I've done it both ways. If you're using 3 layers, it's easier to do it to the 2 inner (or outer) layers...but that's more a practical issue than a design issue. The outer layer will still gather, but you won't see the zig-zag from the elastic application. The fitted diapers I see on the Very Baby site do look like the elastic was sewn to the outer layer. I think it's a matter of preference more than anything.