Instead of adding the line breaks with nl2br() and then removing the line breaks with explode(), try using the line break character '\r' or '\n' or '\r\n'.
<?php
$options= file_get_contents("employees.txt");
$options=explode("\n",$options); // try \r as well.
foreach ($options as $singleOption){
echo "<option value='".$singleOption."'>".$singleOption."</option>";
}
?>
This could also fix the issue if the problem was due to Google Spreadsheets reading the line breaks.