Seems like the bilking of devs for free work could be mitigated by making sure copyright of the test web app code remained with the developer being hired.
Like you said, a small project is a little bit of a red herring. No small test project done in a short amount of time (like a few days) is really going to be complex enough to test if a developer is actually proficient enough to work on a large project.
Like you said, a small project is a little bit of a red herring. No small test project done in a short amount of time (like a few days) is really going to be complex enough to test if a developer is actually proficient enough to work on a large project.