Do I need to decrypt the hard drive before repair?
You should have to remove an EFI password or permit them to reset that since it prevents Service Providers from network booting to diagnostic images or selecting an attached bootable volume to run test software.

You don't need to decrypt FileVault 2 in any service I've ever seen unless you want them to log in to your user account and look at your software. With physical access they can wipe a drive, make a clone/copy of it, but encryption is your way to protect the contents of the files reasonably well without impacting service testing.

My guess is that the person communicating with you mis-spoke or mis-understood the notes from the technician and if you call them back (or have AppleCare update the case notes and alert the technician), they can confirm if you have EFI locked firmware password set.

Apple documents this in the repair terms and conditions both online and you should have received them before signing the machine in for service.

Technically, they could wipe your drive and reset all passwords per the terms, but generally they give you a courtesy notice before doing so intentionally.

See: https://support.apple.com/en-us/HT203253

Despite my generally trusting Apple repair employees, I would not give a machine password to an AASP until I had a very good understanding of who in that organization would have access to it, how it would be protected and when it would be destroyed. As to an iCloud password, the bar for yielding that is far, far, far higher bordering on almost never ever.