Sanitation Issue: Is this acceptable?

First of all, I'm really sorry about your miscarriage. Throwing the chair out is definitely the best thing to do, and if they don't want to waste money, at least reupholster like you said. If not for health reasons, at least because of sensitivity to you!! That is so rude and weird that they would even want to keep it. I have no idea about how they're supposed to handle it legally, but I don't think there's really anything you can do besides keep bringing it up to your boss or throw it out yourself.