It is okay to fold the shoulder over. The guidelines for sling wearing are just that - guidelines. They aren't hard and fast rules, and you can do a lot of tweaking to make the sling fit you and fit your baby perfectly. A lot of sites recommend you flip the shoulder to get a snugger fit, but I've never had very good luck flipping it and it still being smooth, so sometimes I fold the shoulder in half so it hangs a little better for me. My pouch isn't a hotsling, it's a WAHM-made new native style pouch, and it doesn't have any padding so I can't help you on that one from experience, but in my opinion, the padding shouldn't matter in cradle-carry, and you can put it however you'd like, so long as the baby is securely in the pouch.

It's great that your little one is enjoying the sling so much. I forgot my sling when we went to the store last night and I was so sad about it! DH said he would carry the baby for me, but I said that wasn't the point! I
like to have her cuddled in the sling with me.
Happy Babywearing!