Former Great Britain Olympian Jess Varnish is suing UK Sport and British Cycling.
A source close to Varnish has told BBC Sport her legal action is based on claims the 26-year-old suffered sex discrimination, detriment for whistleblowing, victimisation and unfair dismissal.
The sprinter was dropped from British Cycling's elite programme last year, after which former technical director Shane Sutton was found to have used sexist language towards her.
Sutton resigned but was later cleared of eight of nine allegations.
BBC Sport revealed in March that Varnish was considering taking legal action against British Cycling, but she has since decided to expand her claims to include UK Sport.
It is understood funding agency UK Sport had considered applying for a strike-out order to have her case dismissed, along with a costs order and deposit order, meaning Varnish's assets would have been frozen pending the case.
Had these been successful she would have been forced to drop her claim.
But on Monday they decided not to make the applications, allowing Varnish to proceed towards an employment tribunal.
A preliminary hearing in April 2018 will determine whether Varnish should be considered as having effectively been an employee of UK Sport and British Cycling when she was competing.
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If her lawyers successfully argue that she did have employee status, the case could have major ramifications for all contracted British athletes who are funded by UK Sport.
If they are officially deemed to be employees, UK Sport would have to pay pension and national insurance costs. This is currently avoided because athletes are not regarded as members of staff.
The source close to Varnish said: "She's not doing this for money. She's frustrated that neither UK Sport nor British Cycling have changed the grey situation that athletes still remain in.
"Athletes still have no real rights, no pensions, no grievance and whistleblower procedures, and no course of action, outside of civil action. There are some really deep-rooted issues which she's passionate about."
A British Cycling spokesperson said the organisation was "in an ongoing and positive dialogue with Jess and look forward to reaching a resolution which all parties will regard as equitable".
UK Sport told BBC Sport: "Because the legal process is still ongoing regarding Jess Varnish we are unable to comment on the issues mentioned at this time."