Generally speaking, it does not, as it only applies to access to cloud resources. Use the corresponding controls in AD if you want to enforce a smart lockout in your on-premises environment.
The exception is when you are using pass-trough authentication, as authentication "touches" both Azure AD and on-premises servers, thus both the cloud and on-premises policies apply. You still need to have the on-premises policy configured if you want to enforce the account lock. Details are here: https://learn.microsoft.com/en-us/azure/active-directory/authentication/howto-password-smart-lockout#how-smart-lockout-works