Labour says National is letting the ACT Party call the shots, after the Cabinet backed its call to extend the 90-day trial period for new employees to cover all companies.
Documents released under the Official Information Act show Labour Minister Kate Wilkinson recommended the trial period should apply only to businesses with fewer than 50 employees.
In a July Cabinet paper, she argued larger companies tend to have robust systems in place to support good recruitment.
But following negotiations with ACT, the Cabinet decided to extend the trial period to cover all business, regardless of size.
Labour says National is being held hostage by ACT and Ms Wilkinson should resign as the minister after being rolled on the issue.
But Prime Minister John Key says he originally asked her to look at companies with 50 or fewer employees, and she was not resistant to extending it to all companies.