The Court of Appeal's unanimous decision against discount store Poundland is a "huge setback for the Department for Work and Pensions (DWP), whose flagship reforms have been beset with problems since their inception", according to Public Interest Lawyers.
The lawyers, who represented Cait Reilly and 40-year-old unemployed HGV driver Jamieson Wilson, said that "until new regulations are enacted with proper parliamentary approval, nobody can be compelled to participate on the schemes".
Today's 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.
University graduate Cait Reilly's successful appeal was made by Lord Justice Pill, Lady Justice Black and Sir Stanley Burnton.
In November 2011, Miss Reilly 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 she would lose her jobseeker's allowance.
For two weeks she stacked shelves and cleaned floors.
The Court of Appeal has ruled university graduate Cait Reilly's claim that requiring her to work for free at a Poundland discount store was unlawful.
Three judges in London ruled that the regulations under which most of the Government's back-to-work schemes were created are unlawful and quashed them.
Miss Reilly, 24, from Birmingham, and 40-year-old unemployed HGV driver Jamieson Wilson, from Nottingham, both succeeded in their claims that the unpaid schemes were legally flawed.
Their solicitors said later the ruling means "all those people who have been sanctioned by having their jobseekers' allowance withdrawn for non-compliance with the back-to-work schemes affected will be entitled to reclaim their benefits".