This thread being about Puppy Linux mainline distros and not the likes of Kennel Linux, I won't say much about the latter, which uses completely different save2flash/snapmergepuppy code written by fredx181.
What I will say, for reference, is that the problem does not seem to exist in KL. There is a different relatively minor issue. When item is deleted from /, and a save2flash made, a whiteout is left behind and appears in the on-media savefolder. With overlayfs, the whiteout being just a char device that takes up virtually no space, I can't say it is much of a problem, and perhaps it is correct in case since if a user wanted a folder like /myjunk deleted that would include if underlying sfs addons contained such a directory.
I also tried creating a folder /myjunk/filea on Puppy Bookworm, saved to flash, then deleted it and saved to flash again, and I can confirm the deletion did not work (but works fine in KL distros albeit leaving a zero sized whiteout in the save folder). I then took brief look at the Puppy github woof-CE code, but unfortunately I don't know Puppy organisation though I've since worked out what /initrd/pup_rw/ and /init/pup_ro1/ are used for having never known before. However, since I didn't write the snapmergepuppy code for KL/FR distros I don't off the top of my head know the ins and outs of it and not being familiar with that Puppy implementation can't quickly work out what is missing. I expect fredx181 could figure it out much more quickly - probably some sed or find statement missing something, but just a guess.
Without having time to analyse the code, I did nevertheless wonder if line 104 or maybe line 127 for removing directories (I really don't know): rm -rf "$BASE/$N" is where the deletion should be getting done since I also noted that $BASE (albeit a symlink to actual location) is: BASE="/initrd/pup_ro1", which I understand is the media save location (?) and pup_rw the session save in RAM (?). Anyway, even if that rm -rf line is the one that does the removal prior to saving back to media, it clearly doesn't work for the items stored in / in Puppy. Hopefully someone will fix that since others will likely end up at times with much larger save folders than they expected following deletions.