Oh, she punked out :) She was afraid Santa would get angry. I told her he wouldn't, but if she didn't want to ask, that was fine. I did ask her if it was still on her mind, but she said she figured they always looked so happy, they probably got a lot of vacation, which meant they weren't slaves, since slaves probably don't ever get vacation. Kid's astute. Regardless, the concept is still quite worthy of socking away as a good scene for a script or one-act or something.
Naturally, I felt compelled to answer.
Short answer: They're more like house elves than LOTR elves. They work there because they like it.
Longer answer: You can get into the gaelic mythology about how if the elves like you they can come clean your house, repair shoes, do woodwork, etc. in exchange for a plate of milk.
Hippie answer: Santa has a big commune in the far north where they all eat together, live together, and all work for the common good.
Cruel answer: Santa has an assistant known as the Krampus. While Santa gives toys to the good boys and girls the Krampus stuffs the bad ones in a sack and takes them away. Those aren't elves. They're bad children.