Certain file formats do not allow a FotoWare system to store embedded metadata inside the file itself. To be able to store metadata in these files, a "sidecar" file can be made. It will be named the same as the file it accompanies, only with the extension .xmp, and handled transparently by the system to accompany the master file it "belongs" with.
By default, the the Disable side car handling option is checked. This means that an .xmp file is treated just like any other file, and is not regarded as "belonging" to a master file. However, if you want to make sure that sidecar files are treated as just that - as belonging to a master file - you should remove the checkmark next to this option. That way, all operations that Connect applies to a master file will also be applied to the accompanying sidecar file, including renaming, routing etc.