The issue happens when you try to filer out employees by Department or another filter and instead of showing employees in the right group you get everyone as if the filter is ignored.
The most common cause for this issue is that you have an invalid query set in your Staff Directory web part properties → [Filter] property.
One of the most common filters resulting in this error is setting “Department <> None” filter to hide users whose department is not assigned.
To resolve this, try clearing the [Filter] property first. If you drop down filters start working, you know that the issue was with the custom [Filter].
To see the syntax for the [Filter], check out : People Directory and scroll to the section called [Hiding users from directory list]