The GMB workers' union, which had backed the case, said the ruling by the UK's Employment Appeal Tribunal (EAT) was a "landmark victory" for workers' rights in the so-called gig economy, a system of casual working which does not commit a business or a worker to set hours or rights.
"Uber must now face up to its responsibilities and give its workers the rights to which they are entitled. GMB urges the company not to waste everyone's time and money dragging their lost cause to the Supreme Court," said Maria Ludkin, the GMB's legal director.
Drivers James Farrar and Yaseen Aslam had won an employment tribunal case last year demanding that they be classified as workers rather than self-employed. Uber had appealed against the decision, saying it could deprive drivers of the "personal flexibility they value".
"Today is a good day for workers, we made history," said Aslam after Fridays appeal tribunal ruling.
Tom Elvidge, Uber UK's acting general manager, said: "Almost all taxi and private hire drivers have been self- employed for decades, long before our app existed".
"The main reason why drivers use Uber is because they value the freedom to choose if, when and where they drive and so we intend to appeal."
The taxi hailing company is also fighting to renew its licence to operate in London after it expired on September 30.
Transport for London (TfL) had denied permission for renewal amid safety concerns, with Uber filing an appeal against the decision last month and the service can remain up and running until the entire legal process is exhausted, which could mean potentially a year or more.