Work and Pensions Secretary Iain Duncan Smith failed in a Supreme Court bid to overturn an earlier ruling that 2011 regulations underpinning the schemes were invalid.
Five Supreme Court justices upheld a Court of Appeal decision which went against the Government in February.
The schemes were condemned by critics as ‘’slave labour’’ because they involved work without pay and cuts in jobseeker’s allowance for those who failed to comply with the rules.
But the Supreme Court ruled that regulations did not constitute forced or compulsory labour.
Those in favour had welcomed the schemes as an effective way of getting people into employment.
At the Court of Appeal Lord Justice Pill, Lady Justice Black and Sir Stanley Burnton unanimously agreed that the 2011 “work for your benefits” regulations failed to give the unemployed enough information, especially about the sanctions for refusing jobs under the schemes.
The appeal ruling was a victory for university graduate Cait Reilly, 24, from Birmingham, who challenged having to work for free at a local Poundland discount store.
It was also a victory for 40-year-old unemployed HGV driver Jamieson Wilson, from Nottingham, who objected to doing unpaid work cleaning furniture and as a result was stripped of his jobseeker’s allowance for six months.
Lawyers for the pair said the immediate effect of the ruling was that all applicants who had their jobseeker’s allowance withdrawn for non-compliance with the schemes were entitled to reclaim their allowance.
The Government took the case to the Supreme Court, the highest court in the land, while at the same time fast-tracking retrospective legislation, the Jobseekers (Back to Work Schemes) Act, through Parliament.
Public Interest Lawyers (PIL) said the Government aim was to retrospectively “make lawful what the appeal court declared unlawful” in order to avoid a multimillion-pound bill in payouts to individuals who had been unlawfully sanctioned.
A separate legal challenge has been lodged over the new legislation, which has been stayed pending determination of today’s appeal.
Responding to the ruling, Mr Duncan Smith said: “We are very pleased that the Supreme Court today unanimously upheld our right to require those claiming jobseeker’s allowance to take part in programmes which will help get them into work.
“We have always said that it was ridiculous to say that our schemes amounted to forced labour, and yet again we have won this argument.
“Ultimately this judgment confirms that it is right that we expect people to take getting into work seriously if they want to claim benefits.”
Solicitor Tessa Gregory, from Public Interest Lawyers, was at the Supreme Court with Ms Reilly and expressed their “delight” at the court’s ruling in relation to the legality of the 2011 regulations.
Supreme Court President Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Toulson dismissed the Secretary of State’s appeal on the issue of lawfulness, holding that the regulations were “invalid” as they did not contain a sufficiently detailed “prescribed description” of the schemes.
It also held that the Secretary of State had failed to provide sufficient information about the schemes to Ms Reilly and Mr Wilson.
But on the issue of “forced labour” the justices dismissed an appeal by Ms Reilly and Mr Wilson, ruling that the regulations do not constitute forced or compulsory labour.
Following the judgment, Ms Reilly said: “I am really pleased with today’s judgment, which I hope will serve to improve the current system and assist jobseekers who have been unfairly stripped of their benefits.
“I brought these proceedings because I knew that there was something wrong when I was stopped from doing voluntary work in a local museum and instead forced to work for Poundland for free.
“I have been fortunate enough to find work in a supermarket but I know how difficult it can be. It must be time for the Government to rethink its strategy and actually do something constructive to help lift people out of unemployment and poverty.”
Phil Shiner, head of Public Interest Lawyers, said: “Once again the Department for Work and Pensions flagship Back to Work schemes have been found wanting.
“Today’s ruling from the Supreme Court is of huge constitutional and practical significance. My firm will now get on with challenging, by judicial review, the retrospective legislation which was shamefully rushed through Parliament by Iain Duncan Smith in March of this year.”