Throughout most of Naval history, this sort of thing has happened--especially in times of war. In WWII for example, it was not that uncommon for the chief engineer to be a noncom and to be granted command authority over junior officers by the captain, simply because of his experience. This was especially true on smaller ships submarines (or like the Defiant.
). Think about any of the late battles of the war. Who do you think Sisko would rather have take over if he and Worf were killed or seriously injured, Nog or the Chief?
As far as his junior officer subordinates, command has always been about respect first and pips or bars and oak leafs second. Something I've always thought was a missed opportunity was to have O'Brien in FC. For one thing, Meaney was a fairly recognizable face in those days, but I mean just have him aboard the Enterprise. Geordi would have put him in charge, and none of his officers would have thought twice about it. Obviously, it would have had to have been rewritten since the guy Geordi did put in charge was Borgified right away, but you get the idea.
I think the TNG wardrobe issue was simply a matter of not wasting the costume budget on such a small character.