That type of system was used in dd#1's 1st grade, but neither of my girls' kindergartens. Variations have been used in other grades such as "check marks" next to your name for behavior problems. To me, it is a sign of a teacher with poor classroom management skills. The teachers my dds have had who were very able to keep the classroom under control did not need to resort to color coding the children.
Years ago I was asked to take over a kindy class in November. The kids had started the year with a teacher who had no classroom management skills and turned out to be a bit of a nutjob. After she was fired, the class had a string of warm-body subs. The kids were insane.
I used a system of checks (much more forgiving than the system the OP mentioned) to get them to accept me as an authority figure and get their behavior back to normal. After a month or so, when we were actually working as a class, I started phasing out the check system.
I'm not sure what else I could have done. I didn't want to play prison guard, but it worked. Once it worked, we could move on to kinder and gentler.
I do think that using a color system as a default is ridiculous. It's sloppy teaching, and it demeans the students.