Lee had been temporarily suspended last month, according to ABC News, after being harshly criticized for his handling of the Trayvon Martin case.
The Sanford City Commission rejected by a 3-2 vote the resignation. They said many people want to make their police chief a scapegoat, but they refuse to do so, insisting that race was not a factor in their decision.
Some city council members said it was not clear if mistakes were made by Sanford police after the shooting.
"When do we get over this cycle of just throwing people out to the wolves when we don't know?" said one councilman.
Lee will remain on paid administrative leave for as long as it takes, as an outside investigator looks at his handling of the situation.
Zimmerman, 28, was not initially charged for the fatal shooting of the unarmed 17-year-old on Feb. 26 inside the gated community where Zimmerman lived.
The shooting sparked protests nationwide, as well as debates about the laws and race. Martin was black; Zimmerman is the son of a white father and Hispanic mother.
Then 44 days after the shooting, Zimmerman was charged with second-degree murder. He was released around midnight from a county jail after posting $150,000 bail.
Zimmerman was wearing a brown jacket and blue jeans and carrying a paper bag. He met a man in a white BMW and drove away. His destination was unknown and was being kept secret for his safety. Some speculate it could be outside Florida.
Circuit Judge Kenneth Lester said at a hearing Friday he cannot have any guns and must observe a 7 p.m.-to-6 a.m. curfew. Zimmerman also surrendered his passport.
The Associated Press contributed to this report.