You have already answered your own question of 'what it does'.
The reason this is needed is because the
JEE spec does not standardize JNDI naming conventions hence different application servers follow different rules. Some like
Tomcat bind to the JNDI tree with the java:/comp/env/ prefix so in this case you would set this flag to true. It is really application server specific. If you are only going to support one application server it is just a matter of figuring out which one is right and defining it correctly.