How exactly does it work? I haven't been able to find a good description. My friends and I typically use the native PS4 party rooms to chat and not in-game tools. Can people hear us? I've heard people and tried to talk but they didn't react so I have no idea if they could hear me talking to them.

Yes anyone can hear you in game chat within close proximity you'll also hear them if your in party chat, but you can disable voice chat VOIP or the other player could be foreign.

Ok so even though you are chatting "outside" the game, it still has access to your mic?

Yeah, but you don't have to disable VOIP to keep them from hearing you, just disable microphone. I keep VOIP on so I can hear them if they are dumb enough to be talking in a voice chat without realizing we can hear everything they are saying. But have Microphone off so they can't hear us. That way I don't have to be careful about being excited about a High End drop or talking about how we will merc some rogues.

Ok thanks for the explanation guys.

@hestilllives19: I had a great moment last week where I overheard people talking about me specifically.

I was in a party chat with some other players but their in-game player names had the no-mic symbol next to them. I assumed that if you are in party chat it disables proximity chat because we had another random player in our group who wasn't in our party chat and he wasn't responding to any our tactics we discussed in party chat.

@puchiko: Nope, if you have VOIP and Microphone on you are hot to everyone in proximity, even if you are in a voice chat. Guys went Rouge on us last night, killed one of my guys and we killed the whole group and I stole a High End Shotgun from one of the guys. They came after us for 20 minutes to try and get it back even after I extracted it. Then as we were about to log off for the night they found us again and were trying to get us to go Rogue and one of my teammates that had Microphone enable and was in Party Chat told them that their High End Shotgun tasted delicious and that we were just going to grind it up for parts since it was worse than the one we had and they immediately just attacked us. It 100% works in Party Chat. Also, that was incredibly fun, because we destroyed those guys like 4 times when they kept going Rouge on us.