yes, only works with center diff lock on. Although the center diff lock is actually a mechanical thing you engage with the lever, the locker won't work unless you've got that light lit up. For mine, if I don't use the center diff lock for a while, it might take a few hundred yards of driving before it will light up. Normally when I go out on the trails for the day (or longer), I will have to engage the center diff lock as soon as I hit dirt so that everything can fall into place and engage... however, and the end of the trip, I can put it into center diff lock at any moment, and it'll work right away.
It just needs exercised.