I have not installed motor cutoff switches, but I cannot imagine it would matter whether it was cable or hydraulic; the sensor does not know what kind of brake it is. It would more depend on the design of the lever itself. and where/how you would mount the sensor and magnet.
Generally speaking, yes. Hydraulics feel smoother and modulate better. Usually they are easier to adjust with regards to rubbing because both pads move; virtually all cable disc brakes only one pad moves. The one downside to hydraulics is that they are more difficult to service. Bleeding the brakes or replacing a hose is not as simple as replacing a cable and housing.