A single person who is the sole company owner and the sole employee and who only has one contract with one client (and is also bound by said contract not to have any other clients for the duration of his "engagement") is just an employee by another name.
And that's about the crux of it. FTLs limit the usefulness of any contracting pilot and therefore airline's are forced to put into writing that the contractor cannot work elsewhere. Unlucky for them
What the likes of EZY are getting away with today is not illegal in any sense it's just mass exploitation of a loop hole.