Find a new contractor. You may not have to gut the entire room down to the studs (we didn't), but you certainly don't want someone willing to lay new tile over the top of existing. The old needs to come up, a proper underlayment laid, waterproofing (if necessary), leveled (if needed), and new tile put down. Eeeek!

I think this really depends. If the original floor is a solid mortar bed and there is no cracking of the existing tile, this is routinely done. It makes the floor thicker, an issue at the doorway, and it makes it that much heavier, but it isn't always wrong. The shower floor and walls are a different story since it sounds like it is changing in size and it would probably be best to start that area from the studs or subfloor up.