Check out this recent post about what nannies wear to work. It has 6 pages of responses and some of the posts might help you better understand why your nanny dresses nicely.
http://www.dcurbanmom.com/nanny-forum/posts/list/274993.page
If you are concerned about her ruining something and you being held accountable I would let her know that she is certainly welcome to continue dressing the same way but that if something were to happen to any of her clothes while she is at work that it is not within your budget to replace them. If you feel like her clothing is getting in the way of her interacting and playing with the children then I would let her know that she needs to come into work prepared to do A, B, and C with the children.