"Now, they'll be 'employees' of the client for 6 months, with less rights & benefits than any FTE cow-orkers."
That's the bit I don't get. If they are taken on as new hire employees, why don't they get the same conditions as any other new hire employee? eg holiday pay, sick pay, NI payments etc. ie the legal minimum requirements for any employee. If this is some new legal loophole, then why can't "ex-contractors" negotiate an employment contract more favourable to themselves? After all, these are the people with in-demand skills and so should have some power over the employer, just as they had as contractors, ie they negotiate the rates for the job.
(No, I've never contracted or had dealings with contractors so have no idea how it currently works)