Hmm, maybe i had selected department::id in the layout instead of employee::department_id...
going crazy, have to get so used to the filemaker paradigm...
up to the next level, departments & sites...
In Layout setup... of the layout where you are trying to create these value lists, which of the above occurrences is specified in "show records from"?
What you describe is called a conditional value list where selecting a value in one field restricts the values listed in another's value list. These can be chained together so that each selection in the chain filters the options in the next, but the relationships for each value list usually have to link to the layout's table occurrence in order for this to work.
Here are some links on conditional value lists you can review if you have not already done so:
Forum Tutorial: Custom Value List?
Knowledgebase article: http://help.filemaker.com/app/answers/detail/a_id/5833/kw/conditional%20value%20list