Spotify relies on address verification, not live location tracking, for its Family Plan. Here's the key point:
The main account holder provides their address when signing up for the Family Plan.
Ideally, everyone else on the plan would also enter the same address to confirm they live together.
However, Spotify doesn't seem to strictly enforce this. There have been reports of users successfully using the Family Plan without all members verifying the same address. Still, it's against their terms of service.