The Fair Work Commission on Tuesday delivered a 3.5 per cent pay bump for employees on industry awards and the minimum wage, in line with the federal government's call for a "sustainable" real pay rise.
The commission's president, Adam Hatcher, said the decision would help correct a decline in living standards for employees over the past three years.
"The principal consideration which has guided our decision is the fact that, since July 2021, employees who are reliant upon modern award minimum wages or the national minimum wage have suffered a reduction in the real value of their wage rates," he said.
In previous years, the commission was discouraged from awarding a pay increase that would see low-paid workers catch up with rising costs because of its concerns that it could cause inflation to become more entrenched.
Now that the inflation spike was over, it was important for the commission to correct the fall in living standards, Justice Hatcher said.
"We are concerned that if this opportunity is not taken in this annual wage review, the loss in the real value of wages which has occurred will become permanently embedded in the modern awards system and the national minimum wage," he said.
"And a reduction of living standards for the lowest paid in the community will thereby be entrenched."
The decision is roughly in the middle of the range of suggestions made by unions and business groups.
In its submission to the commission's review, the Australian Council of Trade Unions called for a 4.5 per cent increase, arguing the industrial umpire must deliver a pay rise substantially higher than the inflation rate to address years of workers falling back in real terms.
Despite the decision undershooting her demands, council secretary Sally McManus said it was a "great outcome".
"Finally, award wage workers in Australia - our lowest-paid workers - are getting ahead again," she told reporters in Melbourne.
"(An increase of) 3.5 per cent means they're starting to catch up again, and that makes an enormous amount of difference in terms of people's bills, people's ability to pay for the basics."
But employer groups warned businesses were struggling to get by and a pay rise of this scale would force many to lay off staff or shut their doors.
"Small businesses are facing a cost crisis across energy, rent, insurance and input costs," said Council of Small Business Organisations Australia CEO Luke Achterstraat, who argued for a 2 to 2.5 per cent rise.
"A 3.5 per cent increase - which is above the current rate of inflation - will have ramifications for our small business engine room, many of whom are struggling to make a profit on already razor-thin margins."
Prices rose by a relatively modest 2.4 per cent in the 12 months to March 2025, the Australian Bureau of Statistics reported.
But inflation is predicted to tick up again next year as federal government energy subsidies roll off, with the Reserve Bank forecasting prices to accelerate to 3.1 per cent year-on-year by June 2026.
The wages decision increases the minimum pay by 85c to $24.95 an hour.
ACOSS CEO Cassandra Goldie said while it was a first step toward addressing falling living standards of the most vulnerable, it also highlighted the need to lift unemployment payments.
The decision will overwhelmingly affect workers in accommodation and food services, health care and social assistance, retail trade and administrative and support services, which account for over two-thirds of award-reliant employees.
The decision follows an increase of 3.75 per cent handed out in 2024.
The new pay rates will kick in from July 1.
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