Wellington City Council has agreed to pull back from its living wage policy and not automatically extend it to future contractors.
It had wanted external contractors working for the council to be paid the living wage.
But the Chamber of Commerce threatened to take legal action if the policy went ahead.
The chamber's chief executive, John Milford, said the living wage was not practical. The chamber and council have since reached an agreement.
"What we have agreed is that any future contracts for the living wage, with third party contractors, that it will not be a requirement for them to pay the living wage."
He said current cleaning and security contractors will get the living wage from July.
A council spokesperson said the council agreed to consult with the chamber if it changes its mind.
The living wage is higher than the legal minimum wage of $15.25, and is currently set at $19.80.
The council has been paying its own staff a minimum of $18.55 since 2013.