Why does he not use his main computer for encoding video files when he goes to sleep? Unless he does not sleep? does he sleep?
WHS as you know doesn't exactly need a lot of system resources to run, since its suppose to work as a NAS with windows. It's not designed to do the more advanced apps and such that a feature rich OS like win7 does. You can use win7 as a NAS/server if you wanted to, user groups/libraries isn't that hard to do, but don't exactly go and build a "server" box using some atom's and expect them to run through some intensive cpu workloads.
I'd still consider going the NAS route with cheap hardware and use his main, speedy rig for encoding when not in use. If he wants a separate rig, then stick with win7; just make sure you put some decent parts in it.