Graduate pay versus the living wage: an HR headache?

Rising national living wage rates combined with stagnant pay growth now mean many entry-level graduate roles are perilously close to the minimum pay floor, creating a range of HR risks and headaches. Nic Paton reports.

When Tony Blair’s government introduced the national minimum wage (NMW) in April 1999, it was just £3.60 per hour. Fifteen years later, it had reached £6.50.

Then, the Conservative chancellor George Osborne did two things. He created the national living wage (NLW) for people aged 25+, and he tasked the Low Pay Commission to increase it incrementally so it reached the level of 60% of median UK earnings by 2020. The LPC obliged.

Rishi Sunak then announced a new 2024 NLW target of 66% of median earnings. The LPC again agreed. The age threshold would also drop, first to 23 in 2021, then to 21 in 2024.

Last year, the Labour Party maintained the 66% target and also announced plans to phase out the NMW, which had carried on for people aged 18+, by the end of this parliament. This would fulfil its manifesto pledge of an NLW for all adults.

The NLW is currently £12.21 per hour. These year-on-year increases in the NLW mean the UK now has one of the highest minimum wage rates – relative to median pay – in the world, second only to Luxembourg.

Combine this with stagnant wage growth across the rest of the labour market for much of the past two decades, means that increasing numbers of junior white-collar and entry-level graduate roles are receiving pay perilously close to, or only just above, minimum wage levels, an analysis for Personnel Today has concluded.

This incremental erosion in pay differentials between the lowest-paid and the average entry-level graduate is creating a widening headache for HR professionals.

The risk of being fined and ‘named and shamed’ for paying below the NLW is no longer just an issue for the likes of the retail and hospitality sectors, or employers who have inadvertently dipped below the pay threshold because of some payroll quirk.

It now exists for employers with early career intakes, particularly where those graduates might be expected to put in the hours and graft late into the evening to prove their worth.

A new graduate earning a £25,000 salary could, theoretically at least, claim that they are paid under the national living wage for working a 40-hour week. They would only be £222 out of pocket over a year, but still.

A new graduate burning the midnight oil on the same salary doing a 50-hour week would be £6,746 short over a year. They would be being paid just £9.62 per hour.

An analysis of how NLW rates have changed over the past six years compared to starting salary rates by Brightmine, carried out exclusively for Personnel Today, has shown a startling erosion of differentials between the NLW and median graduate-level starting salaries.

Brightmine, formerly XpertHR, also compared these median rates to the “real” Living Wage, the voluntary pay scheme operated by the Living Wage Foundation (LWF). Its minimum pay rate is currently £12.60 per hour, or £13.85 in London.

For a 35-hour working week, for example, while the median graduate salary tracks higher than the NLW, it has, in 2023, fallen below the national LWF rate. The first graph below shows the median entry-level salary for graduates, together with upper and lower quartiles.

For a 40-hour week, the differential between the median graduate starting salary and an employee on the NLW is now around £1,600, against an approximate £6,000 gap in 2019, according to Brightmine. For 2025, the lowest quartile is only £188 per year above the NLW, meaning that nearly a quarter of entry-level graduates working a 40-hour week are being paid under the national living wage.

The erosion has been most marked in the not-for-profit sector, where the headwinds faced by many charities since the pandemic have depressed salaries and meant increasing numbers of graduates could be paid below the NLW. According to the graph above, charity graduates’ median pay in 2025 is £26,158, while the 40-hour week NLW salary equates to £25,396. The lower quartile is £24,280, meaning many graduates are being underpaid if they are putting in those hours. Furthermore, more than three-quarters of graduate pay rates in this sector fall below the LWF rate.

Graduate pay vs minimum wage

Brightmine’s analysis tallies with similar research carried out by the Resolution Foundation last year. This found that graduate salaries have stagnated while the minimum wage has risen, leading to a convergence between the two.

In real terms, entry-level graduate salaries are now lower than they were before the financial crisis. By contrast, full-time minimum wage workers are doing far better than pre-financial crisis, it highlighted, as the figure below illustrates.

“Two decades ago, the median graduate in a ‘graduate job’ had a salary 2.5 times that of a minimum wage worker,” the Resolution Foundation’s Labour Market Update concluded. “But by 2023, the typical graduate earned only 1.6 times the salary of someone on the wage floor. And the lowest-earning graduates now earn only marginally more than full-time minimum wage workers: those at the 10th percentile of earnings now have salaries just 11 per cent higher than someone on the wage floor, compared to 82 per cent higher back in 2001.”

Narrowing differentials not only bring potential compliance issues but a range of other management and HR headaches, especially at supervisor and manager level, argues CIPD senior adviser for pay and performance Charles Cotton.

In a response to a Low Pay Commission consultation last summer, the CIPD also concluded that differentials are narrowing. Nearly a quarter of employers (23%) had reduced the pay differentials between those affected by the NLW and their supervisors/managers, it highlighted.

This (perhaps unsurprisingly) tended to lead to discontent (34%), reduced motivation (32%), challenges in attracting and recruiting the right people (30%), fewer progression opportunities (18%), and poorer performance (14%).

“People ask ‘why should I bother going for a promotion or taking on extra responsibility?’ or ‘why should I become (or stay as) a line manager when it means hardly any more money?’. So, there can be recruitment and retention issues, and issues around motivation,” emphasises Cotton.

As an employer, if you’re running a monthly payroll and paying employees an annual salary, rather than an hourly rate, it can be all-too easy for the question of ‘is that employee at risk of falling beneath the national living wage rate threshold?’ to slip beneath the HR radar, he concedes.

Equally, in more flexible and possibly informal white-collar working environments, especially where there is hybrid or remote working, it can be harder to monitor employee hours.

Risk of legal action

Michael Newman, partner at law firm Leigh Day, highlights that while, as yet, we have seen few cases of ‘white collar’ minimum wage claims make the courts, that’s not to say the risk is not there.

“Just because we’ve not yet seen many white-collar employers caught out in this way does not mean it’s not a potential risk in principle. It is therefore something employers – and HR – need to be recognising could become a problem, if not now, then in the future,” he points out.

“To an extent the increases we’ve seen in NMW and NLW thresholds show that the minimum wage is working, in terms of ensuring people have decent salaries. But it is also true this can lead to pay differentials being eroded for those on lower salaries in white-collar roles, perhaps people on starting or graduate salaries, being paid at or only just above the minimum wage,” he adds.

Often in reality, there can be what we might term a “goodwill factor” at play that mitigates the risk, Newman points out. Employees who are just starting out, or new graduates, may see themselves as on a career track to future progression or they may simply not want to rock the boat, again because they are hoping to progress within their organisation.

But this doesn’t mean employers, and HR, do not need to be on top of their responsibilities when it comes to pay, or be cognisant of the inherent reputational and financial risks that can come with being caught out.

“Employers need to be keeping track of the hours their employees are working, even if their salary is monthly or annual. If employees are consistently being asked to work longer hours or to do unpaid overtime this can become an issue if they are on a low base salary,” emphasises Newman.

Salary sacrifice

Brightmine’s senior content manager Sheila Attwood adds that there needs to be increased vigilance that employees are not inadvertently falling beneath the minimum floor, with all the financial and reputational peril that can bring. For example, in this situation, HR teams need to be very careful how – or even if – they promote or work to expand take-up of salary sacrifice-based benefits.

“Salary sacrifice schemes are seen as a really good benefit for employees,” Attwood tells Personnel Today.

“But, if pay levels have been kept under pressure to the extent that some workers are now only just above the minimum, you’re potentially going to have people who cannot take advantage of it. You’re going to have to recognise that, which can potentially be a real issue,” she adds.

The CIPD’s Cotton also highlights the importance of keeping good records, records that ideally can show hourly rates and compare these against the minimum pay floor.

Role of managers

It is also important that managers – line managers and more senior – are reminded of the potential organisational, productivity, reputational and compliance risks if differentials are constantly being eroded, he advises.

“The first thing, obviously, is to be looking at the pay rates the organisation is offering. Are they competitive? And then you need perhaps to be reviewing your recording system to make sure people are being paid the hourly rate they should be and the impact of any deductions; you should also look at the hours they are actually working,” Cotton argues.

“If you’re not aware of this, there is clearly the risk of being fined and named and shamed. Fundamentally, it comes back to reviewing the question of: how are you employing people in your organisation? And are you taking proper account of the increases in the National Living Wage as, if not, this can have impacts not only on blue-collar jobs but also on white-collar jobs,” Cotton adds.

The final point here for HR, emphasises Brightmine’s Attwood, is that, assuming you’re not going to be able to implement a wholesale pay uplift across your organisation but still want and need to keep employees motivated and incentivised, you will need to adopt an ever-more creative approach to benefits and total remuneration, especially either low-cost or cost neutral benefits.

“You have to be inventive in different ways when it comes to motivating or incentivising your people, or looking at your benefits packages,” she advises, pointing to flexible working and the ability to buy extra holiday days as potentially good options here.

“You’ve got to find other ways to put at least something in front of your workers, low-cost options that are still going to be attractive to them,” she concludes.

Gen Z sometimes gets a hard rap for lacking motivation and not showing commitment to their employer. Perhaps it is not surprising that, given the convergence between minimum wage and entry-level pay, the fact that graduates’ net income is reduced when they begin repaying their student loans (salaries over £28,470), and the difficulties they face getting on the property ladder, they look at the world of work with some sceptism.

While a budding young graduate may not want to rock the boat early on in their career, employers and HR in sectors where minimum wage rates have previously been irrelevant will need to be vigilant that they don’t face the reputational damage associated with minimum wage underpayment.

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