School rules don't trump acts of parliament! I doubt anyone but the richest and most stubborn would go legal, the costs would be monumental, but it's there.
Personally I'd speak to them, express my desire to observe school rules but you cannot be expected to know every rule from heart and interpret it exactly from such a brief text. If it really is such a problem more should be done to make parents aware or at least give parents a warning before taking further action.
I'd expect you were shocked and upset that your child was made feel like a victim by being removed from his class and you should definitely make it clear you are concerned for your boy's welfare (which, clearly you are, but teachers are a pretty cynical bunch).
The most obvious way out would be a further haircut that the school can agree on (ironically, a number 2 all over would probably be fine) as the alternatives of an extended period of isolation/suspension or being forced to wear some head gear to cover his hair for a month or more, would frankly be harmful to the child, both in terms of his education and being singled out for bullying by other children.
The school really should be working with you to prevent further harm to the child at this point.