A university graduate has won a Court of Appeal ruling that a flagship Government back-to-work scheme requiring her to work for free at a Poundland discount store was unlawful.
Three judges in London declared that the regulations under which most of the schemes were created are unlawful and quashed them.
The Government expressed "disappointment and surprise" at the decision and said it now intends to introduce new regulations to ensure future schemes are lawfully based. Moves to appeal to the Supreme Court against the ruling are also under consideration.
Cait Reilly, 24, from Birmingham, and 40-year-old unemployed HGV driver Jamieson Wilson, from Nottingham, both succeeded in their claims that the unpaid schemes they were required to participate in were legally flawed.
Their solicitors said later the ruling means "all those people who have been sanctioned by having their jobseeker's allowance withdrawn for non-compliance with the back-to-work schemes affected will be entitled to reclaim their benefits".
Public Interest Lawyers said: "The result is that over the past two years the Government has unlawfully required tens of thousands of unemployed people to work without pay and unlawfully stripped thousands more of their subsistence benefits."
Employment minister Mark Hoban said he was disappointed and surprised at the court's decision on the regulations. But he said the judges' ruling had upheld the Government's right to run back-to-work schemes. Mr Hoban said: "The court has backed our right to require people to take part in programmes which will help get them into work. It's ridiculous to say this is forced labour. This ruling ensures we can continue with these important schemes.
"There needed to be flexibility so we could give people the right support to meet their needs and get them into a job. We do not agree with the court's judgment and are seeking permission to appeal, but new regulations will be tabled to avoid any uncertainty. Ultimately the judgment confirms that it is right that we expect people to take getting into work seriously if they want to claim benefits."
The ruling was made unanimously by Lord Justice Pill, Lady Justice Black and Sir Stanley Burnton. Lord Justice Pill said the case raised a question of "statutory construction". Declaring the regulations unlawful, the judge said they must be quashed since their central purpose was to impose "requirements" on jobseeker's allowance claimants and sanctions for failing to comply.
Agreeing with Lord Justice Pill, Sir Stanley Burnton said: "I emphasise that this case is not about the social, economic, political or other merits of the Employment Skills and Enterprise Scheme. This appeal is solely about the lawfulness of the regulations made by the Secretary of State in purported pursuance of the powers granted by the 1995 Act as amended."