According to the leaked documents, the scheme will initially target beneficiaries aged 20 to 26 "to reduce the potential lifetime benefit liability".
Action Against Poverty warned the proposed changes threatened to turn society's poor and vulnerable into commodities.
"We are concerned people will be pushed into work in order for providers to receive money, which moves the onus away from wellbeing to profit," said spokeswoman Sarah Thompson.
The beneficiary advocate group was also concerned at the lack of suitable jobs.
Providers to the Mental Health Employment Services will be given just six months to place people into work before the clients are "exited" from the service.
The ministry says it wants to serve 1,000 mentally ill beneficiaries each year in New Zealand, including 600 in the Auckland region.
Under the new scheme, mentally ill beneficiaries deemed unable to look for fulltime jobs will be referred to privately run services by Work and Income. They will be given a "service intensity categorisation" of medium, high or very high.
Service providers have been given a target of placing half of all clients in jobs with 80 per cent of those still working a year after they started.
The private providers will be paid a series of fees according to the level of illness and how successful the beneficiaries are in landing and keeping work. The providers will be paid for enrolment, employment placement, continuous employment at six months and 12 months.
The new service is still waiting for Government budget approval before its anticipated August launch.
Non-governmental organisations spoken to by the Herald on Sunday this week confirmed the new service but said they had to wait another month before learning if their bids were successful.
Bids from private organisations closed on June 24 and agreements are due to start from tomorrow.
