Rather than explaining this myself, I’m going to give you a link to another site that has an in-depth essay on tiers. I will, however, show you the current tier list and add one more bit of info.
The tier list is based on the best level of play currently known to be possible, also known as the current metagame. The tier list is not, however, based off FFA (Free For All) play. If you go look up the term Tournament Legal, those are the rules that the tier list is based off of.
Mr. Game & Watch