Breyer, whose decision was prompted by a lawsuit filed by a coalition of small-business, labor, and immigration-rights groups opposing the plan, said the move would "result in the termination of employment to lawfully employed workers."
Last year, the Social Security Administration issued 138,000 no-match letters, out of more the 250 million wage reports submitted by employers.
Homeland Security Secretary Michael Chertoff called the ruling a disappointment, saying the agency is "reviewing the decision with the Justice Department and will examine all of our options, including appeal."
Chertoff said the proposed no-match regulation would have given employers better guidance in dealing with the employee Social Security problems, while making it more difficult for undocumented workers to use a fake identity when applying for a job.
Small-business and labor groups say most no-match letters have nothing to do with an employee's immigration status. They say mismatches are typically the result of spelling errors, a name change as the result of marriage, or incomplete information on W-2 wage report forms.
"The court's decision is encouraging to small-business owners," said Karen Harned, the executive director of the National Federation of Independent Business Legal Foundation. She said the ruling "raises serious doubt" about the agency's argument that the plan wouldn't have a significant economic impact on small employers, and questions whether the agency violated the Regulatory Flexibility Act. Under federal law, all government agencies must analysis the added costs of new regulations on small business.
Robin Conrad, the executive vice president of the U.S. Chamber of Commerce National Litigation Center, said the court "reaffirmed its concern about the government's authority to act and its failure to adequately consider the costs it imposes on small business."
"The logical next step is for the federal government to enact comprehensive immigration reform," Conrad said in a statement.