A long-running legal battle over a disability employment scheme which paid some people as little as $1 an hour has come to an end after the federal government agreed to back pay 70% of the wages owed.

The Business Services Wage Assessment Tool (Bswat) assessed the pay of about half the employees working in the government-supported Australian Disability Enterprises (ADEs) – formerly known as sheltered workshops. It assessed the competency and productivity of workers, but several aspects were criticised as deeply flawed.

After a 2012 federal court case found two people, Michael Nojin and Gordon Prior had been discriminated against by the system which reduced wages to as little as $1 an hour, the Bswat was suspended.

The federal government appealed to the high court, lost, and then was granted one year by the Australian Human Rights Commission to come up with a replacement scheme.

A bill which was passed in the Senate in 2014 legislated to repay workers 50% of what they were owed. A class action lawsuit brought by the Maurice Blackburn law firm rejected the move and continued to seek 100%.

On Thursday, after extensive mediation between the government and representatives of the class action, the social services minister, Christian Porter, announced new legislation would be introduced under which the Commonwealth would repay 70%.

The legislation will ensure there are no tax implications and disability pensions are unaffected.

The repayments will be available to all workers with an intellectual disability who have worked in an ADE, not just those involved in the class action. It will also be widened, including people who, for example, have since retired.

Kairsty Wilson, senior legal practitioner for the AED Legal Centre and who has worked on the case since 2002, welcomed the agreement.

“I think it’s a good deal and we’d be encouraging all employees with intellectual disabilities to register, and if they need assistance we’re happy to help them do it,” Wilson told Guardian Australia.

“They’re entitled to [the repayments], and Michael Nojin and Gordon Prior had the courage to stand up for themselves in the first place.

“It takes guts to do that. They’ve got it and they should be so proud of themselves, Gordon and Michael and their mothers who fought on behalf of their sons.”

Craig Wallace, the president of the People With Disability advocacy group, tweeted his congratulations to the minister and said the decision was “right and just”.