The idea behind domains fulfilling the segment seems to exclude the situation that "the domain does not lie on both sides of the boundary". But what about the set $$ S := \{x \subset \mathbb R^2 \colon 0 < |x| < 1\}? $$
I have two questions regarding the segment condition (see bottom for the definition as in Adams):
- Does the above set fulfill the segment condition?
- Where exacly can I observe that the fact that $\Omega$ does not fulfill the segment condition leads to a contradiction in the following example? From what I see is that the problem should be the approximation of the weak derivative of $u$ as it is no problem to approximate the "step" function $u(x,y)$ by a $C_0^\infty(\mathbb R^2)$ function in $L^p$-norm.*
- (addendum to 2.) Strictly speaking, $\Omega$ does not fulfill the segment condition because it is no domain. Why do we restrict the definition of "segment condition" to domains anyway?
The following example in Adams -- Sobolev Spaces (3.20, p.68) tries to motivate the segment condition:
Where does this example go wrong? Apparently $\partial\Omega$ only has $2$ points, namely $(0,1)$ and $(0,0)$ failing the segment condition:


1) The segment condition is a way of saying that the boundary is locally the graph of a function. The punctured disk fails this condition at its center $x$ because no matter what $U_x$ and $y_x$ are, choosing $z = -\delta y_x$ with small $\delta>0$ results in $z\in \Omega\cap U_x$, yet $z + \delta y_x = x\notin \Omega$.
2) is a weird example because, as you observed, it's disconnected. A better example would be the function $u(z)=\arg z$ in a slit annulus such as $\Omega = A\setminus (-2,-1)$ where $A=\{z\in\mathbb C : 1<|z|<2 \} $. This is a domain failing the segment condition. If $u$ was a limit of functions in $C^1(\overline{\Omega})$ with respect to $W^{1,p}$ norm, than this limit would be a $W^{1,p}$ function in the entire annulus $A$ (because $A\subset \overline{\Omega})$ that would have to agree with $u$ in $\Omega$. This is impossible because the absolute continuity would have to fail across the negative real axis.
(Incidentally, this argument also works for $\Omega$ in the example you cited.)
To answer the specific question "Where exacly can I observe..." - it's in the fact that $\Phi(b)-\Phi(a)$ is related to integration along segments from $(a,y)$ to $(b,y)$, which is a bunch of segments crossing the boundary of $\Omega$ and coming right back to $\Omega$.
3) We don't really have to: much of what is proved about Sobolev functions on domains could be proved on more general open sets. But (a) this does not bring any new insights; we just do whatever we do on each component separately; (b) some key results like the Poincaré inequality $$ \|u-u_\Omega\|_p \le C\|\nabla u\|_p $$ absolutely require connectedness.