Millions of low-paid workers will receive a 3.5 per cent pay bump after the industrial umpire decided to give a real wage rise to award and minimum wage-earners.

The decision, delivered on Tuesday, was in line with the federal government’s call for a “sustainable” pay increase above inflation, that would not mean workers went backwards as prices rose.

It increases the minimum pay by 85c to $24.95 an hour, and means $32 more a week from July 1 for full-time workers on the rate.

Fair Work Commission president Adam Hatcher said the decision would help make up for a decline in living standards for employees in 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 help low-paid workers catch up with rising costs because of concerns that it could cause inflation to become more entrenched.

The decision is roughly in the middle of the range of suggestions made by unions and business groups.

Hatcher said now that the inflation spike was over, it was important for the commission to correct the fall in living standards.

“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.”

Unions hailed the decision, with ACTU boss Sally McManus saying it was a great outcome.

“It’s 1.1 per cent more than inflation, so it means that, finally, award wage workers in Australia – our lowest-paid workers – are getting ahead again. And that’s great news,” she said.

“The Fair Work Commission accepted the arguments made by unions that it was time for low-wage workers, award workers, to start catching up for what was lost during the inflation spike.”

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 2.4 per cent in the 12 months to March 2025, the Australian Bureau of Statistics reported.

Retail worker Mars King, who was with McManus, said she might finally be able to start saving.

“I haven’t had a chance to [work out how much extra it is yet] but this is really exciting stuff. And it’s really exciting for my other team members, who also have experienced these things,” King, who earns about $650 a week, said.

“I have not made savings at all. I have been in debt.”

In its submission to the commission’s review, the Australian Council of Trade Unions sought a 4.5 per cent increase, arguing it must deliver a pay bump substantially higher than the inflation rate to address years of workers falling back in real terms.

“Australia is very much dominated by a lot of big businesses, and in the retail area and in hospitality, actually, too, they can well afford it. Their profits have been sustained all the way through this difficult time for the rest of us,” McManus said.

“In terms of small businesses, they depend on the average person having a disposable income to spend in their small businesses … the three million workers who get that increase, it means that they have more money to spend in local businesses.”

The Council of Small Business Organisations Australia, which represents smaller employers such as cafes and restaurants, argued for a rise of 2-2.5 per cent.

It said productivity growth was still low and could not support a substantially higher rise than that without contributing to inflation.

Inflation is predicted to tick up again next year as government energy subsidies end, with the Reserve Bank forecasting price rises to accelerate to 3.1 per cent year-on-year by June 2026.

The wages decision overwhelmingly applies to 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.

It follows an increase of 3.75 per cent handed out in 2024.

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.

-with AAP