This sounds like an untrained or not-fully-trained support person. When I had the motherboard replaced in my mid-2012 MBP (don’t ask, my fault), they fired it up before and after repair using an external USB drive - of which there were a bunch behind the “Genius” counter - to run diagnostics and other performance tests. After all, there’s no guarantee I would have arrived with the hard drive in working condition or with OS X on it.
I recently brought an unreliable Mac mini from our office into the Apple store and left it with them to run diagnostics.
I can confirm that I was asked for the password. I instead gave them permission to wipe the hard drive.
They do have many network bootable diagnostic utilities (I’ve seen them used), but seem to also want access to the system as configured to rule out software issues.
They won’t just run a password cracker on it if you don’t give them the password?
If the drive isn’t encrypted then it is easy enough to get your data off anyway.
I used to work in a general PC shop and we were sometimes asked to reset the password for customers that had forgotten theirs.