Key unions and businesses have negotiated a mutually beneficial deal to lower weekend and public holiday penalty rates for South Australian shop workers.

Retail sector employees in the state who voluntarily accept the measure will receive a three per cent annual pay rise and the right to refuse weekend work.

In exchange, workers will lose half of their penalty rate for Sundays, more than a third for public holidays, and completely abolish the extra rates for Saturdays and weekday evenings.

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Industry Minister Ian Macfarlane has welcomed the agreement, saying the retail sector needs to compete with online businesses.

“The internet is 24/7, people do want to shop when they see something they like, and if they walk past a shop and it’s closed whether it’s a Saturday afternoon, or a Sunday or a public holiday, they simply get that item up on their phone and order it,” Mr Macfarlane said.

The deal, which applies to small businesses and up to 40,000 staff, has the support of industry group Business SA, which has suggested it could be used to solve the national debate over penalty rates.

Senior Labor politicians have also come out in support of the idea.

Opposition frontbencher Mark Butler says the bargaining process used to reach the deal between employers and the shoppies union is what Labor has supported for more than 20 years.

“This is what we envisaged when Paul Keating’s government put together the enterprise bargaining model,” Mr Butler, an MP from South Australia, told reporters in Canberra.

Deputy opposition leader Tanya Plibersek said the agreement was an example of the flexibility in Fair Work laws introduced by Labor in government.

Junior Liberal minister Jamie Briggs said the deal vindicated the coalition’s position that penalty rates were a matter for the Fair Work Commission.

“If employers and employees work together for their best interests then we’ll get a better result,” he said.