Here is the update from Adobe:
As the DirectBinary does not create(not a bug) the folders and the documentation specifically says the folder must exist - see [1]. The logic to create folders is included in the higher level FileSystemUpload wrapper - see https://github.com/adobe/aem-upload/blob/master/src/filesystem-upload.js#L58. the DirectBinary type is the lowest level upload logic and does not include this kind of additional business logic. The customer should use the wrappers. If you want to create folders you need to use filesystem-upload wrappers.
[0] https://github.com/adobe/aem-upload#:~:text=uploaded.%20Folder%0A//-,must%20already%20exist,-.%0Aconst%20targetUrl
We were using the logic since our assets are in Azure containers and DirectBinary was the only option -
Please find the ticket details below regarding the folder creation when using DirectBinary Approach. ASSETS-48959
We ended up creating the folders using the AEM REST API then invoke the library to upload assets into that folder.