Luella Breen of Shaftsbury used to supplement her family's income by knitting hats at home and selling them to a nearby ski-wear firm. Now her knitting machine sits idle because the federal government has sued the ski company for employing home workers.

"I could knit when I wanted and still continue with my domestic duties," the 60-year-old woman told officials of the U.S. Department of Labor in hearings here recently. "I feel you have taken away my freedom of choice." i

The Labor Department is holding hearings here this week and next month in Washington on the 40-year-old regulations which forbid home work -- excepting only handicapped workers -- in seven industries, including knitted outerwear.

The rules were adopted in 1942 to protect inner-city immigrants, who were working for slave wages out of tenement sweatshops. Now that the Labor Department has cracked down on two Vermont firms, industrialists, government officials and the workers themselves have banded together to try to get the rules changed.

"I strongly resent being caught in a trap for city rats," said Luella Breen's husband, Charles, a retired factory worker who crafts wood in his home.

Several home workers argued that rules meant to correct city problems should not apply in rural states where many citizens live far from factories and public transportation is almost nonexistent.

"New York City dogs must be kept on a leash. Rural dogs can run free," said Marlene Walsh of Arlington, who also knits hats at her home for Cb Sports of Bennington, the firm being sued by the Labor Department. "If dogs deserve different laws in different habitats, why not people?"

C.B. Vaughan Jr., a former world class skiier and president of CB Sports, began his business 12 years ago by knitting hats on a machine in his own home. From the modest start, his company has become the fastest growing company in the skiwear industry, with sales of $8 million a year. In his testimony today, Vaughan admitted to violating the home work laws and asked that they be abolished. Before the Labor Department suit, his firm was earning $350,000 yearly in ski hat sales. Now he either will discontinue making hats or set up a plant in Asia, he said.

Vaughan's colleague, David Putnam, president of Stowe Wollens of Stowe, Vt., testified Tuesday that the federal regulations could force his business to close. After initial-year sales of $160,000, sales dropped to $110,000 last year after the Labor Department cracked down on the employment of home workers.

"If the home-work regulations are not changed, we might not have a third year," he told Labor officials. The rules also would hurt his employes, he added. "Inflation has made the single-wage-earner family obsolete. Yet a person with domestic responsibilities -- kids, cows, elderly relatives or whatever -- cannot leave home to earn money."

C. Harry Beahney, secretary of the Vermont Agency of Development and Community Affairs, speaking for Gov. Richard A. Snelling, today called for exemptions to the rules for rural workers.

But Vermont stood alone in urging changes in the home-work rules. Officials from the Labor department of New York, Connecticut and Massachusetts testified during the two-day hearings that some industries still esploit home workers by paying them less than the minimum wage.

Labor officials and a spokesman for the New England Apparel Manufacturers Association claimed unscrupulous industrialists abuse home workers and take an unfair advantage over legitimate businesses by evading Social Security, unemployment and workmen's compensation payments.

John O'Malley, New England regional director of the AFL-CIO, urged the home-work ban be extended to electronics workers, some of whom are soldering computer parts in their homes for Massachusetts' booming high-technology industries.

But the star of the hearings were the women who braved 30 degrees-below-zero temperature to come to Burlington to testify. Their remarks were greeted with applause from the audience and praise from the Labor officials, as well.

Luella Breen, whose 85-year-old mother started the family tradition of home knitting by making socks for the soldiers in World War I, summed up the testimony of all the home workers:

"The laws need changing," she said, "not our lives."