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?
Large employers may think they can call the shots. Like you say though, if they're direct employees, then they should be entitled to the same employment benefits given to other staff. If they're expected (or forced) to contract via umbrella outfits, then they effectively become employees of the umbrella, and entitled to all the usual employment benefits.. Either after 12 weeks as an agency worker, or immediately.
That's a bit of a change in relationship between an umbrella-as-a-service doing your payroll & timesheets, and not sure how those agencies will be looking forward to new employees, especially if their clients are also expecting a rates cut.
Where it's likely to cause the biggest challenges are with contractors with project experience and mobility. IT tends to be project based, with varying durations, so bring in specialists to make that happen, then the clients don't necessarily need those resources on a permanent basis & contractors have been a good fit. Contractors have charged a premium because it's potentially riskier, along with additional expenses and hassles from running your own business. So dealing with corporation tax, employer & employee pay, pensions, holiday costs, medical insurance, DOI & liability policies etc etc.
Too often though there's a perception that day or hourly rates are all gravy, which is untrue unless you want the rubber glove treatment from HMRC. Sure, there are some advantages. You can create your own pension fund (with some headaches), but you won't get employer pension contributions from anyone but your own client... Given tax changes, that can be less advantageous, but still better than being enrolled in other company's pension plans when you know the employment's likely short-term, especially as fees are front-loaded, and pension companies aren't very generous with policy transfers.