This is really common in the design world, especially in this crappy economy. Design firms don't have steady demand right now, and a lot of them have laid off former full-time designers, only to pull them back in on contract when work comes through the door. I have friends who are/were in exactly this situation.

I think you probably overreacted. Why don't you trust the professional designers to choose their employees? What does the employee's tax status have to do with the designs they deliver?