Julia Gillard named Rudd her chief envoy, less than three months after axing him in a sudden and ruthless coup that stunned the nation and almost cost her ruling Labor party government at deadlocked August 21 polls.
Gillard said Rudd was "entitled to respect" as a former prime minister but said she had ultimately offered him the foreign ministry because he brought a "lot of expertise", denying there was bad blood between them.
"Of course we are," she said when asked whether they were able to collaborate. "And we obviously will be working together in the interests of the nation."
Meanwhile Ms Gillard has defended her decision to promote Labor's factional plotters who helped her roll Kevin Rudd as prime minister.
"I know focus has gone on Bill Shorten and Mark Arbib," Ms Gillard told ABC Television. "(But) both of them deserve the jobs they have."
As part of the reshuffle, Mr Shorten will step up to become assistant treasurer and minister for financial services.
"Bill did a remarkable job as parliamentary secretary for disabilities," Ms Gillard said.
Arbib praised
The prime minister also praised Senator Arbib, who served as employment participation minister when she was the Rudd government's employment minister.
Senator Arbib would thrive in his new role as minister for indigenous employment, sport and social housing.
"I worked closely with Mark Arbib. He was my junior minister. He did well in his former portfolio and he'll step up to this new challenge," Ms Gillard said.
In unveiling her reshuffle on Saturday, Ms Gillard forgot to mention that Kate Ellis would advise the prime minister on the status of women.
"We're in a circumstance, I suppose, with the first female prime minister that maybe that portfolio can work a little differently," she said.
'There won't be a gang of four'
Asked if incoming finance minister Penny Wong would become part of a gang of four - a term used to characterise the Rudd government's most senior cabinet ministers - Ms Gillard vowed to be more inclusive.
"There won't be a gang of four," she said.
"There will be a traditional cabinet government."
Labor backbenchers would be given more say on legislation before it was drafted, Ms Gillard said.
"What I've said to caucus is we will design some new structures so people get involved at the ideas generation stage," she said.
The term education has been dropped from the cabinet.
Under Ms Gillard's changes, Peter Garrett will oversee a schools portfolio, Chris Evans will have a skills ministry which takes in undergraduate university and vocational education while Kim Carr will continue to be in charge of post-graduate higher education and research.
