Traditionally lills were used when making the types of bobbin lace where the pins are pushed right down into the pillow - mostly the sectional types of lace like Honiton or Duchesse where one section is completed but left pinned in place on the pillow until it's time to connect another section of lace to it.
Because they are tiny they are also used for fine 'heirloom' type sewing and yes they can be used for applique because they are short. Nowadays also used for things like pinflair where they are used to attach sequins onto polystyrene.
In other words they are used for anything in which a short pin would work better than a longer one.