IANAL but as far as I can see this strategy is not without risk.

After all, they are already being paid on those vacation days, are they not technically working for their existing company?

What happens when your new employee's old company turns round and says 'Hey, we just found out about your wonderful scheme about testing out our employees when they're still under our contract. That means our intellectual property is in your code base. That employee has no negotiation power and you clearly knew that, our price for this bespoke job is $100,000. You've already got the goods, payment terms 1 day. Thanks.'.