The decision, which was announced by the FWC on Wednesday, takes Australia's minimum hourly wage for adults to 20.33 Australian dollars (15.47 U.S. dollars), or 772.6 Australian dollars per week for full-time workers, an increase of 18.8 Australian dollars.
It follows a 1.75 percent increase announced at the height of the coronavirus recession in 2020.
Iain Ross, president of the FWC, said the decision reflected the "much more positive" economic outlook than in 2020.
"There was a broad consensus in the submissions before us that the current performance of the economy has exceeded expectations and that the economic recovery is well underway," he said.
However, the final decision angered both business groups and trade unions.
The Australian Council of Trade Unions (ACTU) had advocated for a 3.5 percent increase while the Australian Chamber of Commerce and Industry (ACCI) called for 1.1 percent, describing the pay rise as "premature and irresponsible," saying it would be a "huge burden on business."
"Australians who have managed to battle on through, keep their business afloat and keep people in work now face a highly risky hike in wages, always their biggest cost," Jenny Lambert, the acting chief executive of the ACCI, said.
The FWC said awarding an increase of 3.5 percent, or 26.38 Australian dollars per week, would "pose a real risk of disemployment and of adversely affecting the employment opportunities of low-skilled and young workers."
"The panel also acknowledged that awarding an increase which is less than increases in prices and living costs would amount to a real wage cut," Ross said.
"Such an outcome would mean that many award-reliant employees, particularly low-paid employees, would be less able to meet their needs. For some households such an outcome would lead to further disadvantage and may place them at greater risk of moving into poverty."
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