Proposition 22, a labor law, was declared to be mostly constitutional by the California Court of Appeal.
The bill was challenged by labor organizations and some workers who claimed it violated their rights to benefits like sick leave.
According to the businesses, the proposal safeguards other benefits like flexibility.
The most recent verdict overturns a judgment rendered by a lower court in California in 2021, which determined that Proposition 22 had an impact on the authority of lawmakers to establish workplace rules.
The ruling was appealed by the state of California as well as a coalition that included Uber, Lyft, and other businesses.
A three-judge appeals court bench decided on Monday that employees might be classified as independent contractors. But, it did away with a portion of Proposition 22 that restricted employees' ability to engage in collective bargaining.
After-hours trading saw a nearly 5% increase in Uber and Lyft stock prices.
"Today's ruling is a victory for app-based workers and the millions of Californians who voted for Prop 22," Tony West, chief legal officer at Uber, said.
"We're pleased that the court respected the will of the people and that Prop 22 will remain in place, preserving independence for drivers," Mr. West added.
Lyft said that the proposition "protects the independence drivers value and gives them new, historic benefits."
The Service Employees International Union, which challenged Proposition 22's constitutionality alongside a number of drivers, stated that it was thinking about filing an appeal in response to the court's ruling.
Voters in California approved Proposition 22 in November 2020, allowing independent contractors to classify freelancers as such.
Uber and Lyft won because they spent $205 million (£168.7 million) on a campaign to support the law.
But the victory came with some trade-offs, and businesses had to provide employees with some benefits, such as health care and accident insurance.
While some drivers had supported Proposition 22, others had opposed it, citing the many advantages of being classified as employees, such as sick days, vacation time, and overtime compensation.
In the global gig economy, which includes industries like food delivery and transportation, tens of millions of people work.
Gig workers do not receive a regular salary; instead, they are paid for specific tasks, such as food delivery or car travel.
The majority of labor laws in the US, including those requiring overtime compensation or a minimum wage, do not apply to gig workers.
As the sector expands, companies like Uber and Lyft are facing more scrutiny.
