hiring a friend. is it really allowed?

Hello,
My manager hired one of his best friends, he gave her a part time contract.
this lady(let's call her Jill) is a total nightmare: she is incompetent, she has a very bad attitude towards her colleagues and her supervisors as well, she finds excuses not to do what she is asked for by her supervisors, bossing around and generally making the work place not great.
She has also received complaints by customers. We have talked several times with the Manager about all the problems we have with Jill, but he just won't listen, keeps defending her and keeps saying that if she is like this it is our fault, because she is a strong,confident person, just what he needs (and so he reverses the complaint towards us).
we are aware of the whole "refer a friend" incentive, but we actually thought this would not be allowed in the very same workplace, as that classes as favoritism.
where do we go from here? we don't want to damage Jill, but she is damaging the whole team, which isn't that small (16 of us).
Help!