Graduate Cait Reilly had argued that being made to work unpaid in discount shop Poundland in order to keep receiving Jobseeker's Allowance while she was looking for permanent work was illegal.
In the same ruling, Jamie Wilson, an unemployed lorry driver from Nottingham who was stripped of Jobseeker's Allowance for refusing an unpaid cleaning role, also won his legal challenge.
The judges' decision could effectively prevent the Government continuing with its welfare-to-work programmes in their current form.
However, the British Retail Consortium (BRC), the lead trade association representing a range of retailers including Asda, Argos, Costa, Debenhams and Gap, told HR magazine that its members are "very proud" to be involved with the schemes.
The BRC said that since Reilly's case was publicly highlighted last year none of its members are offering unpaid schemes.
A spokesman for the BRC said: "A third of our members take on 16- to 25-year- olds. They offer significant investment, with £1,275 per person being spent on training.
"Since this case, retailers have now ensured appropriate working conditions for all workers on the back-to-work schemes."
Tom Walker, head of employment law at law firm Manches, told HR magazine he believes the decision will put an end to these schemes "in their current form".
Walker said: "No employer will be under threat legally, because if any employer was sued for an unlawful deduction of wages or the National Minimum Wage it would have a fairly sound right to an indemnity from the Government."
Walker advised any employer involved in such schemes to get in touch with the Department for Work and Pensions for initial guidance and reassurance.
Solicitor Tessa Gregory of Public Interest Lawyers, which represented Wilson and Reilly, said: "This judgement sends [Work and Pensions secretary] 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."
Employment minister Mark Hoban said that the claim that back-to-work schemes amount to forced labour is "ridiculous" and he was "surprised and disappointed" at the court's decision.
The TUC said the judgement "blows a big hole" in the Government's welfare-to- work policies. TUC general secretary Frances O'Grady said: "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.
"This policy is about blaming the jobless, not helping them.
"Ministers should now abandon this misguided approach, and instead guarantee real jobs for the long-term unemployed, especially the young," O'Grady added.
