How do you create an overlay similar to the one in this picture? Do you cut the scallops before or after laying on cake? What do you cut them with?

I would probably cut a circle template with the scallops, roll out the fondant, cut around template, the place on cake top.

You could take paper/cardstock and make a large circle. For the scallops you could take a circle cutter to trace around so that the scallops would be even. Or use something that is round and the correct size. You could purchase the scalloped borders that are used to decorate teacher bulletin boards for a pattern. Once you have your pattern trace and cut out your fondant. Then it appears there is piping over the scallops.