A judge in August granted a restraining order in a lawsuit filed by California attorney general Xavier Becerra and three cities including San Francisco, where Lyft and Uber are based.
The order directed the ride-share companies to comply with the new law and stop classifying drivers as independent contractors while a lawsuit plays out in court.
That order was put on hold while it was appealed.
"We address here whether the trial court abused its discretion in granting a preliminary injunction that restrains Uber and Lyft from classifying their drivers as independent contractors," the appeals court panel said in its ruling.
"Seeing no legal error, we conclude the trial court acted within its discretion and accordingly affirm the order as issued."
The decision could turn out to be moot, however, because the injunction would not take effect until after California voters determine the fate of a ballot measure that could exempt the ride-share services from the law.
Uber and Lyft also have the option of appealing the decision to a higher court.
A ballot measure sponsored by the companies would keep drivers classified as contractors but provide benefits such as healthcare.
Uber has argued that requiring drivers to be classified as employees would leave jobs only for a small fraction of its drivers and that rides would become more expensive.
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