M.T.
There are parents who dont' believe in any type of discipline. As a parent of a 15 and 11 year old, and someone who works in an elementary school, I can tell you that these parents are not doing their kids any favors.
Some parents remember harsh punishments of their own childhood and want to spare their kids that, but punishment is different than setting rules and boundaries, teaching manners and having consequences.
Sometimes working parents do not want to spend the short amount of their day that they have with their kids disciplining them, they want it to be all fun time (kind of like the "weekend dad" in a divorce). My own husband used to complain if the kids were on punishment when he came home.
The parents have made it clear that they do not want you to instill rules or discipline, so you must decide whether you want to keep working for these people, because it is their decision to make even if you really do know better!
If this kid is 3 1/2, he'll be starting school pretty soon and these behaviors wont' be tolerated there, the parents are just making this more difficult. This is the type of child who won't be invited back to a 2nd playdate or the extended family will stop inviting them to events because no one will want this kid with his rudeness and bad behavior around. You can hope that maybe the grandparents willl say something to the parents and they'll listen.