An oil level sensor is typically an on/off switch that tells the engine control computer that the oil level is either at or above what is normal/okay, or too low. Most of these sensors are a float that is lighter than the oil, so when it is submerged in oil, the float is as high as it can reach. When the oil level gets too low, the float gets lower and allows a different electrical signal to occur, either off to on, or on to off.
Another design uses the resistance between two conductors to determine if oil is present or not, or even to determine an amount of oil. The resistance will be different when there is an air gap versus when submerged in oil. On/off sensors will have a small point located at the minimum level (where, if oil is below that point, it is important to know) while gradual level sensors will have a long sensing area from the top to the bottom of the relevant oil pan area, which will have different resistance readings based on how much oil is covering the sensor.
Oil Level Sensor Location
Oil level sensors can usually be found in the oil pan or close to it. If it is an on/off switch style sensor, it will have two wires in the plug, or just one if the sensor is grounded to the engine. More advanced sensors will have more wires, typically three, and won't be grounded to the engine.