Senator Payman shocked colleagues when she defied the party's position and sided with the Greens to vote on a motion supporting Palestinian statehood.
Labor members are expected to toe the party line and crossing the floor can result in expulsion.
Fatima Payman says she crossed the floor as a matter of conscience. (Lukas Coch/AAP PHOTOS)
Prime Minister Anthony Albanese "dealt with this matter with great restraint on this occasion", Foreign Minister Penny Wong said.
Some Labor MPs have privately expressed anger stronger action was not taken against Senator Payman, with convention dictating her expulsion.
"We understand the difficulty that the senator has felt," Senator Wong told Nine's Today Show
"(But) caucus solidarity matters to us. I can understand why caucus members feel upset because we are a party of the collective.
"Our expectation is that Senator Payman will abide by caucus decisions."
Mr Albanese said he spoke with the West Australian senator on Wednesday and she would sit out of next week's Labor caucus meeting.
Anthony Albanese has sidelined Fatima Payman from Labor's caucus meeting. (Lukas Coch/AAP PHOTOS)
Senator Payman said she believed voting in support of the motion, which urged the issue of recognising Palestine as a state be taken as an urgent matter, was in line with Labor's principles.
The party's policy platform is to recognise Palestine but with no timeline attached and some caveats.
Senator Wong defended voting against the Greens motion, chastising their opposition to her amendment to tack on recognising Palestine "as part of a peace process in support of a two state solution".
"The fact that the Greens voted against that demonstrates everything about their intention. It was all about politics, not about change," she told reporters in Canberra on Thursday.
"You don't change policy through Senate motions."
Opposition foreign affairs spokesman Simon Birmingham also defended voting against the motion, saying his amendments - which also failed - outlining the peace process made it clear it was a final status issue.
Senator Birmingham pushed for the inclusion of caveats before recognition, including Palestinian officials recognising Israel's right to exist, security guarantee, right of return and negotiations around borders.
"We were unwilling to support a type of motion and that didn't make clear those preconditions," he said.
Simon Birmingham wants Palestinian officials to recognise Israel's right to exist. (Lukas Coch/AAP PHOTOS)
Senator Payman said she joined the Greens push for stronger action against Israel as a matter of conscience, as the death toll in Gaza nears 38,000, according to the Hamas-run local health ministry.
Save the Children estimates some 21,000 kids are missing, with many trapped under rubble or buried in unmarked graves.
The United Nations has found Israel was using starvation as a method of war, which constitutes a war crime, and almost half a million Palestinians in the besieged enclave face "catastrophic levels" of hunger.
Israel has rejected claims it has conducted war crimes, accusing the UN inquiry of bias.
Tel Aviv launched a campaign in Gaza after designated terrorist organisation Hamas killed 1200 Israelis and took some 250 more hostage - according to its tallies - in an attack on October 7.
