Now this could be a different story entirely. If you made less than $600, you can be paid without claiming anything on either side. If it's over that $600 level you either need to be W2 (employee) or 1099 (contractor). As a W2, the company is required to withhold your taxes for you and pay the employer portion of Medicare (which effectively raises your pay rate even though you don't see the money now). As a 1099, you're responsible to withhold your taxes AND pay the employer part of Medicare - to put it another way, you're self-employed. In the case of being 1099, you should speak to an accountant to make sure you're withholding enough taxes to cover yourself.
Now, as far as the reduction in pay is concerned, that was shady. If you were a W2 I could see it since their costs would increase in covering your Medicare, but they're attempting to 1099 you and that line about making more money this way is bullshit. While your checks will be bigger, you'll now owe MORE in taxes because you need to pay the employer part of Medicare and the burden of withholding falls on you. If anything, they should increase your pay if they're going to 1099 or they should just W2 and suck it up.
Apologies if I frightened you with my first post. Your post was worded in such a way that it sounded like they were converting you from W2 to 1099.