Provided is a system and method for a multi-tenant datacenter with nested hypervisors. This is provided by at least two physical computing systems each having at least one processor and memory store adapted to provide a first level Hypervisors, each providing a First Virtual Computing Environment with a plurality of inactive Virtual Hypervisors nested therein. The multi tenant data center is structured and arranged to activate a Virtual Hypervisor on one of the at least two Hypervisors and automatically migrate the at least one Customer VM from a Customer Hypervisor to the Active Virtual Hypervisor; and evacuate the remaining inactive Virtual Hypervisors from the Hypervisor supporting the Active Hypervisor to another of the at least two Hypervisors supporting inactive Virtual Hypervisors. Further, each Customer Virtual Machine in the Active Virtual Hypervisor is coupled to the second physical computing system by OSI Layer 2, prior to an OSI Layer 3 connection, for the transfer of data frames, each frame having a plurality of OSI Layer 2 tags permitting the segregation of each Virtual Machine independent of Layer 3 communication. An associated method of use is also provided.