The further 3 per cent would come 12 months after the commission hands down its full workplace determination, which is still to be delivered.

The increase is above the 2 per cent annual increases offered by the department, but below the 2.5 per cent yearly increases, including retrospective increases, demanded by the main public sector union.

The department and the Community and Public Sector Union have been locked in a dispute over pay and conditions since 2014 when the two previous agreements that covered employees in the then Department of Immigration and Citizenship and the then Australian Customs and Border Protection Service expired.

The commission took into account increases in productivity and demand at the department, saying "they are factors which in our view should be recognised through appropriate wage increases".

The union had demanded retrospective wage increases in order to take into account the years without a pay rise due to the stalled negotiations. However the commission hit out at the union's bargaining approach, saying "we see no justification for the initial wage increase taking effect prior to [October 2016], particularly as it appears to us that the key protagonists were reluctant to make significant concessions in bargaining".

"The failure of the parties to narrow the range of disputed issues in the post-industrial action negotiation period and subsequent unsuccessful attempts at conciliation in our view further militates against any retrospective wage increases," the statement said.

The decision not to award back pay may also set a precedent for other APS negotiations. The statement acknowledges that other agencies are yet to come to an agreement.

The statement from the full bench of the Fair Work Commission described the negotiations over the past four years as "involving both robust and hard bargaining" from the department and the union.

Since the expiry of the previous agreements, the former departments were merged into the Department of Immigration and Border Protection, including the creation of Australian Border Force, and then transformed into the Department of Home Affairs late last year.

The full bench said the workplace determination it would set out would be for a two-year period, shorter than the three years suggested by the department, but longer than the 12 months suggested by the union. Three years would be too long between bargaining agreements, but more time than 12 months was needed to rebuild the "understandably fractured relationship" between the union and the department,  the commission said.

In an email to staff, the department said it would "consider the best mechanism to deliver the initial pay outcome to you as quickly as possible".

The department said it was pleased with how quickly the commission's statement had been published.

"We do not know when a workplace determination will be made. The full bench noted in the statement that it will make it ‘as quickly as possible’," a spokeswoman said.

"As this matter is not yet determined, it would be inappropriate to comment further."

CPSU national secretary Nadine Flood welcomed the decision, but said she was disappointed about the move to block backpay.

"The Commonwealth has thrown every possible legal obstacle to prevent hardworking staff from reaching a fair deal, so it’s pretty tough that there’ll be no backpay to help these workers and their families deal with the bills that have been stacking up while their incomes have been frozen for five years," she said.

Ms Flood called on the department to make the 4 per cent payrise quickly "to give these workers some relief".

Conditions and allowances have been a major sticking point in the negotiations and were not included in this statement, which focused only on remuneration. A full workplace determination will be made at a later date, but the commission said in the statement that if the parties agreed to it, a conference could be convened to discuss issues in the statement or relation to the full determination.

Ms Flood said, "We also hope that when the rest of the decision is released, the full bench consider making sure that workers at least maintain their take home pay, including allowances, penalties and other provisions."