Presently, it is not possible to hide People Directory in OnDemand. As it is a customization, it is not supported.
However, there is a feature request to introduce hiding the Directory from the Browse menu: CONF-12842. As a feature (and not a customization), it would be available in both standalone and OnDemand versions of Confluence, so do watch and vote for the ticket.
This is not possible in OnDemand, as this requires a tweak in some property files in the application, and this will not be preserverd during upgrade cycle for OnDemand applications. There's a feature request available which I suggest you vote for it :
All the best.
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