The Victorian Labor Party will be investigated by police over its misuse of public money during the last state election campaign.

In March, the state ombudsman found Labor had misused more than $388,000 of taxpayer funds by employing electorate officers to political purposes.

The report by Deborah Glass found 21 MPs had breached parliamentary guidelines by certifying payments to electorate officers who were actually used to campaign for Labor during the 2014 election.

Officers are banned from political campaigning.

Police have now announced the fraud squad will investigate whether there has been any criminal wrongdoing.

"Victoria Police undertook reassessment of the material in relation to allegations of misuse of parliamentary budget entitlements to determine if further investigation was required," it said in statement.

"This assessment has now been completed and a formal investigation will now be conducted by the fraud and extortion squad.

"As this is an active and ongoing investigation, it would not be appropriate to provide further comment at this time."

In her findings, Ms Glass said the MPs who participated in the arrangement believed the scheme was legitimate, and the party had since repaid the money.

Ministers should step down, Opposition says

Opposition Leader Matthew Guy said all ministers caught up in the scheme should be stood down while the police investigation takes place.

Environment Minister Lily D'Ambrosio, Sports Minister John Eren, Special Minister of State Gavin Jennings, Youth Affairs Minister Jenny Mikakos, Attorney-General Martin Pakula and Corrections Minister Gayle Tierney were among the 21 Labor MPs the ombudsman found certified payments to electorate office staff who were doing campaign work.

Police Minister Lisa Neville was named as one of the MPs who benefited from the scheme by having field officers campaign in her seat.

Opposition Leader Matthew Guy says the matter is "serious". ( ABC News: Stephanie Anderson )

"There has never been a situation where a minister has been subject to a police criminal investigation and not stood aside while that investigation has taken place," Mr Guy said.

"This investigation is serious, this investigation is real."

The Opposition put forward a motion in Victoria's Upper House on Friday that would call on the Premier to stand down much of his Cabinet.

Labor MP Harriet Shing told Parliament the motion defied procedural fairness.

"It's important to go back to fundamental principles of evidence," she said.

"What we know at this juncture is that we have an ombudsman's report which found that Members of Parliament who were investigated did not seek to deceive and acted in good faith."

It is understood the ministers will not be standing down and a government spokeswoman said "it's in no way appropriate to comment on these matters".

Investigation a blow to Labor's election campaign

The investigation being launched with less than four months to the election is damaging for Labor, and MPs were worried about what impact it would have on their re-election prospects.

"We're f***ed," one MP said.

"I'm devastated," said another.

Some hoped the investigation would be relatively quick and no charges laid.

But all agreed it had made the job of winning votes more difficult, especially with a tight election predicted.