Taxpayers could face a multi-million pound compensation bill after Government “workfare” schemes which make the jobless graft for their benefits were ruled illegal today.

Up to 150,000 people who have had welfare payments docked for refusing to take part could be in line for a payout according to lawyers who brought two test cases.

University graduate Cait Reilly, 24, from Birmingham, won a Court of Appeal battle after being forced to give up a voluntary museum placement to work in Poundland discount store for nothing.

Truck driver and qualified mechanic Jamieson Wilson, 40, from Nottingham, also successfully challenged a six-month placement cleaning furniture for up to 30 hours a week.

Campaigners said the judgment blew a “big hole” in the Government’s flagship schemes.

Solicitors who brought the test cases said it meant “all those people who have been sanctioned by having their jobseeker’s allowance withdrawn for non-compliance with the back-to-work schemes affected will be entitled to reclaim their benefits”.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.”

But the Department for Work and Pensions insisted that the court had upheld the principle of placing the unemployed on job placements saying the Government had only lost on a technicality.

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Ministers vowed to appeal and rush new regulations through Parliament so that voluntary and compulsory schemes which currently involve work placements for up to 800,000 people can continue.

And Employment minister Mark Hoban insisted that the coalition would find a way to block compensation.

Mr Hoban said: “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.”

Miss Reilly was made to give up voluntary work at a local museum and work unpaid at the Poundland store in Kings Heath, Birmingham in November 2011.

The graduate spent a fortnight stacking shelves and cleaning floors after being told to carry out the work placement or lose her jobseekers' allowance.

Mr Wilson lost six months of benefits after refusing to do the unpaid work which he said was unrelated to his qualifications and would not help him re-enter the jobs market.

The Appeal Court ruled that the schemes regulations had not properly authorised by Parliament.

Miss Reilly said she was “delighted” with the judgment as she had known all along that it was wrong to make her give up her museum work to graft in Poundland.

She said: “Those two weeks were a complete waste of my time as the experience did not help me get a job.

“I wasn’t 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.”

Miss Reilly added: “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.”

TUC General Secretary Frances O’Grady said: “This blows a big hole through the government’s workfare policies.

“Of course voluntary work experience can help the jobless, and it is right to expect the unemployed to seek work.

“But it is pointless to force people to work for no pay in jobs that do nothing to help them while putting others at risk of unemployment.”

Len McCluskey, general secretary of Unite, Britain and Ireland's largest trade union, described Ms Reilly as a "hero for challenging this flawed scheme".

He called on the Government to "ditch this forced labour scheme for big business" and "focus on creating real jobs to help give one million young unemployed people a real future".

Labour’s Shadow Work Secretary Liam Byrne added: “It beggars belief that David Cameron’s Government is now so incompetent it can’t even organise work experience."