The change will come into force under Universal Credit from 2013 and is designed to help claimants make the transition to work and take responsibility for their own finances.
Lord Freud is calling for local authorities and housing associations to get involved by volunteering to play a key role in the Projects.
Lord Freud said:
"It is vital that we close the gulf between being out of work and having a job.
And this means benefit claimants have to manage their own finances, including paying rent - so when they do find work it's easier to leave the safety of the welfare system.
"Increasing the number of social rented sector tenants who are in work can only be a positive thing. For tenants, work can bring increased wealth, stability, improved health and well-being and can encourage people to have a greater stake in their communities. For landlords, higher employment can mean better neighbourhoods."
Although the majority of claimants renting in the social sector will be responsible for making direct payments to their landlords, vulnerable people and pensioners will continue to have their housing costs paid direct to their landlord.
The Projects will also test how to support tenants and landlords on the introduction of direct payments - such as offering budgeting advice to tenants and placing a trigger which switches the housing payment to landlords if the tenant gets behind with their rent.
Local authorities and housing associations interested in volunteering to take part in the Demonstration Projects should email Demonstration.Projects@dwp.gsi.gov.uk
