The government had attempted to change equal opportunity laws that would have made it harder for religious organisations and schools to discriminate against employees based on their faith or sexuality.

The bill was defeated in the upper house on Tuesday afternoon.

In another major blow, the government's push to allow people to change the gender on their birth certificate without undergoing gender reassignment surgery was also defeated by the Coalition together with conservative crossbenchers in the upper house.

The failure to pass that bill came after heated debate in which conservative Liberal MP Bernie Finn said the proposed legislation was "nutbag central".

The government hit back, accusing the Liberals of betraying transgender Victorians while claiming to be "LGBTI equality allies".

The equal opportunity bill would have introduced an "inherent requirement" test, ensuring religious groups and schools could only discriminate against employees based on their sexuality or beliefs if they could prove it was central to their job.

Equality Minister Martin Foley said the Liberals were "either for equality or they're not".

"Their arguments were completely devoid of empathy and a willingness to consider that all Victorians should experience equal rights," he said.

But Opposition attorney-general John Pesutto said the bill was never necessary and it had sought to remove "longstanding protection" for religious freedom.

"The Andrews government completely failed to demonstrate why this bill was necessary in the first place and it did not produce any examples justifying the need for change other than cases that would already offend existing laws," he said.

Religious groups had previously attacked the inherent requirement test as draconian and "anti-religious".

Sex Party MP Fiona Patten was the only one of five cross benchers to vote with the government. She said religious institutions had "felt privileged and above the law".