The dispute started after several of the Brooklyn stores put up signs that read, "Entrance here only for those with modest attire. No Shorts, No Barefoot, No Sleeveless, NO Low Cut Neckline ALLOWED IN THIS STORE," the New York Post reported.
The city has alleged the signs are discriminatory against women and non-religious people who may feel unwelcome in the stores.
"The whole key is, 'How does that sign make someone feel? How would a person feel looking at that sign and [about] whether he or she is welcome in that store?'" said Clifford Mulqueen of the city's Commission on Human Rights.
However, the store owners say their rules are no different than dress codes at fancy restaurants.
"Frankly, it's very troubling that the commission thinks it's OK for the Four Seasons restaurant to impose a dress code but not a bakery owned by a Hasidic businessman," lawyer Jay Lefkowitz said.
A two-day hearing in the case has been scheduled for January, officials said.