I don’t know the official answer, but it seems like they might be incompatible, yes. However, you can recover the behavior by adding another highlighting option:
Yes, that is a workaround. I do find the ability to custom format the label with Tooltip very helpful especially with dates on the x-axis (the system defaults can be too granular).
Hopefully, the PlotHighlighting options will be improved in the next release.
Usually having PlotHighlighting and Tooltips at the same time is frustrating since they’re both reacting to the mouse, trying to put their popups in the same place, etc…
As a result, PlotHighlighting → Automatic turns off the highlighting if there are tooltips, callouts, etc…
Giving a specific setting for PlotHighlighting will turn it on.