We've never had fungus gnats in our worm bins, that I can think of. We are always very careful to make sure everything added gets buried under the cardboard bedding, and I am certain that's an important step.
As for smaller: yes! You sure can. We have even had great success using 5 gallon buckets (using just the bottom 1/3 of the bucket) as bins so you can see you can use almost any size container.
