Since you live in the "rust zone" the extra labor doesn't sound that bad. The part that you don't say is "did they call/talk to you" and get you to authorize the additional labor. If they did, then at that time you could have declined to have that work done.
The noise DOES sounds like Pinion bearings to me by your description, and no ammount of oil is going to fix that IF that is what it is.
My question would be this....did they replace the entire "third member/Pumpkin" or did they just replace the LSD in place of the open carrier. IF they replaced the carrier with the LSD then they did not set it up correctly. IF this is the case, driving it WILL DAMAGE IT.
More good news.
Kary