The Morrison government has gutted its own industrial relations omnibus bill, abandoning the criminalisation of wage theft and passing only limited changes to casual employment.

Under the slimmed-down bill, employers will benefit from a new definition of casual employment and reduced liability for misclassifying casuals, while casual employees of medium and large businesses gain a stronger right to request permanent work.

The passage of the bill prompted immediate recriminations – with Centre Alliance MP Rebekha Sharkie revealing senator Stirling Griff voted against her wishes, and unions promising to campaign against One Nation for passing changes they say will increase casualisation.

The omnibus bill, months in the making through a series of roundtable negotiations between unions and employers in five areas of reform, unravelled in the face of partial and heavily qualified crossbench support.

On Thursday, the Centre Alliance senator Stirling Griff indicated he would use his casting vote to block large sections of the bill opposed by unions, but offered support for changes on wage theft and casuals.

Despite having support from One Nation and Centre Alliance sufficient to pass those two sections, the Coalition responded by taking higher penalties and new criminal offences for wage theft off the table.

The Australian Council of Trade Unions reacted with fury. Its secretary, Sally McManus, labelled it a “shameful and vindictive reaction to not getting widespread support for other changes that would reduce workers’ rights”. The ACTU called for the entire bill to be blocked.

Griff gave unions a win by opposing employer powers to change workers’ duties and location of work, part-time workers’ ability to pick up extra hours at ordinary rates, removal of safeguards in the bargaining process, and project-life pay deals for new work sites.

But Griff offered his support for the Coalition’s proposal that employers and employees should decide whether a job is casual or permanent at the start of an engagement.

In the event a court finds an employee has been misclassified as casual, employers will now be able to deduct the amount of the casual loading they have already paid from the compensation bill for unpaid entitlements.

The Senate agreed to a One Nation amendment exempting small businesses with fewer than 15 employees from casual conversion and a Centre Alliance amendment for a small claims court process to hear disputes about conversion. One Nation abandoned an amendment to halve the wait time for casual conversion from 12 months to six.

Labor, the Greens, Rex Patrick and Jacqui Lambie unsuccessfully attempted a series of amendments to give effect to an agreement between the ACTU and the small business lobby to bolster employee rights to arbitration and specify that courts can consider whether a person works ongoing, regular hours when deciding if they are a casual.

A bid to reinsert wage theft provisions was blocked by One Nation and the Coalition. The final bill passed 35 votes to 33, with Griff and One Nation siding with the government.

McManus said the government had “given a green light to wage theft and increased casualisation”.

In a joint statement, major employer groups, including the Business Council, Chamber of Commerce and Australian Industry Group, thanked the Coalition and One Nation for preventing casuals “double-dipping” by claiming both the casual loading and backpay for permanent entitlements.

“It is important that the government does not abandon the rest of the bill and further efforts need to be made over the months ahead to secure support,” they said.

The treasurer, Josh Frydenberg, said the government would advance reforms “where possible” but made no commitment to attempt to legislate the rest of the package again.

Labor’s shadow industrial relations minister, Tony Burke, accused the Coalition and One Nation of letting “employers who deliberately underpay off the hook”.

“Thanks to them there are no federal penalties for wage theft,” he said.

However, the defeat of the wage theft chapter will preserve the stricter regimes in Queensland and Victoria that were set to be overridden by the bill.

Burke told reporters in Canberra the bill would make “casualisation easier than ever before”. He said that despite One Nation claiming to want to help casual workers, it had endorsed “labour hire rorts” that would allow workers to be paid less than permanent workers, with no right to claim backpay.

In a statement, Sharkie accused Griff of voting against her wishes and a prior agreement not to support changes without the support of both the ACTU and Council of Small Business Organisations.

Griff told Guardian Australia that “no agreement was breached”, that Sharkie or her office had been informed of his compromise on casuals, and all Centre Alliance parliamentarians were entitled to a conscience vote.

In Senate debate, the acting industrial relations minister, Michaelia Cash, praised the crossbench for helping to pass changes to give “greater certainty to those in casual employment and offer a pathway to permanent employment”.

Cash said the government wanted to “put Australia on the road to economic recovery” but failed to explain why it had withdrawn the wage theft provisions.

Cash acknowledged the government had withdrawn changes on bargaining, awards and greenfields agreement because it didn’t have the numbers.

Griff said that Centre Alliance would re-evaluate those provisions if the government were to put them in separate bills.