The hold switch itself is a very simple device - it either opens or closes the circuit that senses it. The orange ribbon cable connected to it would simply contain 2 conductors making up the circuit.
After looking at the repair guide again myself, I notice that it looks like one of the 2 conductors coming out of the switch goes to a large square pad, not far from the switch itself (e.g. photos in step 15 or 16). Then I think it looks like just a single conductor inside the longer part of the ribbon cable, going back to the logic board connector.
if that's correct, then that tells me that square pad is meant to make good electrical contact to the back case - meaning the case itself completes half of the hold circuit. If this is true, you should make sure that the square pad on that ribbon cable is making good contact with the case.
the above is just based on examination of the photos, I can't tell 100% that the ribbon cable needs to be connected to the case. I do have this model iPod, and if I get a chance I will try to open mine up and check. meanwhile, please confirm if both ends of the ribbon cable are firmly connected (one end to the logic board, the other end being this square pad I mention.