Mr Biden said he and Mr Sanders both agreed that putting the party's Senate control at risk was too dangerous to remove him from his position in the Senate.
Mr Biden selected Boston Mayor Marty Walsh, who also has a long history of union advocacy and had the support of major labour organisations, to lead the department.
The president-elect said he could not think of a more “passionate and devoted ally to working people in this country” than Mr Sanders.
According to Mr Biden, Mr Sanders also supported the selection of Mr Walsh for the position.
Later, Mr Biden said he and Mr Sanders were working together to plan a cross-country tour to advocate on behalf of workers and increasing middle class wages.
Mr Biden has promised to raise the federal minimum wage to $15 an hour.
Mr Sanders pressured Mr Biden in recent days to honor the Democrat's request to increase coronavirus relief payments to $2,000.
"With Democrats in control of the Senate, we must keep faith with the working families of this country. Promises made must be kept," he said. "That means not only the $2,000 direct payment but an aggressive agenda that recognizes the economic desperation facing so many Americans."
Incoming Sen Majority Leader Joe Manchin - a "blue dog" Democrat whose politics often fall in line with conservatives - said he would "absolutely not" support a $2,000 relief check for Americans.
Even with Mr Manchin's opposition, the Democrats may be able to find enough Republicans to support the measure to secure the increase.