It works in conjunction with the mechanical lockout to electrically prevent the relay from energizing and trying to bring in the solenoid to activate overdrive. When the car reaches the cut in speed, if the driver has OD mechanically locked out and solenoid energizes it would be blocked from any movement and could burn out if the pull in coil is energized for more than a few minutes.
The second function is due to the way the switch is positioned on the lockout knob mechanism, it also prevents any OD operation unless the knob is completely pushed in so all parts in the mechanical lockout mechanism are fully released.