Worksafe charged the Department of Health in September 2021 with 58 breaches of the Occupational Health and Safety Act, after a 15-month investigation into the bungled system.
But the case has been canned days out from trial after the County Court threw out evidence unearthed during a separate judicial inquiry.
Health Minister Mary-Anne Thomas at parliament on Wednesday confirmed the charges against the department had been dropped by the Office of Public Prosecutions a day earlier.
"WorkSafe is deeply disappointed by the decision to discontinue criminal proceedings," a spokesperson said in a statement.
"As an independent regulator, WorkSafe strives to enforce the highest standards of health and safety for workers and the community it serves."
Victoria's second COVID wave resulted in over 18,000 infections, 800 deaths and a 112-day lockdown. (Con Chronis/AAP PHOTOS)
The case fell apart after an April 9 ruling by the County Court to exclude evidence produced by the 2020 judicial inquiry, led by Judge Jennifer Coate, into the hotel quarantine scheme.
The ruling was that 10 witnesses provided statements to the Coate inquiry on the health department's behalf and under legislation, the statements could not be used against the department in the criminal proceeding.
The prosecutors office did not appeal the decision and said it "substantially weakened" their case.
"As a consequence of the evidentiary ruling, a determination was made that there were not reasonable prospects of conviction in relation to the charges before the court," the office said in a statement.
The second COVID wave was traced to infected guards at Melbourne's Rydges and Stamford Plaza hotels. (Erik Anderson/AAP PHOTOS)
Opposition Leader John Pesutto, a lawyer by trade, questioned prosecutors' justification for not proceeding with the trial.
"If evidence were not admissible that came out of the Coate inquiry, there are other ways you can adduce evidence in a criminal proceeding," he said.
"A lot of Victorians today will be wondering why no one, whether (through) the Coate inquiry or now the abandonment of this criminal proceeding ... is going to be held accountable for one of the worst disasters in Victoria's recent history."
More than 40 charges alleged the department failed to ensure, so far as was reasonably practicable, that persons other than employees were not exposed to health and safety risks arising from conduct of its undertaking.
Another 17 charges allege the department failed to provide and maintain an environment as safe and without risk to health for its employees.
In March 2023, a magistrate found there was sufficient evidence to support a conviction and sent the matter to the County Court for trial, which was scheduled to begin on Monday.
But the department applied to the court to have the matter discontinued - and the Office of Public Prosecutions agreed to it - on Tuesday.
The department was responsible between March and July 2020 for the state's first hotel quarantine program.
The judicial inquiry into the program found 99 per cent of Victoria's second wave of COVID-19 cases could be traced back to private security guards who became infected at the Rydges on Swanton and Stamford Plaza hotels in May and June 2020.
The second wave resulted in more than 18,000 new infections, 800 deaths and a lockdown that lasted 112 days.
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