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 nothing at a Poundland store breached laws on forced labour.
Judges quashed the regulations underpinning the work schemes.
The government has now brought in new rules allowing these unpaid schemes to continue while it appeals.
The judges' decision could effectively prevent the government continuing with the programme in its current form.
However, ministers at the Department of Work and Pensions (DWP) brought in new, more precise regulations on Tuesday evening to allow it to require jobseekers to take part in these schemes, which are being trialled for young people in London and Derbyshire.
"These new regulations mean there will be no break in the support we're able to offer jobseekers, and we continue to have the power to remove benefits from those who aren't serious about getting into work," a DWP spokesman said.
The government is seeking permission to appeal to the Supreme Court. Regardless, the decision will be seen as a setback for the DWP's flagship back-to-work schemes.
Miss Reilly, a 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. This was because the regulations behind the schemes did not comply with the Act of Parliament that gave the DWP the power to introduce the programme.
They had lost their original case, but part of this decision has now been reversed by the Appeal Court.
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. The solicitor said she was confident this case would ultimately be won, but the government said there would be no compensation.
"We have no intention of giving back money to anyone who has had their benefits removed because they refused to take getting into work seriously. We are currently considering a range of options to ensure this does not happen," said a spokesman for the DWP.
The government also 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."
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."
A number of union leaders and campaigners called on the government to ditch schemes requiring people to work for no pay or lose benefits.
Nicola Smith, of the TUC, said this was a good time to take a step back and look again at mandatory back-to-work schemes.
Tom Walker, employment law partner at law firm Manches, said: "This judgment upholds what is perhaps the key tenet of employment, namely the 'work wage bargain'.
"If someone gives their labour to a company, they should be paid for it. However well intentioned a workplace scheme may be, it is very dangerous to introduce compulsory unpaid labour into the UK employment market."
Dame Anne Begg, who chairs the Work and Pensions Select Committee, said the court ruled the regulations were not clear or specific enough.
But she also suggested that the government should look at why Miss Reilly was sent to a retailer to do a work placement when she was already doing voluntary work in a museum - the kind of activity that this scheme was aimed at encouraging.