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As host, you can configure the melee friendly fire damage multiplier for everyone in the lobby. The default value is 0.125x, so the sledgehammer deals 1.5% HP for a light attack or 10% HP for a heavy attack.
As client, your damage multiplier will be set by the host's configuration. If the host doesn't have MeleeFriendlyFire installed, your damage will be nerfed by a 0.125x multiplier – the same as the default host configuration.
By default, MeleeFriendlyFire is always turned on. If you want to set a keybind to toggle MeleeFriendlyFire on/off, or only enable MeleeFriendlyFire while a certain key is held down, then those keybinds can be configured in config/MeleeFriendlyFire.cfg. If you set either of these keybinds, then the game will launch with MeleeFriendlyFire turned off, and you will have to press your keybind to turn it on.