Agreed, min squad size sounds pretty good. Although dynamic regrouping might be nice too. For example, if two groups of 5 light infantry advance and one group loses a soldier, the understrength squad could merge (on the battlefield) with the other one, and subsequently all 9 soldiers would be a single squad.
If I were a brave, proud, nationalistic soldier and 90% of my squad was annihilated, leaving me alone... I'd probably try to join another squad during the battle, rather than routing or fighting alone.
As I understand it, your solution is to force-rout tiny squads
once combat occurs. However... allowing the player to form single-member "squads" of very weak units in the first place is rather silly. No soldier would take their leader seriously if he said "Bob, you stand alone at the front, while everyone else is in a dense wedge formation 200m behind you." The only real problem I see with preventing this on the user-side is that when you have only 4 militias in a province (perhaps they retreated there) you can't get them out easily, since you can't form a squad of 4 weak units. And adding more rules to allow formation of small squads in situation X but not situation Y would cause problems and confusion.
The main problem I see with your proposed version of squad-size control, even if dynamic regrouping were added, is that it might be problematic for tiny armies. For example, what if you buy 3 points of province defense, enough to prevent an enemy scout from singlehandedly stealing a province? Your PD will generally rout... forcing their leader to rout... and giving an automatic loss. Also, as you mentioned, auto-routing cannot solve the problem of mindless AI decoys, since they can't rout. Yet enforcing squad size limits on the user-side brings other problems, as I mentioned.
So... it seems like more thinking needs to be done to address the corner-cases, as there is no obvious, universal answer that is clean and simple. But I think it's a very good approach to eliminating the tactical decoy problem (and adding some realism to battlefield deployment), if those niggling details can be addressed. This forum is full of smart people; I'm sure someone will have an idea.