Small businesses will be forced to grant equal employment rights to temporary staff with more than 12 weeks' service after a deal was thrashed out between the government, business groups and unions.

The agreement paves the way for legislation this autumn that would give temps the same rights in terms of pay and sickness leave as their full-time counterparts enjoy.

But the move stops short of giving them equal rights from day one - as had been demanded by the unions - and will not include additional benefits such as pensions.

The Federation of Small Businesses has described the move as "disastrous". "Small businesses rely on the flexibility provided by agency workers," said Tina Sommer, FSB EU and international affairs chairman.

"Agency fees and high hourly rates mean temporary workers, far from being seen as cheap labour, are already a costly but useful way of responding to fluctuations in demand. If that flexibility is lost, many small businesses will stop using temporary employees."

The Forum of Private Business voiced its concerns. "Increased costs and bureaucracy is an unwelcome burden at a time of financial uncertainty, and we fail to see how these measures fit in with the government's plans to reduce red tape for small firms by 25% by 2010," said its chief executive Phil Orford.

The CIPD also criticised the decision by the government to abandon plans for a commission and predicted it would cause "a great deal of unhappiness among employers".

"Agency workers play a valuable role in the UK's flexible labour market," said Mike Emmott, employee relations adviser at the CIPD. "Undermining this flexibility poses a serious risk to UK jobs, and risks blocking an important pathway into work for many jobless people.

"At a time of economic uncertainty, and with the government committed to ambitious targets for getting more people back into work, the timing could hardly have been worse."

Business groups such as the Confederation of British Industry had pushed for a six-month period before equal rights were granted, arguing that a shorter period would encourage staff not to use agency staff and could even lead to redundancies.

But the TUC said the issue had been crying out for attention for too long and that agency workers received unfair treatment and injustice.

"The agreement now opens the door to the much stronger legal protection that agency workers deserve, as our Commission on Vulnerable Employment so graphically highlighted," said its general secretary Brendan Barber.