"I like sleeping on the grass."
Yes. But 睡觉在草地上 is much more like “as for sleeping, it is on the grass” than “sleep on the grass”. I don't know how to explain the nuance. ;-)
What's the rule when it comes to placement of 在? Can I say:
Or is it because 喜欢 is an auxiliary verb, therefore it must come before 在？
That's okay but that means either:
a) I usually like to sleep on the grass. (without context we are not sure whether more emphasis is on the place or on the activity)
b) I get to love sleeping, sometime and somehow, on the grass. (uncommon wording)
我喜欢在草上睡觉 expresses basically the same thing as (a). But 我在草上喜欢睡觉 and 在草上我喜欢睡觉 are closer to “on the grass I like sleeping”. Now you see what the normal word order is?
Meaning (b) can be safely ignored but I still want to point out a potential source of confusion: “在…” is sometimes part of a habit (or important prerequisite), sometimes part of an incident (or incidental prerequisite). A better example is:
Q-1. 你 刚才 在 做 什么？What were you doing just now?
A-1. 在草地上睡觉。I was sleeping on the grass.
Q-2. 平时 这个时候 你 会 做 什么？What do you usually do at this time?
A-2. 在草地上睡觉。I sleep on the grass.
Q-3. 你喜欢在草地上睡觉吗？Do you like sleeping on the grass?
A-3. 对，我喜欢在草地上睡觉。Yeah, I like it.
If my answer to Q-3 is 我在草地上喜欢睡觉, it would likely mean sleeping is my favorite activity on the grass, which in the dialog above is not stressed or compared with other activities (edit: *sleeping at other places).