Sally Rugg had applied for an urgent court injunction to stop Dr Ryan from ending her employment as chief of staff, after she alleges she was pushed into resigning.
She wanted to continue working for the federal MP for Kooyong as an advisor, undertaking policy and media work, while she pursued an unfair dismissal claim against Dr Ryan and the Commonwealth.
Ms Rugg has alleged she was dismissed after being asked to work "unreasonable hours" of more than 70 hours a week, on a salary of $166,000.
However, she will no longer be paid by the Commonwealth after the Federal Court in Melbourne dismissed her application on Tuesday.
Justice Debra Mortimer found there was no "prospect whatsoever of a co-operative relationship being restored" between the pair.
"It is not rational to contend that Dr Ryan can, or should be able to, put all this to one side and resume a constructive working relationship with Ms Rugg in what is on the evidence a pressured, extremely busy and demanding working atmosphere, at the best of times," she wrote in her decision.
She said Ms Rugg failed to show the court she had a "powerful desire" to continue working for Dr Ryan.
"That evidence could have been given. Ms Rugg has not given that evidence. She has given a lot of evidence about her own ambitions, her own desires to be in Canberra," Justice Mortimer wrote.
Even if Ms Rugg had persuaded her she was dedicated to working for the MP, it was "wholly unreasonable to impose such an obligation on Dr Ryan", she said.
"Especially since the working relationship would be resumed while the parties continue to prepare for trial - a trial which, on any view, will be hotly contested and subject to considerable scrutiny," she said.
Justice Mortimer said Ms Rugg's allegations against Dr Ryan were serious and could affect the MP's reputation both personally and professionally.
She ordered the parties to decide on a timeline for the trial and meet for a case management hearing in the coming weeks.
Ms Rugg claimed, in court documents, Dr Ryan said "this is bigger than Kooyong" and that she needed to know her staff were prepared to work hard for her if "I want to be prime minister one day".
The staffer is seeking compensation and pecuniary penalties from both parties, and has added serious contraventions of the Fair Work Act against the Commonwealth to her dispute.
Dr Ryan disputes all of Ms Rugg's claims that she dismissed her, effective January 31, after she refused to work unreasonable hours for the the teal MP.
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