From the sounds of it all, it is working as intended.
As far as the SEP Client goes, if it cannot contact your SEPM then you lose the green dot. The green dot on the system tray icon is only present when the client is in current contact with the SEPM. Obviously it would make sense for the green dot to disappear if in an "Out of Office" location.
Secondly, the Connection Status (viewed from Help -> Troubleshooting on the client) only denotes the SEP Client's connection to the SEPM. This does not indicate the status of the connection to Symantec LiveUpdate. Therefore, this is expected to say "not connected" when in an "Out of Office" location.
Now, assuming your "Out of Office" location is correctly configured with a LiveUpdate Settings policy that tells the clients to "update via LivUpdate" and use the "Default Symantec LiveUpdate" servers, then you're not really going to see much in the way of confirmation that this is working on the client without also changing the "Advanced" section of that policy to "Allow users to run LiveUpdate" (so that you can kick off a LiveUpdate session while in the "Out of Office" location) or looking at the LiveUpdate logs themselves.
http://www.symantec.com/docs/TECH168602
On a side note, I normally recommend using the "DNS Lookup" condition over the "Management Server Connection" condition when creating locations for if a client is off the network. The reason for this is that it is more consistent and reliable. I find it's generally quite rare for DNS to completely fail, whereas any sort of network blip can cause the "Management Server Connection" condition to fail.