As an update, we have checked the box, however now we get the following error when passwords are reset by the Service Desk using an existing Adaxes web portal page:
"Failed to reset password in Office 365. You cannot reset a password for a federated user."
Are there changes we need to make on the portal page side? Or in O365? Or do you need more details? I'm guessing that DIRSYNC is still syncing the password every 3 hours, but I'm not really sure.
We use local AD, but the users have access to a Sharepoint Online page (that they access with their on-prem credentials via Azure AD group permissions).