This is not a standard rule. According to the World Pool-Billiard Association rules, the only penalty for a foul is the following
3.9 Standard Fouls
If the shooter commits a foul, play passes to his opponent. The cue ball is in hand, and the incoming player may place it anywhere on the playing surface. (See 1.5 Cue Ball in Hand.)
The rule further specifies that no object ball other than the 8-ball is ever spotted (rule3.7). The Billiard Congress of America (BCA) uses the above rules.
Edited this section after finding APA rules online
The American Poolplayers Association 8-ball rules do specify that object balls are spotted if they have been knocked on the floor (Rule 6). An object ball knocked on the floor is not a foul, but it is spotted after the player's shot is complete or after he misses, whichever comes later.
This is Rule 6
- BALL ON THE FLOOR -- If the 8-ball is knocked on the floor , it is loss of game. Object balls knocked on the floor are spotted. If the spot is taken, the ball is placed on a line directly behind the spot as close as possible. Knocking a ball other than the cue ball on the floor is not a foul. It might occur that a player pockets his ball while simultaneously knocking another ball on the floor. In the situation, it is still his turn and the ball is not spotted until he misses. If the ball on the floor is one of the shooter's balls, it is spotted when the shooter had pocketed all his other balls or misses.
Both sets of rules agree with respect to the original question. Pocketed object balls are not spotted after a foul (scratch or any other type of foul).
On the other hand, there are myriad house rules that I've played by: 8-ball on break, loser pays $5; 8-ball on break loses game; All shots must be called; Pull object balls on scratch; No combination shots; Combination shots can use opponent's object ball; etc. There are probably as many house rules as there are places to play. So to answer your question - Yes, it is a rule in that pool-hall with those players. But it is not an official standard rule.