"I was going down the hill and on my step down I saw a guy who appeared to be disguised" is the correct usage.

Who and sometimes that refer to people but only in informal cases. Hence avoid using that for people. That and which refer to groups or things.

I was going down the hill and on my step down I saw a guy who appeared to be disguised"

is the correct usage.

Who and sometimes that refer to people but only in informal cases. Hence avoid using that for people. That and which refer to groups or things.