The Government has refused to let asylum seekers work in the UK after six months claiming it would allow people to bypass the "proper" economic migration scheme.
The Lords amendment was rejected by 291 votes to 232 with a majority of 59.
Senior Tory MPs Tim Loughton and Simon Hoare rebelled against amendment 7 of the Nationality and Borders Bill that would have made it easier for asylum seekers to work in the UK.
In the same session, the Tories voted to make it easier for people to be stripped of their British citizenship without notice.
Peers had voted to remove the clause from the Nationality and Borders Bill, but the Commons voted 318 to 223, majority 95, to disagree with the Lords
The Nationality and Borders Bill returned to the Commons after it had been heavily amended by peers in the House of Lords.
No10 insisted asylum seekers are already allowed to work in UK if claim outstanding for 12 months or more through no fault of their own.
The Prime Minister's official spokesman said the votes in the Lords were "disappointing" and “we will not be deterred” from plans.
Home Office minister Tom Pursglove said the Lords amendment, which would allow asylum seekers to work after six months if no decision has been made on their claim, “would undermine our economic migration scheme”.
He said: “On this issue of right to work, while well-meaning, this would undermine our economic migration scheme.
"It would also allow people to bypass it over and above those who follow the proper process by applying for visas and paying relevant fees to work in the UK. We cannot allow that to happen.”
As many as 65 Tory MPs and peers wrote to the government in support of the Lords amendment that stop asylum seekers needing to wait one year before they can work; if their applications are still being processed.
Conservative former Cabinet minister Sir Robert Buckland defended the Bill as a “reasonable and proper attempt” to change the wider system.
“We know the reality for the lives of many people under this pressure, they go off the radar," he added.
"They end up being exploited, they end even being bound into modern day slavery. We lose them from the entire system. The effect of creating a right to work could be a hammer blow to that type of exploitation.”
Labour MP John McDonnell told MPs about some of his own constituents who are “trapped in the system” and ended up in the cycle of criminality.
The former shadow chancellor said: “I’ve been dealing with cases that have been waiting for four, five years before they get a result. And in the meantime, they’re denied the right to earn a living and they’re now told to live off £5.40 a day. What does that mean? It means they live in poverty.
“The people I’m meeting are some of the most qualified I’ve ever met. They’ve gone through universities, they’ve gone through training. They’ve got skills that they could give this country so much for and yet they’re trapped within this system living in poverty.
"And tragically in some instances what does living in poverty do? Well, you try different angles, don’t you? And sometimes you end up unfortunately in criminality as well.”
Former Liberal Democrat leader Tim Farron warned that by voting for the Nationality and Borders Bill “you are voting for deaths in the Channel”.
The Migration Advisory Committee (MAC) have previously asked the Government to release evidence to back claims that there would be a "pull factor" for others to come to the UK.
Prof Brian Bell, the MAC chair, said he had not seen evidence to back up the “pull factor” assessment and it was incumbent on ministers to make this public.
“It’s not enough to say: ‘There’s a pull factor’. You’ve got to have evidence to support that. You can’t come to conclusions if you’re not willing to tell us what the evidence is on one side of the equation."
The Government also voted down amendments to the bill that would have given Ukrainians and other refugees protection once they have made their own way to safety in the UK.
Sonya Sceats, Chief Executive at Freedom from Torture, said: “The decision by Tory MPs to vote through this cruel bill is a total betrayal of the UK public, who in the last week alone have signed up in droves to welcome more refugees than this government has in ten years.
"Even more, it is a betrayal of vulnerable people fleeing war, torture and persecution, who need our help more than ever."
