The government's back-to-work schemes have suffered a setback after Appeal Court judges agreed with a university graduate's claim that unpaid schemes were legally flawed.
Cait Reilly, 24, claimed that requiring her to work for free at a Poundland store breached laws on forced labour.
Judges quashed the regulations underpinning the work schemes.
But Miss Reilly's solicitors and the government have clashed on the implications of the ruling.
The government said it was seeking permission to appeal to the Supreme Court.
It will also bring new, more precise, regulations to Parliament later in the day, but the case will be seen as a setback for the Department of Work and Pensions' flagship back-to-work schemes.
Benefit withdrawalMiss Reilly, University of Birmingham geology graduate, and 40-year-old unemployed HGV driver Jamie Wilson, from Nottingham, both succeeded in their claims that the unpaid schemes were legally flawed. They had lost their original case, but part of this decision has now been reversed by the Appeal Court.
"Start Quote
End Quote Cait ReillyThose two weeks were a complete waste of my time as the experience did not help me get a job"
Miss Reilly said that in November 2011 she had to leave her voluntary work at a local museum and work unpaid at the Poundland store in Kings Heath, Birmingham, under a scheme known as the "sector-based work academy".
She was told that if she did not carry out the work placement - which, she said, involved stacking shelves and cleaning floors - she would lose her Jobseeker's Allowance.
Mr Wilson was told that his Jobseeker's Allowance would be stopped after he refused to take part in the Community Action Programme, which his lawyers said would have involved him working unpaid for 30 hours per week for six months.
Solicitor Tessa Gregory, of Public Interest Lawyers, which represented the duo, said: "This judgment sends Iain Duncan Smith back to the drawing board to make fresh regulations which are fair and comply with the court's ruling.
"Until that time, nobody can be lawfully forced to participate in schemes affected such as the Work Programme and the Community Action Programme.
"All of those who have been stripped of their benefits have a right to claim the money back that has been unlawfully taken away from them."
This could not happen until the end of the legal process, but solicitors said they were confident this case would ultimately be won.
"Start Quote
End Quote Mark Hoban Employment MinisterUltimately, the judgment confirms that it is right that we expect people to take getting into work seriously if they want to claim benefits"
However, the government pointed out that the Appeal Court judges backed the High Court's view that requiring jobseekers to participate in the scheme did not breach their human rights.
It said that it would bring new regulations forward straight away, allowing these schemes to continue.
"The court has backed our right to require people to take part in programmes which will help get them into work. It is ridiculous to say this is forced labour. This ruling ensures we can continue with these important schemes," said Employment Minister Mark Hoban.
"We are, however, disappointed and surprised at the court's decision on our regulations. 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 judgement and are seeking permission to appeal, but new regulations will be tabled to avoid any uncertainty.
"Ultimately, the judgement confirms that it is right that we expect people to take getting into work seriously if they want to claim benefits."
'Rethink needed'Miss Reilly said she was delighted with the ruling, claiming that making her give up her voluntary work and sending her to Poundland was wrong.
"Those two weeks were a complete waste of my time, as the experience did not help me get a job," she said.
"I was not given any training and I was left with no time to do my voluntary work or search for other jobs.
"The only beneficiary was Poundland, a multimillion-pound company. Later I found out that I should never have been told the placement was compulsory.
"I don't think I am above working in shops like Poundland. I now work part-time in a supermarket. It is just that I expect to get paid for working."
She said she hoped the government would "rethink" how it tackled long-term unemployment.
"I agree we need to get people back to work, but the best way of doing that is by helping them, not punishing them."
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