The message is real and you need to take it seriously. It means you're critically low on disk space.
"Scratch disk" is not a setting in Photoshop. It's real, physical disk space.
Photoshop moves large amounts of data around and only a fraction of it can be held in RAM at any time. So temporary working data are written to disk. This is the scratch disk. For Photoshop to operate normally, you need to have at least 100GB free space or around that, but preferably 500GB - 1TB. It depends on file sizes and how many you have open at the same time.