Originally posted by Dr. Sinister:

No one else was on but I assume the host, me, has to be on in order for everyone to sleep?

No, the dedicated server is the host. When you join you are still a separate client. I play solo on my computer and host the dedicated server on my girlfriend's computer without any sleeping issues.

I'm going to guess it was just a bug, and maybe restarting the server would've fixed it.