They can be flush, but do not have to bebe*. At least for smaller sizes, flush is typical, because it ensures control of tolerances of the interference and compression (squeeze %). The groove has excess width that provides empty volume into which the o-ring material displaced by the interference can go. See Parker O
[*] note: In case of high pressures, extrusion of the o-ring Handbookinto the gap must be prevented with a back-up ring.
See Parker O-ring Handbook (free pdf) for a pretty good reference text, and standard groove sizing tables.