When is 日本語、お上手です (your Japanese is good), or possibly 上手い instead of 上手,
used? Is it based solely on the person's level of proficiency, or their
proficiency compared to what was anticipated, or visibly making an effort?

Please don't be too ranty in your answers.
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meaning
When is 日本語、お上手です used?
I wouldn't imagine it really has any connotations that are different than if
you told someone, "Hey, your English is pretty good." I think generally we
expect others that speak our native language as a second language to have some
issues, so we might be prone to say that even if they have some issues with
grammar or pronunciation that a native speaker would be looked down on for.
Here are two example situations where I would imagine this phrase could be
used:

A Japanese native talking to a foreigner they just met might say this if the
foreigner shows competency in Japanese, whereas the native may have been
(reasonably) expecting their Japanese to be somewhat broken or possibly
nonexistent, especially if they're just a tourist or something.

Maybe you used some phrase or word that shows you have a deep understanding of
the language, and the person saying this was legitimately impressed at your
skill.
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> <https://www.italki.com/#/question/85474> -- ................
> 正直に言えば、日本人は外国人に「日本語がお上手ですね」と言ってどういう意味でしょうか？
>
>
> 相手は本当に上手でも、ちょっとだけ話せても言われるから、真正の意味はあまり分からないかもしれません。僕は初めて日本人に会う時、いつもそれを言われていますが、実は
> なんか ちょっと馬鹿にされていると感じるようになります。 ............
```

           ( I love this last ようになります。-- the responses are good too. )
    
```

i think often it's another way of saying -- [ I'm very happy (or glad or
pleased) that a you (a non-Jp person) are studying Japanese. ]

Often a genuine 「日本語 お上手ですね」 is prompted by, e.g. :

--- Using both 手前 and 前 while differentiating them correctly

--- Using a difficult word or construction correctly, or exactly at the appropriate context.

--- Using a word or construction that this native Jp person feels is uniquely Japanese -- and i don't mean Wabi, Sabi, Mono no Aware, etc.
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上手 is used for anything that is done well. Example, someone sings well, dances
well, speaks Japanese well, does origami well, for all of these you can say
上手！ to express how you feel.  
On a note, you mentioned 上手い, I have found it is used more about good food.
Your Japanese can be 上手(jyouzu) or 上手い(umai) but good food is 上手い or 美味い and
can't be 上手 (if you say 上手 you would then be talking about how it is
prepared).
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