The Supreme Court has found that the ban on asylum seekers looking for work is "in principle" unconstitutional.
The Department of Justice said it is "clearly an important judgment, which may have significant implications for our asylum process".
The Irish Refugee Council has welcomed the court's decision, calling it a huge breakthrough.
A seven-judge court unanimously found in favour of a Burmese man, who spent eight years in direct provision and challenged the legal ban preventing him from working.
But the court adjourned the matter for six months to allow the legislature to consider how to address the situation.
The decision could have significant implications for other asylum seekers.
Mr Justice Donal O'Donnell, giving the court's ruling, said the State could legitimately have a policy of restricting employment of asylum seekers.
However, he said the Refugee Act did not just severely limit their right to work but removed it altogether.
He said that if there was no time limit for processing an application for asylum, that could amount to an absolute prohibition on employment, no matter how long a person was within the system.
Mr Justice O'Donnell said the point had been reached when it could not be said that the legitimate differences between an asylum seeker and a citizen could continue to justify the exclusion of an asylum seeker from the possibility of employment.
He said the damage to the individual's self-worth and sense of themselves was exactly the damage that the constitutional right to seek employment sought to guard against.
The judge said the man's evidence of the depression, frustration and lack of self-belief due to not being able to work bore this out. The man was in the asylum system for eight years before getting refugee status.
Mr Justice O'Donnell said in principle he would be prepared to find, in circumstances where there was no time limit on the asylum process, that the absolute prohibition on seeking employment for asylum seekers was contrary to the constitutional right to seek employment.
But he said the court would adjourn its consideration of what kind of order to make for six months.
He said this was because the situation arose because of the intersection of a number of statutory provisions and could be dealt with by altering one or other of them.
He said that was first and foremost a matter for executive and legislative judgment.
After six months, he said the court would hear submissions as to what kind of order should be made, in the light of the circumstances at that time.
The man's case was brought against the Minister for Justice.
The Attorney General and the Irish Human Rights and Equality Commission were notice parties.
The man arrived in Ireland in late 2008 and was refused refugee status but appealed.
The High Court found errors in how his applications were decided and he was eventually granted refugee status last September.
He had argued that while he was in direct provision on a weekly allowance of €19, he suffered depression and an almost complete loss of autonomy.
He said being allowed to work was vital to his development, personal dignity and sense of self worth.
The man lost in the High Court and Court of Appeal.
The State argued the Supreme Court should dismiss the man’s appeal as he was now entitled to seek employment, but the man and the Human Rights and Equality Commission urged the court to address the issues.
Mr Justice O'Donnell said the court had decided to do so as the case had raised a point of law of general public importance.
Ruling represents a 'huge breakthrough'
The Department of Justice said Tánaiste Frances Fitzgerald and Minister of State David Stanton had already asked their officials to identify barriers to asylum seekers accessing the labour market in certain circumstances.
However, in a statement, it cautioned: "We must also be mindful of any issues that could impact the Common Travel Area and ongoing Brexit negotiations."
Irish Refugee Council Chief Executive Nick Henderson said the decision should protect a basic and fundamental human right.
Speaking on RTÉ's News at One, he said: "This ban has been in place since 1996, over 20 years, so today represents a huge breakthrough in protecting the very basic and fundamental of rights of people seeking protection in Ireland."
He said over 3,500 people in direct provision cannot work while they await decisions on their cases. Allowing people in direct provision to work makes good common economic sense, he said.
The challenge for Government, he said, will be to bring Ireland in line with the rest of Europe, saying that Ireland is the only country, bar Lithuania, to ban asylum seekers from working.
An immediate lifting of the ban, he said, will require an amendment to the International Protection Act 2015 and would allow greater integration of people in direct provision, and allow them to give back to the Exchequer.
