It should work like you described: when you choose add-player, it will only add players that have an outfit in the current location. If no one matches, then no one gets added. There might be a bug, but it's more likely something is configured wrong on your end.
Note: The locations are assigned to the outfits, not the players.
Also note: Not having a location is itself a location, so add-players with no location set will add other players with location-less outfits.
Final note: if your game started with a mix of players wearing outfits from different locations, then ALL these locations are eligible when hitting add-player
Hope that helps.