Rather than using as Employee it would be better to make the compiler basically insert a call to Cast<T> using an explicitly typed range variable:
var options = (from Employee e in m_Employees
select e.DepartmentCode).Distinct();
Or alternatively and equivalently:
var options = m_Employees.Cast<Employee>()
.Select(e => e.DepartmentCode)
.Disinct();
However, I still wouldn't have expected your original code to fail, if the array really does only include Employee references... If you were getting a NullReferenceException then either one of the values was null, or it was a non-null reference to a non-Employee object. These will both still give you an error with the above code, but you'll be able to see which one based on whether you still get a NullReferenceException or an InvalidCastException.
In general you should only use as when you're going to use the result conditionally. If you're sure that every value is really of the right type, you should use a cast instead - so that if you're wrong, you'll get the code blowing up with an exception instead of propagating a null reference to the rest of the code, where it could cause harm later on and make it hard to spot the source of the error.
If you were getting a compile-time error then there are a number of possible causes, based on what exception you were seeing.
EDIT: Okay, so it was an IEnumerable causing a compile-time error... Cast<T>() and OfType<T>() are both extension methods on just IEnumerable instead of on IEnumerable<T>.