Also from 1 January 2027, the removal of the statutory cap on compensation will significantly increase financial exposure arising from employment disputes.
Operational challenges for hospitality and retail employers
Several of the reforms create challenges that go beyond pure legal compliance.
Hospitality and retail employers frequently use flexible staffing models to match labour costs with demand. Businesses may increase staffing during busy periods and reduce hours when demand falls unexpectedly. Restaurants, pubs, hotels and shops routinely experience unforeseen fluctuations in customer numbers due to weather, transport disruption, local events or changes in consumer spending behaviour.
Guaranteed hours obligations and restrictions on short notice shift changes may make workforce planning more complex and potentially more expensive. Employers may find themselves carrying higher labour costs during quieter trading periods or reducing recruitment activity to minimise risk.
The earlier introduction of unfair dismissal protection may also affect hiring decisions. Employers will be placing greater emphasis on rigorous recruitment processes, structured probationary reviews and comprehensive performance management during the first six months of employment. Businesses may become less willing to recruit inexperienced workers where the perceived legal and financial risks of an unsuccessful appointment increase.
For hospitality employers in particular, the strengthened harassment obligations create additional compliance considerations. Customer-facing employees can be exposed to inappropriate behaviour from guests, diners and members of the public, particularly during evening trading, events and hospitality functions. Retail employers face similar risks where staff engage with customers in stores, shopping centres or delivery environments. Employers will therefore need to ensure that policies, reporting mechanisms and management training are robust and effective.
Broader implications for youth employment and entry-level opportunities
The implications of these reforms also extend beyond business profitability.
Hospitality and retail have traditionally served as important gateways into the labour market. For many young people, a first role in a café, restaurant, hotel, supermarket or retail store provides valuable experience in customer service, communication, teamwork and workplace responsibility.
However, increasing employment costs and legal risks is seeing employers adopting a more cautious approach to recruitment. Where margins are already under pressure, businesses are less inclined to recruit candidates with limited workplace experience and in some cases, are reducing the number of entry-level opportunities available altogether.
This is particularly relevant at a time when youth unemployment and economic inactivity among younger workers has become a significant concern, not least because a reduction in entry-level recruitment has wider implications for social mobility and workforce development across the economy.
Conclusion
The often-cited example of a £4.10 flat white generating only a modest profit margin serves as a useful illustration of the commercial realities facing hospitality and retail operators. Many businesses already operate within extremely limited financial headroom while simultaneously responding to changing consumer behaviour and ongoing cost-of-living pressures.
The changes under the Employment Rights Act 2025 has already has significant impact on how employers recruit, manage and retain staff. Whilst the reforms were intended to strengthen worker protections, they have inevitably increased compliance obligations, legal risks and employment costs.
For hospitality and retail employers, the challenge now lies not only as regards legal compliance. It also lies in finding sustainable ways to balance enhanced employment protections with the operational flexibility required to serve customers, manage fluctuating demand, and maintain commercial viability in an increasingly cost-conscious market.
