laissez-faire essentially means allow to do. Faire is the verb "to do" and laissez is akin to allowed (I don't remember if it's a conjugate of to allow or a synonym of allow). But it essentially means to "let it be" and allow [the child] to run [his] course as [he] sees fit.
Generally speaking laissez faire refers to a hands off type of authority. For example, a laissez faire government would be one that does not interfere in the general workings of its people. It would set some general rules/laws/guidelines and let the people work out how they should be put into action.
Your friend might describe her parenting as laissez faire because 1) perhaps she is not involved with her children; 2) she doesn't jump into every little thing that happens between the children(i.e., doesn't try to solve all the sibling rivalry, lets them work it out), or 3) perhaps she just lets them do their own thing without giving them an excessive amount of guidance throughout the day.
I hope that's helpful. It's probably about as clear as mud!