The issue is not with the ticked setting, the issue is that local settings which is where outlook by default stores its data files is not part of the redirect such that should you use roaming folders, these local settings are not copied with the profile to the server.
There are issues with Outlook accessing the PST file when it is on a network share At least that was an issue office 2007 and older.
For folder redirection to work, the data in the current user profile (my documents/documents, appdata/application data, desktop, start up) have to be copied to the new location at which point after the second logon, the user will start referencing the redirected data.
It is always a good idea to configure the redirect GPO such that when the user is no longer subject to this GPO, that the redirected folders be copied back into the profile.
If the user is moved from one organizational unit into another, while both have folder redirection rules, since the user's folders have already been redirected, the second/new GPO will not apply untill the earlier redirection is reversed.
What you should do, is quickly check on the backups (hopefully you have one) to minimize data loss from the PST file.
If the organization has an IMAP based mail access, the emails should still exist on the server.
There is an Office/outlook ADM templates that deal with redirecting/setting user preferences for office products.
Outlook's data storage location needs to be changed from %userprofile%\local settings\application data\microsoft\outlook to %userprofile%\application data\Microsoft\outlook.
in windows 7 and newer %userprofile%\appdata\local needs to be changed to %userprofile%\appdata\roaming\
FYI, it is bet to test on a single account that is similarly configured as the users in the environment.
In that case, if all the same pst file got corrupted and the data was lost, then you can try to restore it using Scanpst from Microsoft https://support.microsoft.com/en-us/kb/272227
Or a third-party utility Recovery Toolbox for Outlook. http://www.pstviewer.oemailrecovery.com/
Look as you will be comfortable. I hope that this will help you!