On-hook is a state in which a landline phone is currently "hung up." That is to say, it cannot dial out to another number. When in this position, the line becomes available, and no calls can be made from the phone.
Younger visitors may not be familiar with rotary dial phones like the red phone shown in the picture. But when the handset is placed down on the phone it is on the hook. If you are more familiar with a cell phone, you can think of on-hook as when your cell phone is on and not making a call.