ToeJam & Earl III follows the extraterrestrial protagonists ToeJam and Earl, who starred in the series' previous games, and a new female character named Latisha. ToeJam is three-legged and red; Earl is overweight and orange. Both characters have been considered parodies of American hip-hop and urban culture. Latisha has been variously described as "feisty" and "brimming with attitude" by critics.

The three characters journey to Earth, in order to retrieve the stolen twelve Sacred Albums of Funk and return them to Lamont the Funkopotamus. Levels take place on terrains that represent Earth's ecosystems. The game's ultimate antagonist is the Anti-Funk, whose defeat will "save the world from all that is unfunky." The "funk" has been described as a parody of the Force from Star Wars, with the Anti-Funk being the dark side.