What is this component and what does it do? I had my transmission fluid changed + rear diff. Lexus tech said that my pinion seal had to be replaced, 7 hour job.. covered under powertrain warranty

 

The pinion seal is at the front of the rear diff.
The propeller shaft that goes from the tranny to the diff. connects to the pinion flange...the pinion flange is connected to the pinion gear, which basically turns the differential unit.
Between the pinion flange and gear that is where the seal is...along with a couple other parts.
Sometimes the seal may wear and start to leak diff. fluid...not the end of the world, it can be simply replaced.
I'm assuming they said they would need the car for 7 hours to do it, but in reality it probably took 1-2 hours if they did it in the vehicle. If they took the diff. completely out then it would take a little longer...maybe 3-4 hours.
I have seen one other member that had the pinion seal leak on the front diff. of his AWD...but I think you are the first to mention the rear diff. pinion seal leaking.

 

Probably one of your output shafts considering he was around your rear diff. If so they'd have to pop the axle to pull the seal and press new one in. hopefully they won't charge you for new diff fluid.. in fact they should have gave you the option to change the fluid when they do the seal. but i imagine free fluid is part of the repair if its under warranty.

 

I would respectively disagree that it's not one of the output shaft seals (aka the driveshafts) as the OP stated it was the pinion seal...the diff. has one pinion seal.
The driveshaft seals are the side seals, to which there are two.
Also the seals don't need to be pressed in...they can be installed with a seal driver...and even that is not absolutely needed.