The Department for Work and Pensions has introduced emergency legislation to reverse the outcome of a court of appeal decision and "protect the national economy" from a £130m payout to jobseekers deemed to have been unlawfully punished.

The retroactive legislation, published on Thursday evening and expected to be rushed through parliament on Tuesday, will effectively strike down a decision by three senior judges and deny benefit claimants an average payout of between £530 and £570 each.

Last month the court of appeal ruled that science graduate Cait Reilly and fellow complainant and unemployed lorry driver Jamieson Wilson had been unlawfully made to work unpaid for organisations including Poundland because the DWP had not given jobseekers enough legal information about what they were being made to do.

The ruling meant that hundreds of thousands of jobseekers who had been financially penalised for falling foul of half a dozen employment schemes, including the government's flagship Work Programme, would have been entitled to a full rebate if a final government appeal was rejected by the supreme court.

However, the government has instead published a seven-page jobseekers (back to work schemes) bill to head off a potential multimillion-pound payout and "protect the national economy".

The Guardian understands that Labour will support the fast-tracked bill with some further safeguards and that negotiations with the coalition are ongoing.

The new bill would also put a stop to any potential claims for the national minimum wage, which could otherwise be due to those who spent weeks working for no pay at high street chains such as Tesco, Matalan and Argos.

Lawyers and campaigners branded the DWP's move as "repugnant" and "unbelievably disgusting", saying it undermined the rule of law.

Official notes to the bill admit the legislative mess was caused by the court of appeal's ruling. "The effect of the court's judgment is that the Department for Work and Pensions had no right to impose a sanction on claimants who had failed to meet their requirements," they say.

However, the explanatory notes add: "Once enacted, [the bill] will ensure that any such decisions cannot be challenged on the grounds that the [back to work employment scheme] regulations were invalid … notwithstanding the court of appeal's judgment. Therefore benefit sanctions already imposed or to be imposed, will stand."

A DWP spokesperson said: "This legislation will protect taxpayers and make sure we won't be paying back money to people who didn't do enough to find work."

Tessa Gregory from Public Interest Lawyers, who successfully represented Reilly and Wilson at the court of appeal, said the legislation smacked of desperation.

"The emergency bill is a repugnant attempt by the secretary of state for work and pensions to avoid his legal obligation to repay the thousands of jobseekers, who like my client Jamieson Wilson, have been unlawfully and unfairly stripped of their subsistence benefits.

"The use of retrospective legislation, which is being fast-tracked through parliament, smacks of desperation. It undermines the rule of law and means that Iain Duncan Smith is once again seeking to avoid proper parliamentary scrutiny of his actions.

"It is time for his department to admit that maladministration and injustice costs. In light of the bill we are considering what further legal action we can take on behalf of our clients."

A spokesperson for Boycott Workfare, a grassroots organisation that has campaigned to stop forced unpaid work schemes, said the move was disgusting. They added that they were shocked that Labour was supporting the move.

"This is almost unbelievably disgusting. They [the DWP] broke the law, now they want to retroactively change the law so that they didn't break the law in order to keep £130m out of the pockets of some of the poorest people in the country.

"The high court found workfare unlawful precisely because people had no way of knowing the rules that applied. It shows an incredible level of arrogance and disregard for the poorest to now attempt to backdate laws to challenge this ruling."