Helen Constas has become the first casualty of the 2014 state election after it was reported the former chief executive of the Peninsula Community Legal Centre reached a confidential court settlement with an employee who had accused her of bullying.

She planned to win the marginal seat from balance-of-power MP Geoff Shaw, whose political career has been marred by controversy; Mr Shaw is currently suspended from parliament for misusing his taxpayer-funded car.

Sources said Ms Constas disclosed elements of the claims to the Labor party in January, in anticipation of the sensitive information being leaked.

Ms Constas said on Thursday she was deeply saddened by the allegations aired by News Limited and was “severely constrained” in what she could say because of a confidentiality agreement.

“This makes it very difficult to actively defend my reputation,” she told reporters on Thursday.

She said she was proud of her work at the legal centre, which had helped the most vulnerable and disadvantaged.

"The matters reported today were fully investigated and considered within the Peninsula Community Legal Centre, and are the subject of a confidential settlement designed to protect all those involved."

An apologetic Opposition Leader Daniel Andrews said Ms Constas did the right thing by stepping down, and Labor would move quickly to preselect a new candidate.

He denied that Labor had previously been aware of the allegation and said he was told of them only on Wednesday night. Mr Andrews said it was “disappointing” the matters did not surface during the vetting process.

“I am disappointed, I am sorry. We will do better, we will work hard.”

He denied personally advocating for Ms Constas.

Ms Constas' resignation came as the Liberal Party ramped up its attack on the Opposition and launched a series of ads linking Labor to the CFMEU.

Planning Minister Matthew Guy said Ms Constas' preselection rubbed off badly on the Opposition leader, whom he claimed intervened to ensure Ms Constas was pre-selected.

“Just a week and a half ago we see him smiling holding hands with her in the paper like she's Cinderella, and now we find out today she's the wicked witch.”

Quinn McCormack, who represented Mr Shaw on fraud charges, worked at Peninsula Community Legal Centre but said she was not aware of any allegations of workplace bullying during her time there.

Right to Life Australia senior executive officer Katrina Haller worked at the community legal centre for more than nine years, and said she left after Ms Constas asked permanent staff to sign three-month contracts.

"She was trying to casualise the workforce and I thought that was wrong, and that was the reason I left."

Liberal candidate for Frankston Sean Armistead said he was sick of seeing the seaside seat being cast in a negative light.

"People are looking for a representative who shares their own values and principles which doesn't include bullying," he said.

Labor MPs expressed concerns about the party's vetting process, saying they should have learnt from the saga surrounding Geoff Lake, who was dumped by former Prime Minister Kevin Rudd for the Victorian seat of Hotham after failing to disclose he had verbally abused a fellow councillor more than a decade earlier.

Frankston was won by Mr Shaw by a 2.1 per cent margin at the last election but now notionally favours the Liberals by a 0.4 per cent margin.