A work for the dole scheme that would allow job service providers to dock people’s welfare in remote areas discriminates against Indigenous Australians, unions and the providers’ peak body have warned.

The Australian Council of Trade Unions and Jobs Australia raised the concerns in submissions on proposed changes to the Community Development Program (CDP), which started on 1 July.

Under the scheme CDP providers match dole recipients in remote areas with job placements, including in for-profit companies.

The ACTU and Jobs Australia said the scheme sets more onerous work conditions in remote areas, which disproportionately affect Indigenous Australians. These include a requirement for 25 hours a week in work or other approved activities year-round. The ACTU said this gives Newstart recipients an effective income of $10.50 an hour.

Other work for the dole schemes only require welfare recipients aged 30-49 to work 15 hours a week and only for six months a year.

The vast majority of unemployed people in remote areas subject to the CDP are Indigenous Australians, making up 84% according to Human Rights Commission figures cited by Jobs Australia.

A map of communities where the Community Development Program applies. Photograph: Department of Prime Minister and Cabinet

The amending bill before the Senate would change the scheme so that CDP providers pay welfare recipients directly for their work activities, rather than the Department of Human Services making payments.

CDP providers would also have the responsibility for cutting off welfare payments if recipients failed to meet conditions like attendance at work. Welfare recipients will have a right of appeal to the department.

Jobs Australia warned this would put CDP providers’ staff “at increased risk of harm in confrontations with job seekers” because they would no longer be able to blame the department if welfare recipients were unhappy their payments had been cut off.

Jobs Australia also complained that the Indigenous affairs minister would have the power to determine welfare recipients’ obligations, including what activities they could be compelled to do and what might constitute a “reasonable excuse” for failing to show up for work.

This amounted to “giving the minister authority to rewrite social security law and ensure that penalties are applied more quickly and with less checks and safeguards”.

“It must be remembered that benefit sanctions can result in severe financial hardship for individuals and their families,” Jobs Australia said.

It argued the CDP changes “most likely discriminate against Indigenous people”.

“Transferring responsibility for administering welfare payments to CDP providers is likely to result in more financial penalties being applied more often, without the scrutiny of the DHS to safeguard against inappropriate sanctions being applied to vulnerable people,” it said.

The chief executive of Jobs Australia, David Thompson, told Guardian Australia: “Rules about welfare should be relatively consistent – you want people in similar circumstances to have similar entitlements, regardless of their race or their location.”

The Senate committee examining the bill reported on 2 March and said it shared reservations about the broad discretion for the minister to set conditions on the CDP program.

But the committee, which has a majority of Coalition government members, said this was done to “provide flexibility” to vary conditions according to community needs. It recommended passage of the bill.

The ACTU’s national Indigenous officer, Kara Keys, told Guardian Australia it objected to the bill because it stopped the Department of Human Services determining when someone’s welfare was cut off.

The bill raises the amount people can earn in other jobs before their welfare payments are reduced, to increase the incentive to work more than the mandatory 25 hours.

But Keys argued it was perverse that a person could do the same work for the same company, providing 25 hours of free labour (since it is paid from welfare funds) and then only receive minimum wage for additional hours worked.

“People can work in a CDP place for up to six months – that’s basically a job,” she said. “Why would a business employ somebody if it can access this free pool of labour?”

Thompson said “thousands of people will be working for free – and that has to displace paid employment at some level”.

Addressing claims of discrimination, a spokeswoman for the Department of Prime Minister and Cabinet said: “The CDP applies equally to all jobseekers who reside within remote income-support regions across Australia.”

She said the CDP was designed for the unique labour market challenges of remote Australia, so it had a greater focus on work readiness activities in contrast with urban areas, where there was a greater focus on looking for jobs.

The Department of Prime Minister and Cabinet spokeswoman said: “CDP workplace hosted placements cannot displace real jobs” because they were limited to six months at a time.

A spokesman for the Indigenous affairs minister, Nigel Scullion, said communities had asked for the reforms.

Addressing concerns CDP providers would cop flak instead of DHS, he said: “Generally, we have found that locally-based Indigenous organisations with close ties to community are well placed to deal with challenging clients in their region.”