Trade body UKHospitality estimates the move will save the hospitality sector, workers and their families around £20m.
Under the EU Settlement Scheme, only those who have lived in the UK for five years or more will be eligible to apply for settled status.
The programme launches on 30 March and would have cost £65 to apply.
Addressing parliament today, May said she had listened to the concerns of EU citizens and would waive the application fee.
The Prime Minister said there would be ‘no financial barrier for any EU nationals who wish to stay’.
Restaurant groups Carluccio’s and Brasserie Bar Co, and pub groups Oakman Inns and Young’s had pledged to pay the fee for their employees.
A 2017 KPMG study, commissioned by the British Hospitality Association, estimated that 75% of UK waiters and waitresses, 25% of chefs and 37% of housekeeping staff were from the EU.
“Scrapping the fee for settled status is a welcome and positive Government decision, providing peace of mind for many EU citizens working in the UK’s hospitality sector planning for their futures," said Kate Nicholls, UKHospitality chief executive.
"It [is] a gesture that rightly highlights the hugely valuable contribution EU workers make to the UK economy, particularly in hospitality. It is encouraging that the Government has heard our concerns.
“Now we need the Government to outline its course of action, to find a solution that minimises disruption to businesses, which need a better idea of what lies ahead. Parliament needs to settle on a decision, preferably avoiding a no deal Brexit, and give UK businesses a chance to prepare for the future.”
Anyone who has or will apply during the ‘pilot phase’ of the settlement scheme will be reimbursed for the cost.