Currently, 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: https://jira.atlassian.com/browse/CONF-7837. 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.
Tin Nguyen | Confluence Support.
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