Scott Morrison has suffered a humiliating defeat on his government's union-busting legislation with One Nation delivering a shock killer blow at the final vote.
The "ensuring integrity" bill, which would have made it easier to deregister unions and ban officials, was expected to pass on Thursday with Pauline Hanson's support.
But in stunning scenes in the upper house, One Nation's two senators sided with Labor, the Greens and Jacqui Lambie to tie a vote 34-34 - meaning the bill failed.
"This is a warning shot across the bows of the unions and the government," Senator Hanson told reporters in Canberra.
The One Nation leader called for law-breaking unions to clean up their act, while urging the government to come down hard on banking misconduct.
Senator Hanson blindsided the government, with an 11th-hour dagger at the heart of one of its signature industrial relations reforms.
After rejoicing in the chamber, Labor's Senate leader Penny Wong said the prime minister had spent the week defending embattled minister Angus Taylor instead of shoring up crossbench support.
"Scott Morrison tried to tear down the union movement with his so-called ensuring integrity bill, he's left with his integrity in tatters," she told reporters.
Attorney-General Christian Porter, who is also industrial relations minister, said he was very disappointed with the result.
"It's for Pauline Hanson to explain why she voted against a bill that met every requirement she sought through extensive consultation."
He said the government remained committed to the reforms, promising to reintroduce the bill to parliament at an "appropriate time".
The government claimed the laws were critically important to crack down on the construction union and rogue officials like its controversial Victorian secretary John Setka.
Labor industrial relations spokesman Tony Burke called for the bill to be abandoned.
Australian Council of Trade Unions secretary Sally McManus warned the coalition government about further industrial relations review.
"I've got a simple message for Scott Morrison: don't mess with working people, don't underestimate us or it will come back and bite you," she told reporters.
Tasmanian independent Jacqui Lambie said the government was stupid to reject her amendments and focus on negotiations with other senators.
"This was really, really badly done and I hope they've learnt their lesson but I doubt it, because it's not the first time that this has happened to them," she told AAP.
Senator Lambie wanted to ensure unprotected industrial action did not form grounds for officials to be disqualified.
Senator Hanson said she couldn't support laws which would give administrators "unfettered powers".
Labor and Greens senators clapped and cheered after the result, following a week of speculation the government had the numbers.
Opposition Leader Anthony Albanese celebrated the surprise victory for the union movement.
"This is a win for the working people of Australia - the very people this bill was designed to hurt," he tweeted after the bill was voted down.
"Thank you to everyone who spoke out, stood up and fought back. This win belongs to you."
Australian Associated Press
