The Human Rights Review Tribunal has found the in-work tax credit for families does not breach the Human Rights Act, a decision welcomed by the Government.
The Child Poverty Action Group argued that the payment, a key plank of the Working For Families scheme, discriminated against families on income-tested benefits.
The policy requires caregivers to work a minimum number of hours to get the credit.
The Human Rights Review Tribunal found while aspects of the policy are discriminatory, that is outweighed by the practical benefits of the tax credit.
Social Development and Employment Minister Paula Bennett said the welfare system must encourage people into work, which is what the tax credit was doing.
"This decision says that we can actually target assistance and help where we want it do be," she said.
Ms Bennett said the best way to help children is the move their parents from welfare into employment.
Beneficiaries' advocate Paul Blair, from the Rotorua People's Union, said he has no doubts that parents on welfare are being discriminated against by not being able to get in-work tax credits.
Mr Blair also believes discrimination is set to worsen, pointing to the National-led government's recently announced package to help those made redundant during the economic downturn.
"Those people who are made redundant and are are rescued by the package for 16 weeks will be able to keep their in-work payment, while their unemployed brothers and sisters who haven't just been made redundant, and their kids, will be missing out."
The Government has allowed for extra assistance payments for up to 70,000 people who may be made redundant in the next two years.
Laid-off workers with children would be able to claim up to $60 a week for up to three children, and $15 a week extra for each additional child.
People who qualify for the maximum accommodation supplement would also receive that, as well as an extra $100 a week.