You are correct USPS regulations c022 states all perishable/live insects must include a description of contents (though "perishables" is considered adequate), it also defines packaging requirements (w5c weatherproof, fiberboard) and flat rate boxes are not to be used. The major issue is that the box is crushed, big no-no according to the USPS. That is a very important rule that packages containing perishables/live insects must be able to reach it's destination intact.
However, the methods used by fivedollarmworms are very common in this community and acceptable by many of us. I do recommend complying with all USDA and USPS regulations to avoid any criminal penalties.
Good luck and sorry with your bad experience with $5mw, I will still state they arrived to me alive, package intact, and I was very pleased.