The Department for Work and Pensions (DWP) brought in emergency retrospective legislation to stop payouts after regulations governing the schemes were found to be legally flawed in an earlier decision by top judges.
But the High Court said yesterday that the emergency legislation was flawed and violated the European Convention on Human Rights, which protects the right to a fair trial.
The schemes have been condemned by critics as "slave labour" because they involve work without pay - but are seen by supporters as a way of getting the unemployed back to the world of work. Jobseeker's allowance benefits have been withheld from those deemed to have failed to co-operate.
Mrs Justice Lang, sitting in London, rejected Government spokesman Lord Freud's claim repayment of benefits withheld unlawfully would be "an undeserved windfall" for claimants. She declared: "They are merely receiving their legal entitlement."
The judge said that Parliament's power to legislate "should not take the form of retrospective legislation designed to favour the Executive in ongoing litigation".
She said she "understood" that a Government faced with the prospect of substantial repayments "would consider it in the public interest not to pay them".
However financial loss alone was not a sufficiently compelling reason to justify retrospective legislation over the right to a fair trial.
A DWP spokesman said payments would be on hold until after an appeal was heard. Public Interest Law-yers solicitor Phil Shiner, who represented the jobseekers, called on the DWP "to ensure the £130 million un- lawfully withheld is repaid".