For 16 years Virginia Gray has made a second income knitting hats and sweaters at her snug Greensboro, Vt. home. But late last year a federal appeals court declared her livelihood illegal when it upheld an often overlooked "no homeworking" provision in the 1938 Fair Labor Standards Act. Since then Gray, 63, and the rest of Vermont's home knitters, mostly retired women or housewives with children, have been fighting for the right to work on their own terms. As Gray told Washington bureaucrats at a hearing on the matter, "I wish you'd shut up and let me go back home and work."

Vermont's 2,000 home purlers would likely agree (the rule also affects many knitters in Wisconsin and Utah). "Let knitters do it at home," their bumper stickers demand with Yankee feistiness. Because of subzero winter temperatures, icy roads and a dearth of factories, Vermonters have always preferred working at hearthside. So in 1981 Secretary of Labor Raymond Donovan rescinded the decades-old ban on knitting outerwear at home. But when garment unions protested that Donovan's ruling could not prevent sweatshop conditions, the appeals court slapped on the ban again.

That came as a shock to the women, who had expected Donovan's decision to be the final word. "They hit us at a good time," says a bitter Audrey Pudvah, 27. "It was just before Christmas, and we were so blasted busy we really didn't have the time [to fight back]." She and most other knitters don't want to switch to other work. "I can't go to a factory and make what I'm making now," says Sharon Casey, 31. "I'd have to buy another car, get a babysitter, clothes, pay for meals."

The Vermont knitters claim they make $5 to $10 an hour, well above the minimum wage of $3.35 an hour. Last year Bonnie Mercier, 35, wife of a Hardwick carpenter and mother of three daughters, earned $15,500 knitting out of her basement workshop. She even logs her hours on her home computer, submitting a printout to Stowe Woolens, Ltd., one of the state's largest home-knitting buyers. In an effort to prove her wages, she took her knitting machine to a 1981 Labor Department hearing in Burlington where she completed a hat, for which she would get $1.50, in 9 minutes. "I wouldn't be knitting for 12 years if I felt like I was being exploited," she says.

But lawyer Max Zimny, who appealed Donovan's ruling for the International Ladies' Garment Workers, Union, argues that on-site inspections are impractical and only a ban can prevent abuses. "This is not a union versus nonunion issue but one of labor standards," he says. "Nor is it an effort to unionize people in the home." Michael Avakian, a lawyer with the Center on National Labor Policy in North Springfield, Va., which represents several knitters, disagrees. "It's an individual rights versus a socialist-collective issue," he contends.

The union certainly didn't endear itself to the knitters during official hearings. "They called us poverty-stricken illiterates who didn't know our own minds," says Emma Pudvah, 29. Even Zimny agrees the law could be modified. "The union is always ready to consider exceptions which wouldn't collide with historic evils," he says. "We are never close-minded." For the time being, the Labor Department and the knitters have asked for a stay to allow the knitters to keep working while the Supreme Court decides on hearing their case. Donovan is trying to lift the ban on homework in knitted outerwear without riling the unions, and Sen. Orrin Hatch (R.-Utah) has proposed a bill to end such restrictions. Anyone who believes the knitters will quit, the women warn, is woolgathering.