Ministers now plan to introduce legislation in autumn, which will see agency workers given equal pay and holiday entitlements after 12 weeks in a job.

Unions have lauded the deal for which they have campaigned. However, industry bodies have warned the move removes flexibility from the labour market at a time when it is most needed.

Unite joint general secretary Tony Woodley said: "This is a landmark deal for 1.4m agency workers currently working in the UK. It is now much harder for employers to treat agency workers as dispensable labour, hired and fired at will."

TUC general secretary Brendan Barber described the deal as "a victory for union campaigning".

However, the CBI, which was integral in the negotiations, described the deal as "the least worst outcome".

John Cridland, CBI deputy director-general, said that crucial to the agreement was the ability to deal with short-term demand for staff and that, while pay is covered, longer-term occupational benefits such as sick pay and pensions are not.

"Critically, as well as enabling the European directive on agency work to be put to bed, this agreement should allow the retention of the working hours opt-out from the working time directive, which is equally vital to the future of the British economy," he added.

Should the legislation be introduced, employers will have to pay equal salaries to temporary staff in addition to the agency fees that come with agency staff.

George Thompson of print recruitment consultants Harrison Scott Associates said: "Our view is that clients will be less inclined to use agency staff and look at ways to resolve peaks and troughs with flexi or overtime with full-time staff.

"Only a small percentage of our work is 'temp' business. In order to do our bit to help our client base, we will operate on a reduced margin after 12 weeks in order to share the added burden with the client."

One managing director of a large direct mail company, who did not wish to be named, added: "This is yet another obstacle put in the way of business. Margins are tight enough without additional costs."