The Victorian Government has lost a legal appeal, clearing the way for the ombudsman to investigate allegations Labor MPs rorted their parliamentary entitlements.

Earlier this year, the Supreme Court ruled the watchdog could investigate allegations MPs misused their taxpayer-funded entitlements by letting paid staffers work in campaign roles in the lead up to the 2014 state election.

The Government challenged that ruling in the Court of Appeal, which has found the trial judge analysed the relevant legislation correctly.

The Victorian ombudsman said the investigation would now continue following the further clarification of its powers by the Court of Appeal.

Greens MP Greg Barber, who put forward the motion to the Upper House that the ombudsman should investigate, said it was important that the investigation continues ahead of the any more appeals.

"There's been two rounds in court and who knows, they may even appeal to the High Court now," he said.

"They need to clear the air, they need to get out in front of this and encourage an open investigation into the matter."

Victorian ombudsman Deborah Glass had asked the court to rule on the matter after the Andrews Government claimed it was outside her powers.

The Opposition has called on the Government to repay taxpayer money used to fund the legal challenges.

Shadow attorney-general John Pesutto said more than $1 million had been wasted.

"If the Labor party felt the ombudsman couldn't proceed then it should have been the Labor party that came to court and put its hand into its own pocket to fund the appeal," he said.

"Instead ... Daniel Andrews has defended the Labor party at the cost of Victorian tax payers, that's pretty outrageous."

A Victoria Police investigation found using staff for party political purposes was not against the law.

The Premier has repeatedly denied any wrongdoing.