This is actually pretty common. Schools know that applicants don't always want to tell their bosses that they're leaving. As long as your previous manager worked with you relatively recently, you'll be fine.
Re: the peer reco, I would say that a reco from someone above you tends to be better, HOWEVER, really the most important thing is that the person knows you well, has really worked with you a lot, and can truly speak to your strengths and weaknesses. If that's the case, then the peer reco should be fine.
You can use the optional essay for this, but it's not completely necessary. Don't call more attention to it than necessary. A lot of other applicants do the same thing.
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