You don't say where you are or which industry. However, assuming it's the IT industry, in the US and large parts of Europe, it's not uncommon to have a "lock in" with a recruiter. I've never seen it in the form of an employment though. What I've seen are various forms of contracts that you sign with the recruiter which prohibits you from contacting, soliciting or accepting offers from a company which the recruiter has had previous contact with on your behalf.
I'm not sure why the recruiter wants to do this employment construct with you. In some countries, enforcing an employment contract when the "employer" is not paying any wage is tricky. Also, many countries/jurisdictions have minimum wages set by law or collective bargaining rules that apply even if you are not a member of a union yourself. It also raises a slew of other concerns like insurance, pension and taxes. Again, some countries mandate certain insurances that the employer has to pay for and certain taxes and fees. Not to mention reporting requirements.
In summary, it sounds like a lot of hassle to solve a problem that has already been solved. For sure, the "recruiter" takes on a bunch of liabilities when "hiring" you. It's very hard to calculate what liabilities this would mean for you personally. Remember, for the recruiter, you are neither a client nor a "real" employee; you are their product. I'm not saying all recruiters will rip you off, but assume that whatever they do, it's not primarily for your benefit. Their goal is to maximize their flexibility, which often means limiting yours.
I would politely inquire with the recruiter what the reason is for this employment construct and why you can't solve this with a more standardized service contract. If they insist on pressing the employment I would strongly suggest you seek the advice of a lawyer or similar to fully evaluate what liability you are exposing yourself to in your jurisdiction. If you have a trade union in your area, they may have a legal aid service you can make use of.
