Yes, I actually implemented such a thing at a company I worked at after Google. We'd give the candidate a fairly simple and self contained codebase, and ask them to add a simple, incremental feature in the span of an hour. No limits on legitimate internet access, stack overflow, etc, and using their favorite text editor (we had several already set up). This worked great for us, as it selects for people who can solve practical problems in code they're not familiar with, which is bulk of the work of any software engineer.

While I'm not in a position to test it, I've thought for a while that companies should save their bugs, make an app that is similar enough to the work that these saved-off bugs can be put into it, then compare the candidate solutions with what your existing people came up with.