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If the work item status is 'Done' and the case status is being changed to 'Cancelled,' there should be a validation rule that prevents this from happening.

Here is what I have:

AND( 
ISCHANGED(Status),
ISPICKVAL(Status, 'Cancelled'), 
ISPICKVAL(Work_Item_Status__c, 'Done') 
)

Error: Incorrect parameter type for function 'ISPICKVAL()'. Expected Picklist, received Text

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The error message is telling you that either Status or Work_Item_Status__c is a text field. Since Status is a standard picklist, we know it is in fact Work_Item_Status__c you are handling incorrectly. The correct way to check text equivalence in a formula is:

Work_Item_Status__c = "Done"

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