Is there a way to make the "~" work for our Virtual Server (i.e., http://www.domain.com/~user is ~/www/htdocs/user)? I ask because I would like to distinguish things we host on our site and things that are actually designed by us.

This is not possible with the Virtual Web Server. I would suggest creating a "users" directory on your Virtual Server and put all of the users accounts there or lease another virtual server for your clients.