The commonwealth government has agreed to pay $112 million in compensation to members of the robodebt class action in a $1.2 billion settlement.

The government last November paused Centrelink’s AI debt recovery system, which came to be known as Robodebt because it used a computer-based income averaging algorithm to match ATO data with welfare payments, and delivered automated letters demanding repayment based on the result.

The system was widely criticised for resulting in errors, incorrect debts and unnecessary hardship for welfare recipients and culminated in the largest class action in Australian legal history with 400,000 members.

The law firm running the class action, Gordon Legal, confirmed the settlement on Monday.

“The settlement reached with the Commonwealth of Australia means that if approved by the (Federal) Court, since the commencement of the Robodebt Class Action, more than $1.2 billion in financial benefit will have been provided to approximately 400,000 group members,” it said.

As well as compensation, which includes legal costs, the government will repay more than $720 million in invalidly collected debts and will drop around $398 million worth of claims.

The government has also agreed to the establishment of a settlement distribution scheme to assess the entitlements of individual members of the class action.

Legal liability is not admitted in the settlement.

Labor leader Bill Shorten described the out-of-court settlement, which came just before the matter was set to go to trial on Monday, as  a last minute pre-trial admission meant to a avoid coalition ministers having to take to the stand to answer questions.

“What is the dirty secret about Robodebt’s origins that the Government does not want anyone to know,” he said.

“Were they told it was illegal and ignored the advice? Or did they not check its legality at all before unleashing it on an unsuspecting public?”

The CPSU said Robodebt was another social security fumble that wouldn’t have occurred if the government had listened to frontline workers.

“Even before the scheme was rolled out, our members working in Centrelink were telling the department that the scheme was flawed and would cause serious problems,” National Secretary Melissa Donnelly said.

“Our members are experts, they are on the frontline of this work every day, and had they been listened to in the first place they could have saved Stuart Robert an eye watering amount of money.”

The Greens have joined Labor in calling for a Royal Commission.

“We still don’t know what the government knew and when and they are still desperate to cover it up,” Greens senator Rachel Siewert said.
 
“Now the community needs to know how this all happened.”