Centrelink's plans to have its call centres manned by Telstra workers have been put on hold.
The giant Department of Human Services, which runs the welfare agency, will instead hold talks with unions about alternatives to the outsourcing deal.
Fairfax revealed last month that DHS and the telco had agreed a "pilot scheme" which would see Telstra operators move into two Human Services call centres.
The news brought a furious response by public sector union the CPSU and a challenge to the Fair Work Commission, with the union claiming the move threatened 7000 DHS jobs.
The union said that Centrelink and Medicare are being "privatised by stealth" with the government looking for private companies to take over Medicare and Pharmaceutical Benefits payments while DHS file storage warehouses are being outsourced to a top a US multinational.
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The department rejected the union's claim saying the "pilot scheme" would free-up experienced DHS call centre operators to take complex calls while the Telstra staff deal with simple matters.
After a second round of talks at the Fair Work Commission the two parties have agreed to a temporary compromise with agreeing it would take DHS take no further steps to outsource services or work to third party providers.
The department also says it will hand over documentation and information behind the proposal to contract services out to private companies.
There will also be further talks with the CPSU to discuss alternatives to contracting-out work currently done by DHS staff.
CPSU deputy president Lisa Newman said the department had changed its story several times on the outsourcing proposal.
"Getting answers about the true nature of the deal to outsource Centrelink and Medicare work to Telstra has been like getting blood out of a stone," the union official said.
"At the time DHS claimed it just wanted to learn from Telstra – by putting 200 of the telco's staff in its call centres.
"Now DHS is claiming that it is really about dealing with surges in demand that flow from emergencies.
"It's time for DHS to come clean and tell us what it's really up to - staff and the public have a right to know if this Government is planning on breaking up and outsourcing chunks of the public sector to big business."