Its inclusion was backed by all parties except for New Zealand First, which is strongly opposed to any flag change.
Despite Labour's support, there is simmering anger at the deal between the Government and the Green Party, under which Prime Minister John Key changed his position and agreed to pick up a bill from Green MP Gareth Hughes.
The Greens voted against amendments from Labour this morning.
Labour MP Clare Curran labelled it a "tricky deal" and a "stitch-up", and said the flag process had become an embarrassment and a political game.
"We have ended up with an X Factor competition, instead of a respectable process...we have been treated as if we were puppets or muppets."
Labour finance spokesman Grant Robertson said his party had not attempted to hide its extreme disappointment with the Greens for the Red Peak deal.
"Having said that...we have a good relationship with the Green Party, we have a lot in common, we have a lot of issues that we will continue to work together on, and whatever happens around this piece of legislation I know that that relationship can, will and should endure."
Mr Hughes said he understood Labour's frustration, but not moving to add Red Peak risked playing politics at the expense of what Kiwis wanted.
NZ First leader Winston Peters, freshly back from touring England with the Parliamentary rugby team, unsuccessfully called for a personal vote, which was declined by Assistant Speaker Lindsay Tisch.
Mr Peters read out critical messages he said had been posted on the Greens' Facebook page, and ripped into the party for doing a deal with National and offering and playing into Mr Key's hands.
"Russel Norman would never have done this, he had his faults, but dear Russel would never have done something as stupid as this.
"When the National Party come and rub their tummy they roll over."
In return for the Government's support, the Green Party agreed to vote against any bid by the Labour Party to include a yes/no vote on changing the flag in the first referendum - a critical factor in persuading the Government to adopt the bill.
The law change means voters will now have five flags to rank in order of preference in the first referendum in November.
Mr Key initially dismissed calls to add Red Peak but last week said he would include it if the Labour Party agreed to support it and to stop criticising the $26 million flag referendum process. Talks between National and Labour never eventuated after Labour pushed for a yes/no vote in the first referendum - something Mr Key refused to do.
Mr Hughes rode in with the solution yesterday by putting up a bill without strings attached. His attempt to introduce it himself was vetoed by NZ First, but the Government then agreed to take it up and push it through.
Mr Key said Red Peak was not his preference but others clearly wanted it.
Labour's Andrew Little put the blame on Mr Key for acting in bad faith, saying National could have made the change without Labour's support.
Fans of Red Peak started agitating for its inclusion after it was left off the original shortlist selected by the Flag Consideration Panel - culminating in a petition with 50,000 signatures which was presented to Parliament last week.
Its abstract design is not for everyone - NZ First deputy leader Ron Mark compared it to Nazi symbolism yesterday.
Despite its popularity in recent weeks, Red Peak will also be up against the popular and well known Kyle Lockwood silver fern designs.
However, there are hopes its last-gasp inclusion could help shift some opposition to the flag change process. A 3 News Reid Research poll this week showed that after seeing the four flags, 70 per cent of people did not want change.
The first referendum in November and December will ask New Zealanders to rank the alternative flags. The winner will then run against the present flag in a second referendum in March.
Key U-turns
Red Peak: A fortnight after point blank ruling out a law change to add Red Peak to the flags referendum shortlist, Prime Minister John Key caved in and cut a deal to push it through.
Syrian refugees: After saying New Zealand would wait until the middle of 2016 to assess whether to take more Syrian refugees, local and international pressure prompted Key to announce an extra 750 refugees over three years.
Capital Gains Tax: After panning Labour's capital gains tax policy for two elections, National's May 2015 Budget introduced a 'bright line' capital gains tax on investment properties bought and sold within two years.
