Smith, a former Labor member of Parliament, said the work was legitimate and that she and her husband, Richard Timney, had made a donation to a community group that organized the prisoner work program, The Daily Telegraph reported.
"Two prisoners who were coming toward the end of their sentence and doing work experience carried out about 3 hours' work at my house doing a bit of decorating," she said. "They didn't have anything else on."
A Prison Service spokesman said inmates are not supposed to work in private homes.
"Anybody involved with resettlement work with prisoners will have been made aware of the restrictions in place," he said. "If prisoners have no work, they should have been returned to their prison."
The program involved has been suspended and an investigation is under way, he said.
Smith was one of the casualties of the parliamentary expenses scandal. She resigned from Prime Minister Gordon Brown's cabinet amid reports she had listed pay-per-view pornography rented by Timney as expenses.