Lawyers for the families have issued a pre-action letter to the DfE with details of the case, including of a teenage girl who attempted suicide in her school isolation room.
Law firm Simpson Millar has urged Education Secretary Damian Hinds to review the guidance, which specifies no upper limit for the practice, or face judicial review.
The guidance says that isolation booths must be used for a "limited time", but does not suggest what that may be.
The firm's education solicitor Dan Rosenberg, said schools were using isolation booths as a "dumping ground" for children, particularly those with SEN.
The letter follows a separate case against launched in December by the same firm, against Outwood Grange Academies Trust, on behalf of a boy who spent up to 35 days in isolation in one academic year. The case was later dropped when the trust said it would review its policy.
The girl, who has an autism spectrum disorder (ASD), anxiety and depression, had been confined at her academy school in Kent for at least six weeks - during which time she received no direct teaching and had to remain silent.
The second pupil, a teenage boy with attention deficit hyperactivity disorder (ADHD), was repeatedly sanctioned and placed in confinement at another academy school, in Nottinghamshire, leading to significant mental health problems.
He had no contact with other children, received no direct teaching, ate his lunch in silence, and was only allowed three toilet breaks a day.
After a medical professional intervened, he left the school, and was able only to take GCSE exams in two subjects.
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Rosenberg said: "What was originally a method for dealing with an immediate crisis in a classroom is now being used as a low-cost solution for the long-term management of pupils, to the detriment of their mental health and education.
"The current guidance is not fit for purpose, and as a result children are suffering.
"It is imperative that the government urgently review its guidance, and we would urge them to pay particular attention to the impacts of the use of isolation on children with disabilities, and in particular disabilities such as ASD and ADHD, as in our clients' case, when so doing."
The lawyers argue the guidance also fails to impose a requirement for teachers to provide pupils with direct teaching or set work if they are in isolation, as it states only that time spent by students in isolation should be "used as constructively as possible".
"This is in contrast to all other pupils of the same age, even those who have been excluded," they add.
The letter states that the guidance "does not sufficiently recognise the widespread nature of this practice or its consequences, and thus the limited and confusing nature of the guidance leads to a risk of illegality in the way that schools operate their policies, and in respect of the end result for individual children".
It adds that it is "for schools to set their own disciplinary policies", but that "too many schools" appear to be following unlawful practices.
It is asking for the government to either confirm that it will review its guidance, that it will consult widely on and publish separate guidance on the use of isolation.
The DfE, which must respond to the letter within 14 days, said it was "considering the letter carefully" and that "it would be inappropriate to comment further at this stage".