While I can't say I can recommend the "best" Level Up system for a Multiplayer Free for all, I can offer this idea:
Something like king of the hill. Multiple terraces, each terrace can only be accessed at certain levels. I.e. terrace 1 can be accessed by anyone. Every person you kill is worth % exp to the next level. higher level people are naturally worth more points.
Wow. Ever thought of developing this into an actual game? Sounds really interesting.
So, what you're essentially recommending is to stick to the traditional level up system where higher levels are more powerful than lower levels, but segregating them. Then, allow some ways for them to interact, and some incentives to control that interaction.
No, I just wanted to post the idea and hope someone else does so I can play it. Ideas are typically easy, its the long mundane battle of getting every bit (pun intended) in place, that detracts my interest from producing it.