By this point, some Italian units were fighting with the British in Italy, units of the Navy and Air Force loyal to the King had also changed sides. On the other hand, the Italian Social Republic had been set up by Mussolini in Northern Italy. So the status of these prisoners was a bit ambiguous.
Certainly the German prisoners would be treated much more poorly after the unconditional surrender by that country, but those facts are a bit different. The British still had a moral duty to protect the prisoners, whatever their status, from hazardous work, which they clearly were not doing.
So, was this a common practice, one that Churchill was aware of?
My Dad, who was just a kid during the war, told me stories about the Italian prisoners of war who were used to work on the Adams Ranch, just a few miles from our family farm in Sac County, Iowa. They were treated very well, at least as well as hired hands. They were even allowed to walk in to town to go to the movies.