Varnish was dropped by the British cycling squad in 2016 before the Rio Olympic Games. She has alleged that she was the victim of bullying and sexist language, particularly from technical director Shane Sutton.
The case could impact how UK Sport offers grants to British athletes in future, forcing the body to introduce benefits and increased protection in the event of disputes or grievances.
Sutton resigned in April 2016 and was later found guilty in an independent investigation of discriminatory language.
British Cycling maintains that Varnish, 28, was dropped on performance issues alone. But the cyclist says she was akin to an employee of the sports body and funding agency UK Sport, and therefore entitled to basic workers rights.
Her witness statement said that aspects of the British Cycling programme, which she joined as a 15-year-old, such as regular blood tests and social media control were an example of "extreme control exercised over the lives of cyclists".
She also said coaches would "listen through the (hotel) door to see if you were still awake" at training camps.
Under cross examination by British Cycling's lawyer, it was put to Varnish that her annual funding agreements did not change between 2005 and 2016 and that she should have known they came with terms and conditions, adding that Varnish's position was more like that of a freelancer.
Witness statements for Varnish, who won team sprint silver at the 2011 world championships, were provided by her partner and former Great Britain BMX rider Liam Phillips, her agent James Harper and former British Cycling and Team Sky doctor Richard Freeman.
The hearing is set to continue until Dec. 17.
(Reporting by Christian Radnedge; Editing by Hugh Lawson)
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