Oh, yes. It's been discussed at SMF that the 'hide online' doesn't hide last online time for users, this is an extension of the same idea.
Well, I suppose we could just hide it entirely, too. It's a bit annoying because sometimes you'll (at least) want to know whether someone is an active member or not, but...
Oh, maybe we could hide the item *only* if the user has been online in the last X months...? i.e. if you're no longer a regular visitor, what do you care that people know you aren't...?
There is still an issue, though, regardless of whether hide online is enabled or not - it's still logged as to what they're doing and it's still shown to admins, so even if 'hide online' is on, it's not hidden from admins. Whether that's a privacy issue is also questionable, of course.
(AFAIK we have only one regular lurker who's hiding his online status here, and it was helpful for my tests earlier today :P)
Now, as to whether or not we should STORE their online status in the database... I think it's asking a bit much not to do it, right..?