Yes, the PB360 does use the file system to store ebooks.
If there is a limit to how deep you can nest your folders I've never heard of anybody finding it. Me, I've gone as far as 6 levels.
You can use any folder organization system you choose to create; I've never heard of anybody running into issues with the folder names.
Now, in *addition* to the file system-based bookself, the PB360 has a parallel ebook organization system found under FAVORITES. This uses shortcut links to physical files or folders to access ebooks. Favorites *also* lets you create arbitrarily-named folders of these links.
Some folks use Favorite links for categories or collections both manually and through Calibre:
https://www.mobileread.com/forums/showthread.php?t=94697
Also, the PB bookshelf has full file-management capabilities: copy, delete, move, erase, rename.
Basically, if you put some thought to how you want to set-up your storage system you can have quick fast access, done *your* way, to all your books through either or both options.